Al Madani & Co. Law Firm & Legal Consultants

Promissory Notes as an Alternative to Bank Guarantees: A Business Perspective

In the fast-paced world of business, companies are constantly seeking flexible and efficient financial solutions. Among these solutions, promissory notes stand out as a practical alternative to bank guarantees, especially in cases where it may be difficult to provide such guarantees.

Many business owners and traders face challenges in collecting their financial dues from customers or partners who delay payments. To protect financial rights and expedite collection processes, Saudi laws offer effective legal tools, the most prominent of which is the promissory note. This instrument provides creditors with direct legal means to recover their funds without the need for lengthy litigation.

At Al Madani & Co. Law Firm and Legal Consultancy, we have extensive experience in providing effective legal solutions to safeguard our clients’ rights and recover their dues in accordance with Saudi law. We are committed to offering the best legal services to ensure the swift enforcement of financial rights and the protection of our clients’ interests with the highest levels of professionalism.

I. Concept of a Promissory Note

A promissory note is a commercial instrument that involves a commitment to pay a specified amount of money on a set date. It is considered one of the strongest financial securities in commercial transactions, granting the creditor the right to claim their dues without resorting to complex litigation procedures.

A promissory note includes several key elements, the most important of which are the name of the beneficiary (creditor), the name of the debtor (drawer or drawee), the amount owed, the due date, and the debtor’s signature.

It is noteworthy that Saudi Enforcement Law has established that a promissory note constitutes an enforceable instrument, granting the creditor the right to directly approach the enforcement judge to recover their funds, according to Article (9) of the Enforcement Law. This exempts the creditor from engaging in lengthy litigation processes, as enforcement is carried out directly through the Enforcement Court.

II. Importance of Promissory Notes as an Alternative to Bank Guarantees

• Ease and Speed of Issuance: Promissory notes are a flexible financial tool, as their issuance process is simpler and faster than obtaining bank guarantees, which require approvals and complex procedures from banks.
• Lower Costs: Unlike bank guarantees that incur high fees from banks, promissory notes are usually less expensive, making them a preferred option for businesses, especially small and medium-sized enterprises.
• Flexibility in Terms: Promissory notes can be tailored to suit the needs of the contracting parties, providing businesses with greater flexibility in negotiating their terms based on their commercial circumstances.
• Transferability: Promissory notes can be easily traded between parties, providing liquidity for their holders, unlike bank guarantees that are confined to the issuing institution.
• Risk of Non-Payment: Despite the advantages of promissory notes, they carry the risk of non-payment by the debtor. Therefore, the financial solvency of the parties should be verified before accepting them as a security method.
• Legal Strength: Promissory notes carry legal weight in Saudi Arabia, as they are considered enforceable instruments under Article (9) of the Enforcement Law, allowing the creditor to approach the enforcement judge directly to collect their dues without the need for litigation.
• General Acceptance: Although promissory notes are legally strong, some large and international transactions still prefer bank guarantees due to their acceptance by major financial institutions and multinational corporations.

III. Conditions for Accepting a Promissory Note as an Enforceable Instrument

For a creditor to enforce a promissory note directly, the following conditions must be met:

• The promissory note must comply with the legal form stipulated in the Commercial Paper Law, with a specified and clear amount due.
• The debtor’s signature must be present and valid.
• The due date must have arrived.

If these conditions are met, the promissory note can be submitted to the Enforcement Court for immediate collection of the owed amount.

IV. Procedures for Enforcing a Promissory Note in Saudi Arabia

• Electronic Enforcement Request: The creditor submits an enforcement request via the Ministry of Justice portal (Najiz).
• Issuance of Enforcement Order: The enforcement judge reviews the request, and if the promissory note meets the conditions, an enforcement order is issued.
• Compulsory Enforcement Procedures: If the debtor fails to pay, procedures such as asset seizure, suspension of services, travel bans, and freezing of bank accounts are implemented.

It is important to note that most procedures are conducted through the Nafith platform, which is one of the prominent electronic platforms in Saudi Arabia for the enforcement of commercial papers such as promissory notes. This platform enables creditors to submit enforcement requests electronically, track their requests instantly, communicate with the Enforcement Court electronically, and receive technical support and guidance.

