What Are Promissory Notes

A promissory note is an unconditional promise made by a party to pay an agreed sum of money at a fixed or determinable future time, to or at the order of a specified person.

This article endeavours to shed some light on what a promissory note is, when you may need one and why you need a lawyer to draft this kind of legal document.

Promissory Notes – When You May Need One

What is a promissory note? A promissory note is a negotiable instrument, where in one party – known as the maker or issuer – makes an unconditional promise in writing to pay a determinate sum of money to another party – known as the payee – either at a fixed or determinable future time or on demand of the payee, under specific terms.

Generally, if an offer involves just a promissory note with a face value of at least $50,000 and no other special features, it will not be regulated under the Corporations Act 2001 (“the Act”).

However, the Australian Securities and Investments Commission (“ASIC”) notes that some issuers are seeking to rely on the promissory note exemptions under the Act by offering complex investment arrangements involving promissory notes to retail investors.

A person can also borrow money by way of a loan agreement.

Promissory notes and loan agreements both relate to the borrowing of an amount of money, but these terms do not have the same legal meaning.

In case of a loan agreement, it is vital that both the lender and the borrower sign the agreement for it to be legal, valid and binding. Whereas, only one party – the issuer – needs to sign a promissory note. Furthermore, a promissory note is generally a relatively simple, straight forward document, compared to a loan agreement which can contain some very complex clauses, terms and conditions.

Once the payee has signed and dated a promissory note, he/she has a legal obligation to make the payment.

Promissory notes can be a great option in a circumstance where you do not want to draft, negotiate and sign a complex loan agreement, but at the same time want to ensure that you have proper documentary evidence of the sum owed to or by you.

You must ensure that the loans or sums owed are documented clearly and correctly, particularly if the loan is made by a family member or in a familial context.

Why You Need A Lawyer

If you are an issuer or payee and have decided to have a promissory note, you must create one with the help of a legal professional or engage a commercial lawyer to draft it or offer their legal advice.

If you are looking to rely on the promissory note exemptions under the Act, by offering complex investment arrangements involving promissionary notes to retail investors, or inserting complex clauses into a standard promissory note, it will be deemed as a financial product and therefore will be regulated under the Act, requiring licensing and disclosure.

In particular, ASIC is concerned about complex arrangements involving promissory notes that:

  • are accompanied by other promises about how the money loaned may or will be repaid;
  • may reasonably be considered to express or contain a representation or agreement that the investment returns will be produced by an underlying specific investment or the performance of some specific commercial activity;
  • are not liquid, cannot be easily traded and are not designed to raise short term finance to manage day to day liquidity issues; and
  • are directed primarily at the retail clients.

Hence, this will add a layer of complexity to your transaction and could even invalidate the documents.

We at Owen Hodge Lawyers can assist you in drafting a promissory note and ensure that your note is not deemed to be invalid by the Courts.

In case your promissory note has a face value of less than $50,000 and there are no other special features, our experts will ensure that it is not deemed as financial product and falls under the promissory note exemptions under the Act.

Call the lawyers Sydney residents can trust at Owen Hodge Lawyers on 1800 770 780 to help with your promissory notes.

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