Bill of exchange - what is it?


Bill of exchange - a relatively popular term, often used, for example, in loan agreements as one of the options for securing a loan. However, despite its commonness, the correct definition is not fully known and understandable to all people. So - what is a promissory note and in what cases can it be used?

Glossary of terms

Before presenting the exact definition of a promissory note, it is worth getting acquainted with the specialized terms used in the context of these documents. They mainly concern the parties to the promissory note agreements, but not only.

First, it is worth knowing the names by which the parties to bill of exchange operations are determined. The first of them is the drawer, i.e. the issuer of the promissory note. Often, though not always, he is obliged to pay the promissory note at the same time, while - if the contract does not contain a clause releasing him from this obligation - the drawee is responsible for accepting the promissory note by the creditor. A drawee, i.e. a person indicated by the issuer of the promissory note, may be required to repay the receivables resulting from the promissory note. At the moment when such a person accepts the bill of exchange - makes the acceptance - he becomes a merchant, otherwise a pleasure. When issuing a promissory note, there may also be a promissory note surety, known as avalist - whose signature guarantees the payment of the promissory note sum by the debtor.

The promissory note creditor is a remit - it is on his behalf that the payment is to be made. Sometimes it happens that the receivable resulting from the promissory note is made by a person other than the drawee - that is, by the savior who, by paying off the existing remitter, becomes the creditor himself.

Bills of exchange may be transferred by way of endorsement. The person who is the recipient may make a written declaration of the transfer of rights to someone else - thus he becomes the endorser (resident). On the other hand, the person to whom the rights to the promissory note have been transferred is referred to as the endorser (guarantor).

The holder of the bill of exchange may also undertake a recourse - that is, a reverse search, in a situation when it is already past the due date and payment has not been made, or in certain cases before the due date. In such a situation, the debtor responsible for the promissory note is referred to as the regressant, while the person requesting the sum of the promissory note by way of recourse - the regredient.

Definition of a promissory note

The word promissory note comes from a German expression Wechsel and means change. A promissory note is a type of security in which one of the parties undertakes unconditionally to pay a specified amount of the promissory note on a specified date to the other party. Unconditional means that the promissory note document itself is not bound by any other legal activities - e.g. a contract.

Among the promissory note documents, two basic divisions can be distinguished - the first one in terms of the debtor, the second - the creditor. And so, depending on who will be obliged to pay the receivables, there can be distinguished promissory notes (sola) and drawn (drawn) bills of exchange. In the first case, the person responsible for paying off the debt will be the issuer of a specific promissory note. In the second, the main debtor is the person indicated on the document who accepted the document - the drawee. Only when the drawee turns out to be insolvent, the debt is taken over by the promissory note issuer - he is therefore a minor debtor in this situation.

Bills of exchange may also be classified according to the person of the remitter. If a promissory note is issued on request, it is possible to transfer the right to the claim to another remitter by way of endorsement, transfer or inheritance. The name promissory note is issued to a specific remitter and thus contains a strict definition of the person who can obtain repayment on this account. On the other hand, a bearer's promissory note allows the holder to obtain the resulting amount due.

Elements of the bill of exchange

The rules for issuing promissory notes are governed by the provisions of the Bill of Exchange Law of April 28, 1936. According to it, it must be made in writing and signed by hand. To be considered a full-fledged document, the promissory note must contain:

  • the name "promissory note" in the text in the language in which it was issued,
  • unconditional order to pay a specified sum of money (bill of exchange sum),
  • name of the person liable to pay,
  • indication of the place and date of payment,
  • the name of the person on behalf of or on whose behalf the payment is to be made,
  • designation of the date and place of issue of the promissory note,
  • the aforementioned signature of the issuer of the promissory note.

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In addition to the obligatory elements, the promissory note may also contain additional elements, referred to as promissory note clauses. They can be divided into four types, with different effects for the parties to the agreement. Thus, the promissory note clause may be:

  • effective - its placement will cause specific effects, in accordance with the promissory note law (e.g. without costs),
  • indifferent - not having any effect from the point of view of the bill of exchange law, considered as unwritten (e.g. foreign currency payment clause),
  • prohibited - its inclusion will invalidate the promissory note (e.g. making the payment of the promissory note conditional on the condition),
  • non-exchange rate - significant for non-exchange rate relationships (e.g. coverage).

A specific type of a promissory note is a blank promissory note. Such a document is deliberately issued with incomplete data and therefore cannot be considered a valid security. Most often, in such situations, the bill of exchange sum remains unaddressed.

Blank promissory notes are issued when an additional agreement - agreement, or promissory note declaration, has been established between the parties. As part of such a document, the parties agree on how and when to complete the missing elements on the promissory note.

For what purpose are promissory notes issued?

As a rule, promissory notes fulfill three basic functions - payment (credit), security and circulation. In the case of the former, a promissory note is a surrogate for money - it can be used to pay for the purchase of goods or services, and also to cancel the debt covered with it.

The securing function - also known as the warranty function - applies to situations in which the promissory note secures the obligations taken at a given moment or future. On the other hand, the circulation function is related to the possibility of transferring receivables from one person to another.

Additionally, among the functions of bills of exchange, one can also mention the refinancing one. By presenting this document to the bank, the holder can get the promissory note amount before the payment date, less the commission due to the bank. In some studies on bills of exchange, this function is considered to be one of the manifestations of the aforementioned credit function.