What different promissory notes are there?
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What Different Promissory Notes Are There?
Table of Contents
- Introduction
- The Promissory Notes Act
- Simple promissory notes
- Promissory notes
- Specific Types of Promissory Notes
- Advantages and Disadvantages of Different Debentures
- Conclusion
Introduction
A promissory note is a legal document that establishes a debt and specifies the terms of repayment. There are different types of promissory notes, each with its own unique characteristics and uses. In this article we will explore the different types of promissory notes, their legislation, practice examples and provide practical examples of when each type of promissory note is applied.
The Promissory Notes Act
The Promissory Notes Act (1936:81) is the central legislation that regulates promissory notes in Sweden. The law distinguishes between two main types of promissory notes: simple promissory notes and current promissory notes. Within these categories are additional subcategories that we will explore.
Simple promissory notes
A simple promissory note is addressed to a specific person and is not intended to be transferred to others. This means that the lender and borrower are specified in the document, and the debt can only be paid to the specified lender.
Examples of use:
- Personal loan: When a private individual lends money to a friend or family member, they can use a simple promissory note to formalize the loan and specify the repayment terms.
- Consumer Credit: Banks and financial institutions may use simple promissory notes to document consumer credit that is not intended to be assigned.
Case law:
In the legal case NJA 2001 p. 191, the validity of a simple promissory note that had been drawn up between two private individuals was tested. The Supreme Court ruled that the promissory note was valid and that the borrower was obligated to pay according to the terms specified in the document.
Promissory notes
Current promissory notes are designed to be transferable to others. They can be further divided into two subcategories: bearer debentures and order debentures.
Holder debenture
A bearer debenture is addressed to the "holder" and is transferable by being given to a new holder. Whoever has the promissory note in their possession has the right to demand payment.
Examples of use:
- Trade Loans: Bearer promissory notes are often used in trade and business transactions where the debt can be transferred to a new holder as part of the payment process.
- Short-term credits: Companies can use bearer debentures for short-term credits that can be assigned to different parties depending on business needs.
Case law:
In NJA 1987 p. 639 a case was dealt with where a bearer debenture had been transferred several times. The Supreme Court confirmed that the holder in question had the right to demand payment, underscoring the transferability of the promissory note.
Order promissory note
A promissory note is addressed to a certain person or order, which means that it can be transferred to someone else by the recipient writing a declaration of assignment on the promissory note.
Examples of use:
- Corporate financing: Companies can use promissory notes to finance operations by assigning the debt to investors or other companies.
- Intercompany loans: Promissory notes can be used when one company borrows money from another company and the debt can be transferred to a third party if necessary.
Case law:
In NJA 1992 p 351 the Supreme Court held that a promissory note had been properly assigned and that the new holder was entitled to demand payment under the terms of the debenture.
Specific Types of Promissory Notes
In addition to the main categories of simple and current promissory notes, there are several specific types of promissory notes that are used in different contexts.
Mortgage debt
A mortgage debt is a promissory note that is secured by a mortgage on real property or other valuable property. If the borrower is unable to repay the loan, the lender can take the property as collateral.
Examples of use:
- Mortgage: Mortgage debt is often used in mortgages where the property acts as security for the loan.
- Business loans: Businesses can use mortgage debt to obtain loans secured by real estate or other property.
Case law:
In NJA 2010 p. 317, a case was dealt with where a mortgage debt had been secured with a property. The Supreme Court determined that the lender had the right to take possession of the property in the event of non-payment.
Consumer debt
A consumption tion debt is a promissory note used to finance consumer credit. These loans are usually short-term and have higher interest rates.
Examples of use:
- Personal loans: Often used for smaller loans to private individuals for consumption purposes, such as the purchase of electronics or furniture.
- Credit card debt: Credit card companies use consumer debt to document debt incurred from credit card use.
Case law:
In NJA 2005 p. 624, a case was examined where a private person had taken out a consumer loan and was unable to pay it back. The court determined that the promissory note was valid and that the borrower was obligated to repay the debt with interest.
Advantages and Disadvantages of Different Debentures
Advantages:
- Flexibility: Current promissory notes offer flexibility in that they can be assigned to others, which can be useful in business contexts.
- Security: Mortgage debt provides the lender with security through a lien on real property, which reduces the risk of losses in the event of non-payment.
- Clarity: Simple promissory notes provide clarity and certainty for both lenders and borrowers by specifying all loan terms.
Disadvantages:
- Complexity: Current promissory notes can be more complex to manage due to their transferability and the legal requirements that come with it.
- Costs: Mortgage debt can entail extra costs for the valuation and registration of collateral.
- Risk: Consumer debt often has higher interest rates and can be risky for borrowers who have difficulty repaying.
Conclusion
Choosing the right type of promissory note is crucial to ensure fairness and clarity in loan agreements. By understanding the different types of promissory notes and their uses, lenders and borrowers can better prepare for future transactions and ensure that their financial interests are protected. The Promissory Note Act (1936:81) provides a stable legal basis for all types of promissory notes, and practical examples show how the law is applied in different contexts. A well-drafted promissory note is a necessary investment to avoid future conflicts and legal disputes.
