Promissory notes are an essential tool for managing trade receivables. It facilitates the granting of payment deadlines while allowing the sums due to be mobilised quickly. Less widely used than the bill of exchange, it retains its advantages for certain specific transactions and provides a secure legal framework for creditors. However, there are a number of special features that need to be understood.
Definition and legal characteristics
A promissory note is a document of title by which one person, the subscriber, undertakes to pay a specified sum on a specific date to another person, the beneficiary, or to his order. Unlike a bill of exchange, which brings together three people, a promissory note commits only two parties:
- The subscriber: the debtor who issues the instrument and undertakes to pay
- The beneficiary: the creditor who receives the promise to pay
The subscriber combines the functions of drawer and drawee in the bill of exchange. This simplification modifies certain aspects of the applicable legal regime, in particular concerning the provision.
The promissory note is based on a direct commitment by the debtor. It is not an order to pay given to a third party, but a promise to pay. This characteristic makes it a particularly suitable instrument for relations between private individuals or for bank loans.
Mandatory information for a valid promissory note
Article L. 512-1 of the French Commercial Code lists six compulsory items of information:
- The term "promissory note" inserted in the text
- A pure and simple promise to pay a specific sum
- Indication of maturity
- Indication of the place of payment
- The name of the beneficiary
- The date and place where the ticket is purchased
- The policyholder's signature
If any of these details are missing, the document will be disqualified as a promissory note. However, the document may be used as an acknowledgement of debt subject to ordinary law.
Article L. 512-2 of the French Commercial Code provides for certain presumptions to compensate for the absence of certain secondary particulars. For example, in the absence of any special indication, the place of creation of the security is deemed to be the place of payment and the domicile of the subscriber.
This strict formalism protects the parties and guarantees the legal certainty necessary for the title to circulate.
Practical uses of promissory notes
Sale of business assets
In business sales, promissory notes are used to formalise payment of the price in instalments. The buyer subscribes to a series of promissory notes in favour of the seller, corresponding to the various agreed due dates.
These notes, sometimes referred to as "fund notes", have one major advantage: the seller's lien on the land sold is automatically transferred to the holder of the note. This enhanced protection explains their frequent use in this type of transaction.
Bank loans
Credit institutions use promissory notes as a means of securing loans. The borrower customer subscribes to a promissory note in favour of the bank, which can then rediscount it with other financial institutions.
This practice enables banks to improve their cash flow while maintaining commercial relations with their customers. Promissory notes used in this way are often referred to as "mobilisation notes".
International transactions
In some international transactions, particularly with English-speaking countries, promissory notes are preferred to bills of exchange. Its simpler mechanism makes it easier to use in different legal contexts.
These international aspects are developed in our article on conflicts of laws relating to commercial paper: a practical guide.
The circulation of promissory notes
A promissory note is a negotiable instrument circulated mainly by endorsement, a technique whereby the beneficiary transfers his rights to a third party by signing the back of the instrument.
Article L. 512-3 of the French Commercial Code refers to the provisions relating to bills of exchange for all matters concerning endorsement. This means that :
- The endorsement must be pure and simple
- It transfers all rights resulting from the ticket
- It confers the status of legitimate bearer on the holder of the security
The endorsement may be :
- Translative: it transfers ownership of the security
- By power of attorney: he gives a mandate to cash the ticket
- Pignorative: it constitutes a pledge on the claim
Bearer notes, a rarer variant, are passed on by simple tradition (manual delivery). This form is less secure for successive bearers, as it leaves no trace of transmission.
These circulation mechanisms make it possible to mobilise receivables, an essential function of commercial paper, as explained in our complete guide to commercial paper for businesses.
Legal protection for beneficiaries
The holder of a promissory note benefits from significant protections that reinforce the effectiveness of this debt instrument.
Unenforceability of exceptions
The principle of the unenforceability of defences, applicable to promissory notes by reference to article L. 512-3 of the French Commercial Code, particularly protects the holder acting in good faith.
This principle means that the subscriber cannot assert against the bearer the defences that it could have raised against the initial beneficiary or previous bearers. For example, a dispute over the original commercial transaction will not affect the rights of the rightful holder.
