Debt instrument: simple vs. negotiable explained

What is a debt instrument (gældsbrev)?

A debt instrument (gældsbrev) is written evidence that one person (the debtor) owes another person (the creditor) a specific amount. Debt instruments are governed by the Debt Instruments Act (lov om gældsbreve) and are used to document loans, payment obligations and credit agreements.

A debt instrument differs from a loan agreement by focusing on the debtor's obligation. A loan agreement typically governs the rights and duties of both parties more explicitly.

Simple vs. negotiable debt instrument

The most central distinction in the Act is between two types:

Simple debt instrument

A simple debt instrument is not intended to circulate as a means of payment. It is addressed to a specific creditor:

• The debtor can as a rule raise their objections, including against a new acquirer of the instrument
• Typically used for private loans, family loans and business loans
• Has lower formal requirements than negotiable instruments
• Covered by chapter 3 of the Debt Instruments Act on simple debt instruments

Negotiable debt instrument

A negotiable debt instrument is designed to circulate and can be transferred to a third party with extinguishing effect. This means an acquirer in good faith can obtain a better right than the original creditor:

• The debtor's objections can as a rule not be raised against an acquirer in good faith
• Requires that it is expressly drawn up as a negotiable instrument
• Typically used in business and financing contexts
• Covered by chapter 2 of the Debt Instruments Act on negotiable debt instruments

Choose a simple debt instrument for private and family loans. Only choose a negotiable instrument if you expressly want the debt to be transferable.

When should you use a debt instrument?

Debt instruments are especially relevant in the following situations:

Private and family loans

If you lend money to family or friends, a written debt instrument is crucial. It documents:

• That the amount is a loan and not a gift (important towards the tax authorities)
• The loan terms, including any interest and repayment
• The parties' obligations if the borrower does not pay

A family loan can be interest-free without being a gift, if there is genuinely a loan. It is therefore common to draw up an interest-free on-demand debt instrument, where the debt can be called for repayment on demand. What matters is that it is a real loan that is to be repaid. If the lender later chooses to forgive the debt, that forgiveness can, by contrast, be a gift that can trigger gift tax if it exceeds the annual thresholds for tax-free gifts.

Business financing

Owners who put money into a business as a loan (rather than equity) should document this with a debt instrument. This matters for:

• Interest deductibility
• Priority in the event of insolvency
• A clear separation of loan and capital contribution

Sales on credit and instalment arrangements

If you sell goods or services on credit, a debt instrument gives you a documented claim to payment.

What should a debt instrument contain?

A valid debt instrument should as a minimum contain:

1. The debtor's and creditor's full name and address
2. The size of the debt, a precise amount in kroner
3. The date of creation, that is, when the debt arose
4. Interest, the rate and method of calculation (or a statement that it is interest-free)
5. Repayment terms, the term, repayment plan or due date
6. Consequences of default, for example default interest and early repayment
7. The debtor's signature (the creditor's signature is also recommended)
8. Date and place

Formal requirements

There are no strict formal requirements for a simple debt instrument; it just has to be in writing and signed by the debtor. A negotiable instrument must in addition expressly appear as a negotiable instrument and either be addressed to a named creditor or contain a bearer clause.

Interest and interest rates

If you do not agree on interest, the Interest Act rules on default interest on late payment apply. The default interest is the National Bank's reference rate (the lending rate) plus a supplement of 8 percentage points.

For family loans it is not a requirement to agree on interest. An interest-free loan is not in itself a gift, when there is genuinely a loan that is to be repaid.

Limitation of debt instruments

Here is an important and often misunderstood detail. An ordinary claim as a rule becomes time-barred after 3 years (section 3 of the Limitation Act). But when a debt instrument has been issued for the claim, the limitation period is 10 years, under section 5(1)(1) of the Limitation Act.

• The longer 10-year period applies to both simple and negotiable debt instruments. It is the debt instrument itself that triggers it, not notary confirmation or registration.
• Interest and the like that fall due on an ongoing basis do, however, become time-barred after the ordinary 3-year period (section 5(2)).
• The period can be interrupted, for example by the debtor acknowledging the debt or by legal steps. A new period then runs.

Registration of a debt instrument

A debt instrument does not have to be registered to be valid. However:

• A mortgage deed (a debt instrument with a charge over real property) must be registered to be protected against acquirers and creditors
• Registration costs a duty that is partly calculated on the size of the debt
• Registration gives priority in relation to other holders of rights over the property

How to draw up a good debt instrument

A legally usable debt instrument does not require a lawyer, but it must follow the framework of the Debt Instruments Act and contain all the essential terms: the parties, the amount, interest, repayment and the debtor's signature. The document can be signed digitally and is ready for use as soon as the signatures have been obtained.

Frequently asked questions

Can you make an oral debt instrument?

Oral loan agreements are legally binding but very hard to prove. A written debt instrument is always preferable, as it provides clear documentation of the loan, the terms and both parties' obligations.

What happens if the debtor does not pay?

If the debtor does not pay on time, the creditor can charge default interest. The creditor can then send a debt-collection demand and ultimately bring the case before the enforcement court to obtain an attachment. A correctly drawn-up debt instrument makes that process markedly easier.

Is a debt instrument the same as a loan agreement?

Not quite. A debt instrument focuses primarily on the debtor's obligation and on the evidence of the debt. A loan agreement typically governs both parties' rights and duties more broadly, including disbursement, default terms and any security. In practice the two documents are often used side by side.