Promissory note

How BC law treats it

Bills and notes are federal jurisdiction, so promissory notes are governed by the Bills of Exchange Act, RSC 1985, c B-4, Part IV. Section 176 defines a promissory note as an unconditional promise in writing, signed by the maker, to pay a sum certain in money on demand or at a fixed or determinable future time to a specified person or to bearer. Only the maker signs. Where two or more people sign as makers, they can be liable jointly, or jointly and severally, according to the note's wording. A demand note is payable whenever the holder asks. A term note is payable on a set date or in instalments. A note is usually short; the detailed bargain (covenants, events of default, fees) belongs in a separate loan agreement that both parties sign. A note gives no security. To take priority over other creditors, the lender needs a separate general security agreement registered in the Personal Property Registry under the Personal Property Security Act, RSBC 1996, c 359, or a mortgage registered at the Land Title Office. Interest terms must comply with the federal Interest Act, RSC 1985, c I-15 (for example, stating an annual rate) and must stay below the criminal interest rate in s. 347 of the Criminal Code. Under BC's Limitation Act, SBC 2012, c 13, a claim on a demand obligation is generally discovered when the debtor fails to pay after a demand is made, and the two year period runs from then. Notes issued to raise money from investors are usually securities under the Securities Act, RSBC 1996, c 418, so the issuer needs a prospectus exemption.

What it means for your business

Promissory notes are used for shareholder loans, vendor take back financing on a business sale, bridge loans and friends and family financing. They are quick and cheap, but a bare note leaves the lender as an unsecured creditor if the borrower fails. Founders who raise money with notes from several investors may be making a securities distribution that requires an exemption and filings. A clear note, paired where appropriate with a loan agreement, guarantee and registered security, avoids most disputes. Example: On selling her Victoria café, the owner accepts $80,000 of the price as a vendor take back promissory note payable over three years. She also takes a general security agreement over the café's assets and registers it in the Personal Property Registry so she ranks ahead of unsecured creditors.

Risks and common mistakes

Treating the note as security, when it creates only an unsecured debt unless a security agreement or mortgage is registered. Having the lender sign as a party, which is unnecessary and can blur whether the promise is unconditional. Adding conditions to payment, which can stop the document from being a promissory note under the Bills of Exchange Act. Stating interest only as a monthly rate without an annual equivalent, contrary to the Interest Act. Issuing notes to several investors without a prospectus exemption under BC securities law.