Promissory note

What it means

A promissory note is a security carrying an unconditional undertaking to pay a stated sum at a stated time. A promissory note promises payment; a bill of exchange orders a third party to pay.

It is strictly formal: a missing element, such as the word "bill" in the text or the date of issue, turns it into ordinary paper with no bill-of-exchange effect.

As a security, a note can be transferred to another person by endorsement. The new holder then enforces it in its own name, and the debtor cannot raise most defences from the original deal against it. Whoever signs a note therefore does not know in advance whom they will end up paying, and cannot rely on arrangements made only with the first creditor.

How it works in practice

It is used as security: the supplier holds an instrument enforceable faster than an ordinary receivable, because bill proceedings do not examine why it was issued.

Gentler alternatives with the same purpose are an acknowledgment of debt and a notarial deed with consent to enforceability. Both are clearer and less risky for both sides.

In the books a note used as payment is recorded on separate note accounts, with the maturity date taken from the note. If it only secures an existing invoice, no second receivable is booked; the note is kept in off-balance-sheet records instead. That way it is not forgotten when collecting, and the claim is not counted twice.

What to watch out for

A blank note signed "just in case" is a serious risk for the signer: the amount filled in is hard to challenge and defences in bill proceedings are severely limited.

A note has its own deadlines: rights under it are subject to limitation under bills of exchange law, not the rules for an ordinary receivable, and with a bill of exchange steps against other obligors must be taken in time. Leaving a note in a drawer until trouble starts can mean discovering that the bill claim is gone and only an ordinary lawsuit remains.