Question: What is a Promissory Note and How Do I Draft One?Answer:
A promissory note is a negotiable instrument that sets out the terms under which one party, known as the issuer, agrees in writing to pay a set monetary sum to another party, known as the payee. The repayment can be either on demand or on a specified future date.
It is important to note that this tool is not a loan agreement, although both do relate to borrowing money. Both a lender and a borrower need to sign a loan agreement for it to be legal, valid and binding. 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 issuer has signed and dated a promissory note, they have a legal obligation to make payment. Using a promissory note can be a great option in circumstances where you don’t want to have to draft, negotiate and sign a complex loan agreement, but where you nevertheless want to make sure you have documentary evidence of the sum owed to or by you.
It is a very good idea to ensure that loans or sums owed are documented clearly and correctly, particularly if the loan is made in a familial context. If you decide that you need a promissory note, either as a payer or payee, make sure you either create one using a template which has been reviewed and approved by lawyers, or engage a lawyer to draft it. In particular, if you start inserting complex clauses into a standard promissory note, it may be deemed a complex financial product and hence become regulated by the Corporations Act (2001). This will add on a layer of complexity to your transaction and could even invalidate the documents. You don’t want your promissory note to be deemed invalid by the courts.