We hear of people executing or being subjects to promissory notes countless times for a number of reasons. The promissory note has become the favorite document of traders, private parties and companies as a way of guaranteeing and protecting all their everyday transactions, such as loans (mutual ones), credits, purchase of products and even services.
But, what exactly is a promissory note? Our General Law of Credit Instruments and Transactions (Ley General de Títulos y Operaciones de Crédito), defines credit instruments as “those documents necessary to exercise the literal right enshrined in them”. That means, a promissory note is a credit instrument that covers a certain amount of money to be paid on a certain date or after a certain specified time has elapsed, on behalf of someone and which can also convey an obligation to pay any set interest, both ordinary and penalty interests.
What truly matters regarding promissory notes is the enforceability bestowed by the Code of Commerce (Código de Comercio), in Article 1391, derived from the acknowledgement of the debt ruled by the text in this document, which enables the payee, in a special judicial procedure — as in a Commercial Court enforcement proceeding — to seize assets that will sufficiently cover the unpaid amount ruled in the note. In other words, it allows (to a bigger extent) the effective collection of the debt.
That said, the main feature of promissory notes is that, in order to be executed, it has to comply with some minimum requirements established by the Law, such as:
I.- The note must explicitly mention its own nature as part of its contents;
II.- The unconditional promise to pay a certain sum of money;
III.- The name of the person who is to receive the payment;
IV.- Time and place for the payment;
V.- When and where the document is issued; and
VI.- The signature of the underwriter of the promissory note, or that of the person who signs on his/her behalf.
If any of these requirements is missing, the promissory note loses, among other features, its executability.
Another fundamental feature of a promissory note is the possibility of including a guarantor, bondsman or someone who is jointly liable, who will respond to the payment obligation acquired by the debtor in case of a breach. Then, without a doubt, it is indispensable to know the paying capacity of our debtor or client, in order to identify the need or the lack of the need for any of the jointly responsible figures mentioned above; this is achieved by means of an asset investigation with the purpose of assess his/her paying capacity and patrimonial reach in case of having to respond to a breach of the note; the same should be applied to the jointly responsible figure.
Nowadays, different industries have developed and implemented advanced technologies that force traders, individuals and companies to find more practical ways to document their everyday transactions; therefore, many have chosen promissory notes due to its easy circulation as a document. However, despite of the relevance of promissory notes, its users do not often look for appropriate legal assistance when issuing them, since they can simply go to a stationary store and buy a template or a guide to the writing of the document, which they later fill without any professional assistance, often interpreting fields in the format at their free will —with best intentions.
Who doesn’t know someone who has useless promissory notes in his/her hands? Who hasn’t heard horror stories about lost executive proceedings that turned out to be uncollectible?
Without a doubt, most of you felt identified with these questions, since these are things that happen every day, which leads us to the further analysis of the title of this article: Is the promissory note actually one of the most effective means to collect a debt?
The answer is YES, only if we know the paying capacity of our debtor through an asset or commercial investigation, and when applicable, an asset investigation on those who sign the document as jointly responsible, on which the success of debt collection lies. For all these reasons the promissory note is the most widely used debenture bond in trade, which has pushed our lawmakers, law courts and law enforcers to constantly update their knowledge on the subject.
Consequently, the relevance of asset investigation lies in that information conveying all the goods that can be used as guarantee for the debt, whether they belong to the debtor or to the jointly responsible, which will help determine the need to include one or many jointly responsible parties, or not, in order two execute the obligation ruled by this debenture bond.
Our suggestion is to always get proper legal assistance when issuing or executing any debenture bond, such as promissory notes, as well as to reduce the number of high-risk transactions as much as possible; you should also know your client or debtor and run an asset investigation that will lead to smart decisions; it will never be enough to fill a form or template, no matter how healthy a business operation may seem at first.
In FLOCAR LAW, we provide legal assistance, we run asset investigations, and we are knowledgeable in this delicate and important commercial branch, which allows us to provide the best strategies based on your needs, in order to protect your business and your assets.
For any question or comment you can contact me on my personal Twitter profile: @fcarpioc or, you can send an E-mail to: fcarpio@flocarlaw.com.
Francisco Carpio Campos · Partner · FLOCAR LAW
