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.

If you are looking to have a promissory note drafted or reviewed, get in touch with our banking and finance lawyers. Fill out the form on this page or contact us on 1300 544 755.

Lachlan McKnight

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