There are limits to this rule, particularly in cases of bad faith on the part of the bearer or where the note is vitiated by an apparent defect.
Chamber solidarity
Article L. 512-3 of the French Commercial Code extends the principle of joint and several liability for bills of exchange to promissory notes.
All signatories to the note (subscriber and endorsers) are jointly and severally liable for payment. The holder may therefore take action against all the bondholders individually or collectively, without observing the order in which they have committed themselves.
This solidarity considerably strengthens the creditor's position and makes it easier to recover the debt.
Access to enforcement procedures
The promissory note gives the bearer an enforceable title after protest. This formality, drawn up by a bailiff, establishes non-payment and enables enforcement measures to be taken quickly.
However, any recourse to the courts must be exercised within strict time limits, failing which it will be forfeited. Vigilance is therefore essential to safeguard these rights.
Risks associated with the use of promissory notes
Solvency risk
The main risk remains the insolvency of the underwriter and any endorsers. A prior analysis of the financial situation of the parties involved is essential.
If insolvency proceedings are instituted against the purchaser, the claim represented by the promissory note becomes part of the frozen liabilities. The holder must then declare his claim and be subject to the rules of insolvency law.
Formal defects
Failure to comply with strict formalities may result in the ticket being disqualified. Particular attention must be paid to the wording of the ticket and compliance with the mandatory information.
The disqualified document may nevertheless be used as proof of a claim under ordinary law, but the bearer will lose the advantages of the exchange regime.
Effects of convenience
The use of fictitious promissory notes or notes of convenience can result in severe civil and criminal penalties. These practices, designed to mislead third parties about a company's true financial position, are analysed in detail in our article on effects of convenience: legal risks and penalties.
Contesting a promissory note
A promissory note can be challenged on several grounds:
Invalidity for formal defect
Failure to comply with the mandatory information shall result in the disqualification of the security. This disqualification may be invoked by any interested party, including the subscriber.
Vitiated consent
The signing of a promissory note does not exclude the application of the general rules relating to defects in consent (error, fraud, violence). However, these can only be invoked against the original beneficiary or a bearer acting in bad faith.
No cause
A promissory note issued without a real cause or for an illicit cause may be contested. This defence is rarely effective against a holder acting in good faith, because of the abstract nature of the exchange undertaking.
Disputes must generally be lodged in the context of legal proceedings, after payment has been refused. The court of jurisdiction varies according to the civil or commercial nature of the ticket.
The electronic promissory note
The dematerialisation of commercial paper also affects promissory notes. The raised promissory note (BOR) enables computerised processing of transactions while retaining the essential legal characteristics of the instrument.
Act no. 2024-537 of 13 June 2024 ("Attractiveness" Act) goes a step further by introducing the concept of electronic transferable securities. Article 15 creates article L. 512-1-1 of the French Commercial Code, which allows promissory notes to be drawn up, signed and kept in electronic form.
This step considerably modernises the promissory note regime while preserving its essential functions. The precise terms of application are detailed in our article on the dematerialisation of commercial paper: Attractivité 2024 law.
The electronic promissory note therefore retains its rightful place alongside the bill of exchange in the legal arsenal of companies.
A strategic alternative to bills of exchange
Less complex than the bill of exchange, the promissory note is sometimes an appropriate strategic alternative. Its simpler formalism and two-person mechanism make it a suitable instrument for certain specific situations.
It offers creditors strong legal protection while simplifying relations between the parties. In certain commercial contexts, this simplicity is a decisive advantage.
To take full advantage of the benefits of promissory notes while limiting the associated risks, appropriate legal advice is often essential. Our firm oflawyers in commercial paper law can help you secure your receivables and resolve any disputes relating to promissory notes. Contact us for a personalised analysis of your situation.
Sources
- French Commercial Code, Articles L. 512-1 to L. 512-8
- Law no. 2024-537 of 13 June 2024 aimed at increasing business financing and the attractiveness of France
- BONHOMME R. and ROUSSILLE M., Instruments de crédit et de paiement, LGDJ
- GIBIRILA D., Effet de commerce, Répertoire de droit commercial, Dalloz, January 2023
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