Saudi Arabia
JordanAl Madani & Co. Law Firm & Legal Consultants
Promissory Notes as an Alternative to Bank Guarantees: A Business Perspective
Many business owners and traders face challenges in collecting financial dues from customers or partners who are delayed in their payments. To protect financial rights and expedite collection processes, Saudi regulations offer effective legal tools, most notably the promissory note, which provides creditors with direct legal means to recover their money without the need for lengthy litigation.
At Al Madani & Co. Law Firm and Legal Consultancy, we have extensive experience in offering effective legal solutions to ensure our clients’ rights and recover their dues in accordance with Saudi law. We are committed to providing the best legal services to ensure swift execution of financial rights and protect our clients’ interests with the highest levels of professionalism.
1. Concept of a Promissory Note
A promissory note consists of several essential components, including the beneficiary’s (creditor’s) name, the debtor’s (drawer or drawee) name, the amount due, the due date, and the debtor’s signature.
2. 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 procedures are simpler and faster than obtaining bank guarantees, which require complicated approvals and procedures from banks.
• Lower Cost: Unlike bank guarantees, which incur high fees, promissory notes generally have a lower cost, making them a preferred option for companies, especially small and medium-sized enterprises.
• Flexibility in Terms: Promissory notes can be customized to suit the contracting parties’ needs, offering companies more freedom to negotiate their terms based on their commercial circumstances.
• Transferability: Promissory notes can easily be transferred between parties, providing additional liquidity to their holders, in contrast to bank guarantees, which 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, it is essential to assess the financial solvency of the parties before accepting them as a form of guarantee.
• Legal Strength: Promissory notes have legal strength in Saudi Arabia, as they are considered enforceable documents under Article 9 of the Enforcement Law, allowing creditors to approach the execution judge directly to collect their dues without the need for a lawsuit.
• General Acceptance: Despite the strength of promissory notes, some large and international transactions still prefer bank guarantees due to their reliance on major financial institutions and multinational companies.
3. Conditions for Accepting a Promissory Note as an Enforceable Document
For a creditor to enforce a promissory note directly, the following conditions must be met:
• The promissory note must comply with the legal form prescribed in the Commercial Papers Law: the amount due must be clearly specified.
• The debtor’s signature must be present and valid.
• The due date must have arrived.
If the promissory note meets these conditions, it can be submitted to the execution court for immediate collection of the due amount.
4. Execution Procedures for Promissory Notes in Saudi Arabia
• Electronic Execution Request:
o The creditor submits an execution request through the Ministry of Justice portal (Najiz).
o The promissory note is attached as an enforceable document.
• Issuance of Execution Order:
o The execution judge reviews the request, and if the promissory note meets the conditions, an execution order is issued.
• Coercive Execution Procedures:
o If the debtor fails to pay, actions such as asset seizure, service suspension, travel restrictions, and bank account notifications may be taken.
It is worth noting that most of these procedures are handled via the Nafath platform, which is one of the key Saudi electronic platforms specializing in the enforcement of commercial papers like promissory notes and bills of exchange. This platform enables creditors to submit execution requests electronically without the need to personally visit execution courts. Through this platform, users can submit execution requests electronically, track the status of their requests instantly, communicate with the execution court electronically, and receive technical support and guidance.
5. Parties Involved in a Promissory Note
As outlined above, the parties involved in a promissory note under Saudi law have various designations, which depend on the content of the note and the relationship between the parties. Each party has specific powers based on 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 to whom the promissory note is drawn, for the benefit of the beneficiary.
• Acceptor: The person who accepts the promissory note, which may be the beneficiary or another party.
• Payee: The beneficiary who is paid the value of the promissory note, and may be the drawee or another party.
• Holder: The person who holds the promissory note, provided it contains the phrase “to the bearer.”
• Owner: The beneficiary or another party designated by the drawer to receive the value of the promissory note.
• Endorser: The holder who transfers the promissory note to another party.
• Endorsee: The person to whom the promissory note is endorsed by the endorser.
6. Penalties for Non-payment of a Promissory Note
In Saudi Arabia, a promissory note is considered both a payment and credit instrument, governed by the Saudi Commercial Papers Law. Failure to pay the promissory note on its due date results in legal, civil, and criminal penalties as follows:
1. Civil and Commercial Procedures:
o The holder of the promissory note has the right to file an order for performance before the competent court to obligate the debtor to pay. This simplified procedure allows for a faster judgment compared to regular lawsuits. Additionally, since the promissory note is an enforceable document by itself, the holder can approach the execution court directly to claim its value without the need to file a lawsuit to prove the debt, significantly reducing time and procedures. Furthermore, the holder can request precautionary measures on the debtor’s assets to guarantee payment before the final ruling, offering extra protection for the creditor’s rights.
2. Criminal Penalties for Bad Faith:
o Saudi Arabia imposes a prison sentence for bad faith related to promissory notes. According to Article 118 of the Commercial Papers Law, individuals who issue a promissory note without sufficient funds or withdraw it in bad faith are punishable by imprisonment for up to three years. Additionally, a fine of up to SAR 50,000 may be imposed, with the possibility of doubling the penalty for repeat offenses. This reflects the severity of such practices on the financial and commercial system. It may also result in the debtor being prohibited from issuing checks or promissory notes in the future, significantly limiting their commercial activities.
3. Inclusion in Blacklists and Credit Restrictions:
o Failure to honor a promissory note leads to the debtor being listed in SIMAH (Saudi Credit Bureau), which negatively affects their credit rating and restricts their ability to obtain future financial or credit facilities. The consequences also include a ban on conducting any banking or commercial transactions until the debt is fully paid, adding additional pressure on the debtor to meet their financial obligations and ensuring the creditor’s rights more effectively.
4. Coercive Execution under the Execution Law:
o The Saudi Execution Law provides effective mechanisms to compel the debtor to pay the promissory note’s value. Government services can be suspended for the non-compliant debtor, preventing them from completing official transactions. Additionally, the debtor may be prohibited from traveling until the promissory note’s value is settled, which is immediately applied once the execution order is issued. The system also allows for the seizure of the debtor’s bank accounts and assets to satisfy the debt, and if liquid assets are insufficient, the debtor’s property can be sold at public auction to recover the amount due, ensuring the creditor’s financial rights are fully met.
7. When to Consult a Lawyer for Collecting Debts via a Promissory Note?
Although a promissory note is a powerful legal tool, there are situations that warrant consulting a specialized lawyer, such as:
• If the debtor refuses to pay despite an execution order.
• If the debtor challenges the validity of the promissory note.
• If there is a dispute over forgery or the authenticity of the signature.
A promissory note is one of the most powerful legal means for a creditor to recover their dues swiftly in Saudi Arabia. With the existence of execution courts, business owners can effectively protect their financial rights. However, it is essential to ensure that these documents are drafted in the correct legal form to guarantee their enforceability.
At Al Madani & Co. Law Firm and Legal Consultancy, we have a team of attorneys specialized in debt collection and the enforcement of promissory notes according to the latest legal systems in the Kingdom. If you require legal consultation or assistance in recovering your dues, do not hesitate to contact us to ensure your legal rights are protected through the fastest and most efficient means.