Promissory Note FAQ - Australia

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A Promissory Note is an enforceable promise to pay back a loan or debt.

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Contents

Definitions

Who is the Borrower?

The Borrower is the person or corporation that receives value (money, property or some service) from the Lender on the condition that the Borrower will pay the principal amount plus any interest to the Lender at sometime in the future.

Who is the Lender?

The Lender is the person or corporation that gives something of value (money, property or some service) to the Borrower on condition that the Lender will be paid a certain amount in the future.

What is the governing law for a Promissory Note?

The governing law is the law of the jurisdiction in which the promissory note will be entered into. Often the parties select the jurisdiction where the Lender resides. If the promissory note relates to the purchase of certain assets, then the location of those assets is selected.

What is the Principal amount?

The principal is the original amount of the note that is owed by the Borrower to the Lender on the date the Promissory Note is signed. Once the Borrower has begun to pay back the note, the principal refers to the amount of money still owing to the Lender at any given moment in time.

What is interest?

Interest is an amount charged to a Borrower for the use of the Lender's money. It is usually expressed as a percentage of the amount borrowed and is calculated at a specified interval over the course of the term of the Promissory Note. The interest rate is the annual interest rate.

What does compounded mean?

Compounded refers to how frequently the interest is calculated and added to the principal amount of the note to arrive at a new balance. The more frequently the interest is calculated, the more interest the Borrower will end up paying to the Lender.

What is a demand promissory note?

The balance owing in a demand promissory note does not need to be paid until the Lender demands to be repaid. In other words, the loan is repayable 'on demand'. There is no fixed end date for the repayment of the note. Upon demand, the Borrower is given a certain period of time to repay the outstanding balance of the note.

What is the difference between a Promissory Note and a Loan Agreement?

Both contracts evidence a debt owed from the Borrower to the Lender, but the Loan Agreement contains more extensive clauses than the Promissory Note.

What is the Term?

The Term is the time length of the note. At the end of the term, the Borrower must repay the outstanding balance of the note.


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Promissory Note Details

I am a shareholder. Should I use the Loan Agreement, the Shareholder Loan Agreement, or the Promissory Note?

As a shareholder, if you are lending money to the corporation, use our Shareholder Loan Agreement. If you are borrowing money from the corporation, use either our Loan Agreement or promissory note. If you want an extensive contract, use our Loan Agreement. Use our promissory note if you prefer a standard basic contract.

Do I have to charge the Borrower interest?

No, the Lender can choose whether or not to charge interest. If the Lender decides to charge interest, they can pick how much interest to charge. However, there may be tax consequences to the Lender or Borrower if interest is charged but it is not a reasonable rate.

What are the payment options available?

There are four options for the method of repayment.

  1. Specific periodic amounts - the Borrower will make a certain payment to the Lender on regular intervals.
  2. Lump sum payment at the end of the term - the Borrower pays nothing to the Lender until the end of the note term, at which time the Borrower repays the entire note in one payment.
  3. Interest only - the Borrower makes regular payments to the Lender that are put toward paying off the interest on the principal amount only, with no portion of the payment going towards the principal amount itself.
  4. Interest and principal - the Borrower makes regular payments to the Lender that are put toward paying off both the principal amount and the interest as it is compounded. At the end of the term of the Loan Agreement, there will be no outstanding balance to be repaid.

Should the Borrower be able to pay the Outstanding Principal without penalty?

Granting this option enables the Borrower to pay the outstanding balance at any time without having to pay an additional sum as a penalty. If the Lender is making this loan as an investment, the Lender may not want to allow prepayment without a penalty as the lender would incur expenses and possible lost income in reinvesting this amount.

Should the Lender require the Borrower to provide security/collateral for the note?

If you do not take collateral, and the Borrower defaults on the note, you will have to take the Borrower to court in order to recover your money and your judgement can only be enforced against certain assets of the Borrower. However, if you take collateral for the note, then you may be entitled to seize and sell the collateral if the Borrower fails to repay the note.

