The board of a Norwegian limited company (aksjeselskap, AS) is not only responsible for day-to-day management – it also has a statutory duty to take action when the company's financial position deteriorates to a critical level. Section 3-5 of the Norwegian Companies Act (aksjeloven) sets out clear obligations for what the board must do when equity is no longer sound.
What Triggers the Duty to Act?
The duty to act arises when it must be assumed that the company's equity is lower than what is sound given the risk and scale of its operations – that is, when the requirement for sound equity and liquidity under Section 3-4 of the Companies Act is no longer satisfied.
It is the company's actual equity that is decisive, not the accounting figure. The board cannot simply rely on the balance sheet from the last annual accounts. The board is expected to monitor the financial position on an ongoing basis – particularly when events occur that may materially affect equity, such as significant losses, loss of key customers or changes in market conditions.
What Must the Board Do?
When the conditions for the duty to act are met, the board is obliged to:
1. Deal with the matter immediately. The board cannot defer the issue. The chair of the board has a duty to ensure the matter is placed on the board's agenda without undue delay.
2. Convene the general meeting within a reasonable time. If the board is not able to rectify the equity position on its own within a reasonable period, the general meeting must be convened. What constitutes a "reasonable time" depends on the circumstances – but the board cannot wait too long, particularly where the financial position continues to deteriorate.
3. Present the general meeting with a report on the company's financial position.
4. Propose specific measures capable of restoring sound equity. Relevant measures may include restructuring or rationalising operations, or injecting new equity through a share capital increase.
If the board is able to rectify the situation itself within a reasonable period – so that equity again reaches a sound level – it is not necessary to convene the general meeting.
Duty to Propose Dissolution
If the board finds no basis for proposing measures that would give the company sound equity, or if such measures cannot be implemented, the board is obliged to propose that the company be dissolved.
This applies, for example, where the general meeting has approved a share capital increase that subsequently proves impossible to complete due to insufficient subscriptions. In such a situation, the board may either propose alternative measures or propose dissolution – depending on what is sound given the company's circumstances.
Where the financial position is so serious that the board is obliged to file for bankruptcy under Section 407 of the Norwegian Penal Code, the board has an independent right and duty to do so without referring the matter to the general meeting.
Consequences of Failing to Act
Board members who fail to act in accordance with Section 3-5 may be held personally liable in damages under Section 17-1 of the Companies Act. The Norwegian Supreme Court has in several cases held that passivity on the part of the board in such situations can give rise to liability towards creditors who suffer losses as a result of the insolvency not being addressed in time. In serious cases, criminal liability under Section 19-1 of the Companies Act may also arise.
It is also not sufficient merely to propose measures if those proposals are not followed up by the general meeting. If the board does not achieve support for necessary measures, the consequence may be that the board should resign – or, if the situation warrants it, file for bankruptcy.
Practical Advice for Board Members
Many board members in small limited companies are not aware that the duty to act under Section 3-5 can arise long before the company is technically insolvent. The key is ongoing monitoring:
- Review the financial position regularly – not only in connection with the annual accounts.
- Take warning signs seriously – declining revenue, growing debt or loss of key customers may trigger the duty to act.
- Document the board's assessments in the board minutes, so it is clear that the situation has been considered and what measures have been discussed.
- Seek advice early if you are uncertain whether the company's equity position is sound.
At Stift, we help you structure your company correctly from day one. Get in touch if you have questions about the board's obligations or other aspects of Norwegian company law.