Types of Promissory Notes
A common instrument of credit financing is the promissory note, which is a specific commitment by a debtor regarding payment of a certain amount to the creditor. A promissory note often specifies terms applicable to the debt and payment, such as time and place for payment and applicable interest, as well as highlighting possible collateral and recollection. From an agreement regarding the debt, the terms of which the parties have agreed upon, a promissory note is accordingly differentiated by the fact that a promissory note is valid also as a unilateral commitment. According to the Promissory Notes Act, promissory notes can be divided into simple promissory notes and negotiable bonds.
A simple promissory note is always made out to a named person, i.e., it always specifies the name of the creditor to whom the debtor has to pay the debt. On the other hand, the creditor cannot assign a simple promissory note to a new creditor either, without issuing notice to the debtor of the assignment. In the absence of a notification regarding assignment, payment to the original creditor specified on the promissory note releases the debtor from the debt, provided that the debtor acted in so-called well-founded good faith, i.e., he/she was not and should not have been aware of the assignment.
Negotiable promissory notes are made out, that is, the debt specified in the document shall be paid, to either a designated person, a third person ordered by such person, or the holder of the promissory note, in which case the promissory note is referred to as a bearer bond. Also a promissory note, where the payee is not specified at all, is a negotiable promissory note within the meaning of the Promissory Notes Act. The holder of a bearer bond is, as a rule, deemed to be the creditor entitled to payment for the debt. The same applies to a promissory note made out to a designated person or a third person ordered by such person, provided that the note-holder can refer to a so-called uninterrupted chain of transfers, i.e., consequent written assignments on the promissory note which extend up to the holder. Such assignments may be either to a designated person or to the holder, or open assignments, since the holder is deemed to be the lawful creditor, and is not, in the absence of a specific reason, required to examine the validity of previous assignments. Also, the debtor’s payment of the debt to such a holder is deemed to be valid.
Unless otherwise agreed in the promissory note, the following general rules of the Promissory Notes Act apply to the debt:
applicable rates of interest and late payment interest are determined by the Interest Act;
the debt will become due upon demand by the creditor, and the debtor is also entitled to pay the debt at will. Interest on debt capital shall, however, be paid annually;
the debt must, as a rule, be paid at the home or business premises of the creditor. However, the creditor is responsible for possible delays and costs arising from the fact that the debtor has not received any information regarding changes of the creditor’s address or the location of payment.
Bonds are a type of negotiable promissory note inherently related to company financing. Bonds are promissory notes issued by companies or public bodies under the same terms to a large number of creditors, for the purpose of obtaining market-priced financing. Bonds are often included in the book-entry system, in which case entries in the creditors’ book-entry accounts replace bonds in physical form and their written assignments. They are often tradable on a secondary market, i.e., creditors can trade them at prices based on the bond issuer's financial situation and prevailing interest rates.