Management of foreign owned ships in the NIS
In some transactions a non-Norwegian company may wish to register its ship in the Norwegian International Ship Register (“NIS”). This can only be done if the ship is managed by a shipping company who has its head office in Norway. This requirement has a bearing on the contractual structures and financing schemes that can be put in place and also raises issues concerning enforcement.
The NIS was established to enhance the competitiveness of Norwegian ships used in international trade. This is achieved primarily by allowing NIS ships to be crewed by foreign seafarers in accordance with favourable tariff agreements negotiated with foreign unions, which reduces costs compared to ships registered with the Norwegian Ordinary Ship Register (“NOR”). Consequently, the NIS has become the preferred ship register for Norwegian ships used in international trade.
Various financing schemes for ships intended for registration in NIS may result in owners needing to be a non-Norwegian company. This could be the case in connection with a sale-leaseback transaction where a special purpose vehicle (“SPV”), is incorporated, for example, by a Chinese leasing house who purchases the ship in order to charter it back to the seller on bareboat terms. The Chinese leasing house will typically require the ship-owning SPV to be incorporated in a tax efficient jurisdiction. Another example is the Spanish tax lease scheme where there is a requirement for the ship to be owned by a Spanish company for a certain period of time.
The NIS Act permits a foreign owner to register otherwise eligible ships with NIS subject to certain requirements being met. The most important of these is that the ship is “managed by a Norwegian shipping company with its head office in Norway”, see the NIS Act section 1.2.
The motive behind the management requirement is to ensure that there is a genuine link between the ship and the flag state. The preparatory works (Ot.prp.nr.45 (1986-1987), p. 18.) to the NIS Act states that “management” means technical management (crewing, supply, maintenance, etc.) and commercial management (employment, chartering, etc.) of the vessel. It is sufficient however that “a substantial part” of either one of these management functions is carried out in Norway. Consequently, parts of the management may be outsourced to foreign entities abroad. Which specific management activities have to be carried out in Norway in order to meet the requirement is not explained in the NIS Act or its preparatory works, but is a matter left to the owners to assess. The reason being that the organisation of ship-owning companies is not always the same, and it was felt that such differences in organisation made it impractical for the requirements to be specified further.
This management requirement will invariably have a bearing on the contractual structures available to parties involved in these types of transactions and any financing schemes. It is therefore important that the parties take into account the management requirement at an early stage of the structuring process.
In sale-leaseback schemes the leasing house should be aware that a termination of the bareboat charter usually entails that the contractual connection between the foreign owner and the Norwegian management company is broken. Consequently, the foreign owner will have to either change the place of registration for the ship or put in place a Norwegian manager immediately after termination.
Furthermore, stakeholders such as secured bank lenders and investors in bonds secured by ship mortgages should be aware that the Norwegian management requirement may be an issue in connection with the enforcement of a ship mortgage over a NIS registered ship. Where a mortgage is enforced the ownership of the ship may need to be transferred from a Norwegian entity to a foreign entity. As a result the mortgagee will have to either ensure sufficient Norwegian management of the ship (which may not have been required and in place when the ship was owned by the Norwegian entity) or change the flag of the vessel. The latter alternative may cause problems if the ship under charter with restrictions regarding either a change in management or flag.
In light of the above the various parties involved in shipping transactions where a choice is made to register the ship with NIS will need to carefully structure the deal, and the related contracts, to take into account the Norwegian management requirement.