Adequate equity and liquidity under Norwegian law

1. Purpose of the requirement
The requirement for adequate equity and liquidity serves an important creditor-protection function.

It also reflects the board's responsibility for the company's financial management. The board must remain informed about the company's financial position and ensure that its business, accounts and management of assets are subject to appropriate control.

The requirement is also relevant when the company makes distributions to shareholders. Even where the accounting rules would otherwise permit a dividend, the company may only make the distribution if it will continue to have adequate equity and liquidity afterwards.

A breach of the board's duties may, depending on the circumstances, give rise to liability under Section 17-1 of the Companies Act.

2. Adequate equity
Whether a company has adequate equity requires an overall assessment based on the circumstances of the particular business.

Particular attention must be paid to the risk and scope of the company's operations.

The relevant risks may be financial, operational or commercial. A company with stable and predictable income may require a different capital position from a development company with substantial expenditure and uncertain future revenues.

The assessment is based on the company's real financial position, not necessarily the book value of its equity.

Assets and liabilities should therefore be considered at their realistic values. Where the company relies on values above those recorded in its accounts, there must be a sound basis for doing so.

Equity should also not be assessed in isolation. Relevant considerations may include:

• the relationship between equity and debt
• the composition and maturity of the company's debt
• interest and repayment obligations
• subordinated financing
• access to committed long-term financing
• the risks inherent in the company's business.

The company's stage of development may also be relevant. A start-up or development company may legitimately operate with losses and declining equity for a period, provided there is a realistic and sound basis for expecting the financial position to improve within a reasonable time.

The start-up phase does not, however, exempt the company from the requirement to maintain adequate equity.

3. Adequate liquidity
The company must also maintain adequate liquidity.

Liquidity concerns the company's ability to meet its obligations as they fall due.

The assessment should take into account available cash and other sources of liquidity as well as expected receipts and payments. In practice, liquidity budgets, cash-flow forecasts or similar projections will often be important tools for the board.

The appropriate forecast period will depend on the nature of the business and how far into the future meaningful projections can reasonably be made.

The assessment should also allow appropriately for uncertainty and foreseeable events that may create additional liquidity requirements.

A company may therefore have positive accounting equity while still failing the liquidity requirement if it does not have adequate resources to meet its obligations when due.

4. When must the board make the assessment?
The statutory requirement applies at all times.

The board cannot therefore limit its assessment to preparation of the annual accounts, decisions on dividends or other formal capital transactions.

How frequently and in what detail the position needs to be reviewed depends on the circumstances.

For a company with stable finances, separate assessments may be required relatively infrequently. Where the company is experiencing financial pressure, material changes or increased business risk, much closer monitoring may be necessary.

The assessment should be based on the information available at the relevant time. It should not, however, be purely static.

The board may – and should – consider reasonably foreseeable future developments, including:

• contractual payments
• expected revenues
• financing requirements
• committed or realistically available financing
• changes in costs
• other circumstances likely to affect the company's financial position.

The assumptions used must be realistic and appropriately reflect uncertainty and risk.

5. The board's duty to act
If it must be assumed that the company's equity is lower than is adequate under Section 3-4, the board must address the matter immediately.

Within a reasonable period, the board must call a general meeting and provide the shareholders with an account of the company's financial position.

If the company still does not have adequate equity, the board must propose measures to remedy the situation.

Possible measures may include:

• new equity
• refinancing
• conversion of debt into equity
• cost reductions
• sale of assets or parts of the business
• other restructuring measures.

The board should also consider measures within its own authority. If the financial position can be restored within a reasonable period, this may affect how the statutory process needs to be handled.

If no measures capable of restoring adequate equity can be proposed, or if the proposed measures cannot be implemented, the board must propose that the company be dissolved.

The rule that previously triggered a separate duty to act when the company's equity fell below half of its registered share capital no longer applies to Norwegian private limited companies (AS).

The express statutory duty to act under Section 3-5 relates to inadequate equity. The separate requirement to maintain adequate liquidity under Section 3-4 nevertheless applies continuously, and serious liquidity difficulties may require the board to consider financing, restructuring or other measures without delay.

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Originally published 12 October 2024. Last updated 16 August 2026.