Why Issue a Promissory Note

Issue a Promissory Note

The Romanian economy changed in 1989 and this brought about a profound effect on the way that people lived their lives and business was done in Romania.

Many foreign investors forget that only since 1989 has Romania had a free market economy. This has been a blessing and a curse.

One of the major impacts has been that Romania has moved from a cash economy to a cashless economy without going through a paper economy. This means that the use of cheques is not common in business in Romania for Romanian companies although foreign clients may wish to use cheques to pay their bills. In Romania you pay cash, use a credit/debit card, or send the money direct into counter parties bank account.

As a Romanian commercial law firm we often encounter the question, what is the status of a Promissory Note issued by a company and which is not met on presentation.

A client will approach us and explain that one of his clients has issued a Promissory Note as a guarantee for delivery and payment of goods. The Promissory Note may have been issued to cover a future liability such as the completion of a building contract, delivery of goods at some time in the future or indeed any other transaction where a guarantee is necessary.

The transaction proceeded normally, but when the date for the presentation of the Promissory Note came the Promissory Note was not paid on presentation. The failure to pay may have been caused by a number of reasons such as the issuer themselves not being paid by their clients; cash flow problems or for any other reasonable business reason. If the Note is not met then the Client asks what the liability of the company and the personal liability of the person is who signed the Promissory Note.

In the past the reason why Promissory notes were requested and were issued was because that there was the belief that that the issuing of a Promissory Note which was not met on presentation was automatically a criminal offence, and as such exposed the person who had signed the Promissory Note to a criminal charge. Therefore for an administrator of a company which issued a Promissory Note there was the threat that a criminal charge would occur if it was not met upon presentation.

The issuing of the Promissory Note is a future promise to pay and therefore the intention of both parties not only the issuer, but also the recipient at the time of issuing the Promissory Note must be examined. The Penal Code provides that for an offence of fraud to have been committed a number of elements must be present. These elements are (a) a signed contract. (b) that at the time of signing the contract the issuer of the Promissory Note must have been aware that at the time of presentation of the Note it would not be met, (c) the recipient of the Promissory Note was induced or deceived into signing the contract and accepting the Promissory Note by a deceitful or fraudulent act of the issuer (d) fraudulent means were used to deceive the recipient of the Promissory Note and (e) the act of deception was intentional. If any of these elements are not present then the criminal offence has not been committed.
From the above it is clear that not only does the intention of the issuer of the Promissory Note have to be considered, but also the position and intention of the recipient. If the recipient knows that the company who issues the Promissory Note cannot and will never be in a position to pay, then he cannot claim that he was induced to enter into the contract by reason of the issue of the Promissory Note. This raises the question as to what enquiries the recipient of the Promissory Note should make as to the affairs of the issuer.

As prudent Romanian commercial lawyers even now in this day and age we advise clients that if they are going to use a Promissory Note then they should at least make minimal enquiries concerning the financial status of the issuer of the Promissory Note and they should also ensure that they have kept proper notes of the discussions which led up to the issuing of the Promissory Note.

If they wish to use the threat of criminal proceedings when the Promissory Note is not paid then they need to show that they acted properly and the issuer carried out acts of deception.

None of the above will affect the civil liability of the company who issued the Promissory Note, who is still liable to pay under the contractual terms of the Promissory Note. Clients have to take a realistic view if the Promissory Note is not met on presentation bearing in mind that the issuing is a potential criminal act as mentioned above. If the issuing company did not pay the Note on presentation then the chances of recovery, in the absence of substantial assets in the ownership of the issuing company are slim.

So the person to whom the Promissory Note is issued should take some time and carry out a limited due diligence before accepting a Note. At the same time if you issue a Note you should be careful to ensure that reasonable disclosures are made and that there is a level of honesty with regard to the issue which will remove any question of a criminal offence.

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