Product Code Database
A promissory note, sometimes referred to as a note payable, is a financial instrument in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), (1987). 9780195043778, Oxford Univ. Pr. ISBN 9780195043778 subject to any terms and conditions specified within the document.
A promissory note is said to be a negotiable instrument when it contains an unconditional promise.
Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days' notice before the payment is due.
Promissory notes may be used in combination with security agreements. For example, a promissory note may be used in combination with a mortgage law, in which case it is called a mortgage note.
A promissory note is very similar to a loan. Each is a legally binding contract to unconditionally repay a specified amount within a defined time frame. However, a promissory note is generally less detailed and less rigid than a loan contract. For one thing, loan agreements often require repayment in installments, while promissory notes typically do not. Furthermore, a loan agreement usually includes the terms for recourse in the case of default, such as establishing the right to foreclose, while a promissory note does not.
In the United States, the Non-Negotiable Long Form Promissory Note is not required.
When a company engages in many of such transactions, for instance by having provided services to many customers all of whom then deferred their payment, it is possible that the company may be owed enough money that its own liquidity position (i.e., the amount of cash it holds) is hampered, and finds itself unable to honour their own debts, despite the fact that by the books, the company remains solvent. In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid insolvency. However, in jurisdictions where promissory notes are commonplace, the company (called the payee or lender) can ask one of its debtors (called the maker, borrower or payor) to accept a promissory note, whereby the maker signs a legally binding agreement to honour the amount established in the promissory note (usually, part or all its debt) within the agreed period of time. The lender can then take the promissory note to a financial institution (usually a bank, albeit this could also be a private person, or another company), that will exchange the promissory note for cash; usually, the promissory note is cashed in for the amount established in the promissory note, less a small discount.
Once the promissory note reaches its maturity date, its current holder (the bank) can execute it over the emitter of the note (the debtor), who would have to pay the bank the amount promised in the note. If the maker fails to pay, however, the bank retains the right to go to the company that cashed the promissory note in, and demand payment. In the case of unsecured promissory notes, the lender accepts the promissory note based solely on the maker's ability to repay; if the maker fails to pay, the lender must honour the debt to the bank. In the case of a secured promissory note, the lender accepts the promissory note based on the maker's ability to repay, but the note is secured by a thing of value; if the maker fails to pay and the bank reclaims payment, the lender has the right to execute the security.
Ancient Carthage was purported to have issued lightweight promissory notes on parchment or leather before 146 BC. In China during the Han dynasty promissory notes appeared in 118 BC and were made of leather. The Romans may have used promissory notes in 57 AD as a durable lightweight substance as evidence of a promise in that time has been found in London among the Bloomberg tablets.
Historically, promissory notes have acted as a form of privately issued currency. Flying cash or feiqian was a promissory note used during the Tang dynasty (618 – 907). Flying cash was regularly used by Chinese tea merchants, and could be exchanged for hard currency at provincial capitals. (2026). 9780195175714, Oxford University Press. ISBN 9780195175714 The Chinese concept of promissory notes was introduced by Marco Polo to Europe.
According to tradition, in 1325 a promissory note was signed in Milan.Jankowiak, Marek. Dirhams for slaves. Medieval Seminar, All Souls, 2012, p.8 Around 1150 the Knights Templar issued promissory notes to pilgrims, pilgrims deposited their valuables with a local Templar preceptory before embarking, received a document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds in an amount of treasure of equal value.
Around 1348 in Görlitz, Germany, the Jewish creditor Adasse owned a promissory note for 71 marks. There is also evidence of promissory notes being issued in 1384 between Genoa and Barcelona, although the letters themselves are lost. The same happens for the ones issued in Valencia in 1371 by Bernat de Codinachs for Manuel d'Entença, a merchant from Huesca (then part of the Crown of Aragon), amounting a total of 100 florins.As noted by Manuel Sanchis Guarner in La Ciutat de València. Ajuntament de València, València. Cinquena Edició 1989, plana 172. Quote in Catalan language In all these cases, the promissory notes were used as a rudimentary system of paper money, for the amounts issued could not be easily transported in metal coins between the cities involved. Strozzi family issued an early form of promissory note in Medina del Campo (Spain), against the city of Besançon in 1553. However, there exists notice of promissory notes being in used in Mediterranean commerce well before that date.
In 2005, the Korean Ministry of Justice and a consortium of financial institutions announced the service of an electronic promissory note (eNote) service, after years of development, allowing entities to make promissory notes (notes payable) in business transactions digitally instead of on paper, for the first time in the world.
In the United States, eNotes were made possible as a result of the Electronic Signatures in Global and National Commerce Act in 2000 and the Uniform Electronic Transactions Act (UETA). An eNote must meet all the requirements to be a written promissory note.
The 1704 legislation was repealed by the Bills of Exchange Act 1882 (45 & 46 Vict. c. 61).
The various State law enactments of the Uniform Commercial Code define what is and what is not a promissory note, in section 3-104(d):
Thus, a writing containing such a disclaimer removes such a writing from the definition of negotiable instrument, instead simply memorializing a contract.
International law
In 1930, under the League of Nations, a Convention providing a uniform law for bills of exchange and promissory notes was drafted and ratified by eighteen nations. Article 75 of the treaty stated that a promissory note shall contain:
Worldwide
England and Wales
The Bills of Exchange Act of 1704, also known as "An Act for giving like Remedy upon Promissory Notes, as is now used upon Bills of Exchange, and for the better Payment of Inland Bills of Exchange", primarily aimed to extend the same legal remedies available for bills of exchange to promissory notes. This made promissory notes legally negotiable instruments, meaning they could be transferred to others via endorsement.
United States
In the United States, a promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes called are used extensively in combination with Mortgage law in the financing of real estate transactions. One prominent example is the Fannie Mae model standard form contract Multistate Fixed-Rate Note 3200, which is publicly available. Promissory notes, or , are also issued to provide capital to businesses. However, promissory notes act as a source of finance to the company's creditors.
See also
|
|