V. Parties to a Promissory Note

As previously mentioned, the parties to a promissory note in Saudi law have various designations, depending on the content of the note and the relationship between them. Each party has specific powers according to their role in the commercial transaction. The parties involved in a promissory note under Saudi law include:

• Drawer: The person who issues the promissory note and commits to paying the specified amount to the holder.
• Drawee: The party upon whom the promissory note is drawn for the benefit of the beneficiary.
• Acceptor: The person who accepts the promissory note, and may be the beneficiary or another party.
• Payee: The beneficiary who receives the payment of the promissory note, which could be the drawee or another party.
• Holder: The holder of the promissory note if it is endorsed with the phrase “to the bearer.”
• Owner: The beneficiary, or another entity to whom the drawer has endorsed the promissory note.
• Endorser: The holder who transfers the promissory note to another party.
• Endorsee: The person to whom the promissory note is endorsed.

VI. Penalties for Non-Payment of a Promissory Note

In Saudi Arabia, a promissory note is considered both a payment and a credit instrument, governed by the Saudi Commercial Paper Law. In the event of non-payment upon the due date, legal, civil, and criminal penalties are imposed, as follows:

1. Civil and Commercial Procedures: The holder of the promissory note has the right to file an Order for Payment with the competent court to compel the debtor to pay. This is a simplified procedure that allows for a faster court ruling compared to regular lawsuits. Additionally, as a self-enforcing instrument, the holder can approach the Enforcement Court to collect the value of the promissory note without the need for a lawsuit to prove the debt, significantly shortening the time and procedures. Moreover, the holder can request provisional seizure of the debtor’s assets to secure payment before the final ruling, providing additional protection for the creditor’s rights.
2. Criminal Penalties in Cases of Bad Faith: Saudi Arabia imposes criminal penalties for bad faith related to promissory notes, as Article 118 of the Commercial Paper Law provides that those found issuing promissory notes without sufficient funds to honor them or withdrawing them in bad faith are subject to imprisonment for up to three years. A fine of up to SAR 50,000 may also be imposed, with the possibility of doubling the penalty in cases of recurrence. This reflects the severity of such practices on the financial and commercial system. Additionally, the debtor may be prohibited from issuing checks or promissory notes in the future, severely restricting their business activity.
3. Blacklisting and Credit Restrictions: Failure to honor a promissory note results in the debtor being listed on SIMAH (Saudi Credit Bureau), negatively affecting their credit rating and limiting their ability to obtain future financial or credit facilities. The debtor may also be prohibited from conducting any banking or commercial transactions until the debt is fully settled, creating additional pressure on the debtor to meet their financial obligations and ensuring creditors’ rights are better protected.
4. Compulsory Enforcement under the Enforcement Law: The Saudi Enforcement Law provides effective mechanisms to compel the debtor to pay the value of the promissory note, including suspending government services for the debtor who refuses to pay, thus preventing them from completing official transactions. A travel ban can also be imposed until the debtor settles the amount owed. The system also allows for the seizure of the debtor’s bank accounts and assets to fulfill the debt directly. If there are insufficient funds, the debtor’s property may be sold at public auction to settle the promissory note’s value, ensuring that the creditor receives their full financial rights.

VII. When to Consult a Lawyer for Debt Collection Using a Promissory Note

Although a promissory note is a powerful legal tool, there are situations that may require the consultation of a specialized lawyer, such as:

• If the debtor refuses to pay despite the enforcement order.
• If the debtor contests the validity of the promissory note.
• If there is a dispute regarding forgery or the authenticity of the signature.

Promissory notes are among the strongest legal instruments that enable creditors to recover their dues quickly in Saudi Arabia. With the presence of Enforcement Courts, business owners can protect their financial rights effectively. However, it is essential to ensure that these documents are drafted correctly to guarantee their immediate enforceability.

At Al Madani & Co. Law Firm and Legal Consultancy, we have a team of lawyers specializing in debt collection and the enforcement of promissory notes in accordance with the latest legal systems in Saudi Arabia. If you need legal consultation or assistance in recovering your dues, do not hesitate to contact us to safeguard your legal rights in the fastest and most efficient manner.