Does the collateral need to be equivalent in value to the note amount?

No, if collateral is given for the note, it can be for any amount. If the Borrower fails to repay the note, and the collateral is worth less than the note, then the Lender can seize the collateral and sue the Borrower for the remaining amount of the note. If the Lender recovers more than the outstanding balance from the sale of the collateral, any surplus amount would be returned to the Borrower or his other debtors depending upon the situation.


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National Consumer Credit Protection Act and Required Disclosures

What is the National Consumer Credit Protection Act

The National Consumer Credit Protection Act (the 'Act') is a set of laws developed to standardise credit practice in Australia. If you pay a business for credit and use the credit (loan) mainly for personal, household or domestic purposes, then the National Consumer Credit Protection Act will affect you.

Does the Act apply to my promissory note?

The Act will apply to your promissory note if:

  1. the borrower is a natural person ordinarily resident in Australia or a strata corporation formed in Australia; and
  2. the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes; and
  3. a charge is or may be made for providing the credit; and
  4. the credit provider provides the credit in the normal course of business or incidentally to any other business of the credit provider.

Are there any disclosures that the lender must provide to the borrower before entering into a promissory note?

If the Act applies to your agreement, the lender must provide the following to the borrower:

  1. a precontractual statement setting out the matters required by section 17 of Schedule 1 to the Act; and
  2. an information statement in the form required by the regulations stating the borrower’s statutory rights and statutory obligations.

Where can I access the information statement?

You can access the information statement in the regulations at: (Form 5) http://www.comlaw.gov.au/Details/F2012C00052

The information statement may be in the form of a separate document or part of the credit contract document. You only need to provide information if it is relevant to the credit contract concerned.

Where can I access the precontractual statement?

Requirements for your precontractual statement are set out in s.17 of Schedule 1 to the Act (the National Credit Code). You can access the code at: http://www.austlii.edu.au/au/legis/cth/consol_act/nccpa2009377/sch1.html

Generally speaking here are some of the issues you need. The contract document must contain:

  • The credit provider’s name.
  • The amount of credit to be provided.
  • The persons, bodies or agents to whom payments are to be paid.
  • If the credit is provided by the supplier for a sale of land or goods by instalments then include a description of the land and its cash price or a description of the goods and their cash price.
  • The annual percentage rate or rates under the contract.
  • If there is more than one percentage rate, how each rate applies.
  • The method of calculation of the interest charges payable.
  • The total amount of interest charges payable.
  • The number, amount and frequency of repayments.
  • Any credit fees and charges and as well as changes to those fess, if applicable.
  • Any penalty interest rate where payments are in default.
  • Details of any commissions to be paid if applicable.
  • Details of any credit-related insurance if applicable.
  • Details of any changes that can be made under the contract.
  • A statement that, in the event of a breach, enforcement expenses may become payable.

Depending on your circumstances, an amortization schedule will usually provide most of this information.

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Signing Details

I do not know when the Promissory Note will be signed. Can I fill in the date later?

Yes, by selecting 'Unsure' as the date the note will be signed, a blank line will be inserted into the contract so that you can add the correct date after printing the document.

Do I need witnesses to sign the Promissory Note?

Generally speaking, there is no requirement for a witness or notary public to witness the signing of the Promissory Note. However, depending on the nature of the note and the governing law of the jurisdiction in which you're entering into the note, you may be required to have witnesses or a notary public witness the Promissory Note. Even if it is not required, having an objective third party witness the signing of the note will be better evidence when you need to enforce the repayment of the note. Signing the note in front of a notary public is the best evidence that the Borrower signed the note.

Who should sign the promissory note?

In general, at least the borrower should sign the promissory note. Depending how much the parties trust each other, you may also wish to have the lender sign as well AND get the signatures notarized.


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