An Australian Promissory Note is a written, unconditional promise made by one person (the Maker) to pay a specific sum of money to another person (the Payee) or their order, either on demand or at a fixed or determinable future date. In Australia, promissory notes are governed by the Bills of Exchange Act 1909 (Cth), a Commonwealth statute that establishes a uniform legal framework for negotiable instruments — including bills of exchange, promissory notes, and cheques — throughout all Australian states and territories.

Section 89 of the Bills of Exchange Act 1909 defines a promissory note as “an unconditional promise in writing made by one person to another, signed by the Maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.” For an instrument to qualify as a promissory note under the Act, the promise must be truly unconditional — any condition attached to the obligation to pay will disqualify the instrument as a valid negotiable instrument, though it may still be enforceable as an ordinary contract.

One of the most commercially significant features of a promissory note is its negotiability. A promissory note payable to a named person “or order” can be transferred from the Payee to a third party by endorsement and delivery. The transferee becomes the holder of the note and, if the transferee satisfies the requirements for a “holder in due course” under the Act, they take the note free from most personal defences the Maker might have raised against the original Payee. This makes promissory notes a useful instrument in trade finance, inter-company lending, and factoring arrangements.

A promissory note differs from a cheque in that it is not drawn on a bank and is not payable on demand by default — it may be made payable on demand or at a specified future date. It differs from a bill of exchange in that it involves only two parties (Maker and Payee) rather than three (drawer, drawee, and payee).

For consumer credit purposes, a promissory note alone is insufficient to comply with the disclosure requirements of the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code. Consumer lenders must provide additional mandatory disclosures and must hold an Australian Credit Licence.

A Promissory Note is used in Australia when a simple, formal written acknowledgment of a debt and a promise to pay is needed — particularly when the parties want an instrument that can potentially be transferred to a third party, or when the simplicity and clarity of a negotiable instrument is preferable to a full loan agreement.

A Promissory Note is appropriate in the following circumstances:

Business-to-business lending between related entities, where a company lends funds to an associated entity and wants a clear written record of the debt. A promissory note evidencing the loan may also satisfy the documentary requirements under Division 7A of the Income Tax Assessment Act 1936 (Cth) for loans between private companies and their shareholders or associates, though specific Division 7A requirements must be carefully checked with a tax adviser.

Informal personal loans between individuals, where one person lends money to another and wants a simple written record of the amount and repayment terms without the complexity of a full loan agreement.

Commercial transactions where goods or services are purchased on credit and the buyer issues a promissory note as evidence of the obligation to pay at a future date. In this context, the seller may discount or transfer the promissory note to a financier in exchange for immediate funds.

Inter-company transactions within a corporate group, where a holding company or subsidiary advances funds to another group entity. A promissory note simplifies the documentation of intra-group loans.

Supplementary security, where a promissory note is issued alongside a more detailed loan agreement or security agreement to provide an additional, easily enforceable instrument evidencing the debt.

A Promissory Note is not appropriate as a standalone document for consumer credit regulated by the NCCP Act 2009. For such loans, a full credit contract complying with the National Credit Code is required.

A valid Australian Promissory Note under the Bills of Exchange Act 1909 (Cth) must contain certain essential elements.

The unconditional promise to pay is the cornerstone of the instrument. The promise must be absolute and unqualified — the Maker must commit to pay regardless of any external event or condition. Phrases such as “I promise to pay provided that...” or “I will pay when my business has sufficient funds” negate the unconditional nature of the promise and disqualify the instrument as a negotiable promissory note under the Act.

The sum certain in money must be stated clearly and without ambiguity. Best practice is to state the amount both in figures and in words — for example, AUD $25,000 (Twenty-Five Thousand Dollars) — to eliminate any possibility of alteration or dispute.

The name of the Maker (the person making the promise) and the Payee (the person to whom payment is promised) must be clearly stated. For an individual Maker, the full legal name and address are required. For a corporate Maker, the full company name, ACN or ABN, and registered address should be included. If the Maker is a company, the note should be executed by an authorised signatory in accordance with the Corporations Act 2001 (Cth).

The maturity date determines when payment is due. A promissory note may be payable on demand (meaning payment can be demanded at any time after the note is issued), on a fixed future date, or at a determinable future time (such as a specified number of days after sight). For a demand note, the Payee can require payment at any time by presenting the note to the Maker.

Negotiability language — specifically, the words “or order” after the Payee’s name — makes the note transferable by endorsement. If the note is payable simply to the named Payee without “or order” language, it is not automatically negotiable under the Act.

Interest provisions should specify the annual rate, the calculation basis (usually daily on the outstanding balance), and the start date. Default interest provisions incentivise timely payment and compensate the Payee for the cost of enforcement.

The waiver of dishonour notice is a standard provision in commercial promissory notes. Under the Act, failure to give formal notice of dishonour may discharge certain parties from liability. By including an express waiver, the Maker agrees to remain liable regardless of whether formal notice procedures are followed.

The governing law clause specifies which Australian state or territory’s law governs the note. While the Bills of Exchange Act 1909 is a Commonwealth Act that applies nationally, state law may be relevant for limitation periods, court procedures, and stamp duty.