In credit enforcement proceedings, a promissory note is an important security instrument. However, when a dispute arises, certain questions may prove decisive for the creditor’s ability to enforce its rights, such as the consequences of failing to prepare a separate written authorization accompanying a blank promissory note, and who bears the burden of proof in establishing that the promissory note was completed contrary to the agreement.
These issues were addressed by the Supreme Court in its judgment Rev 26537/2023, which provides useful insight into the relationship between a blank promissory note, the underlying contractual relationship, and the possibility of challenging the promissory note obligation.
Factual Background of the Case – Court’s Reasoning
In the case at hand, a company entered into a long-term loan agreement and provided blank promissory notes as security for the due repayment of the loan. One of the promissory notes was also signed by an individual who was the founder and director of the company.
Following the borrower’s failure to duly fulfil its obligations, the creditor completed the promissory note and initiated enforcement proceedings. The claim against the company remained unpaid, partly because the company was undergoing compulsory liquidation proceedings.
What Did the Supreme Court Decide?
The Supreme Court upheld the conclusion of the lower courts that the mere absence of written promissory note authorization does not render a blank promissory note null and void.
Relying on Article 16, paragraph 2 of the Law on Bills of Exchange, the Court pointed out that, in the relationship between the issuer of a blank promissory note and its holder, a defence may be raised on the grounds that the note was subsequently completed contrary to the existing agreement.
According to the Supreme Court’s position, the absence of written promissory note authorization empowering the claimant to complete the note does not necessarily render the promissory note null and void. The defendant could have sought to prove that the claimant had acquired the promissory note in bad faith or had acted with gross negligence when acquiring it, as well as that the note had been completed contrary to the existing agreement. However, the mere absence of written promissory note authorization is not sufficient grounds for declaring the promissory note null and void.
The burden of proof is a particularly important issue.
According to the position adopted in this judgment, a blank promissory note is presumed to have been completed in accordance with the agreement between its issuer and holder. Where the issuer challenges the manner in which the promissory note was completed, they must set out and prove the facts supporting such a defence, having regard to the circumstances of the particular case.
This does not mean that every promissory note completed by a creditor is automatically valid. If the promissory note has been completed contrary to the agreement, the issuer may raise the relevant defences and seek legal protection, particularly where there is evidence of misuse of the authorization.
What Does This Judgment Mean for Banks and Other Creditors?
The judgment highlights several issues of practical importance.
sporova. First, when securing credit claims, it is important to clearly define the conditions under which a blank promissory note may be completed. Although the absence of separate written authorization does not, in itself, necessarily render the promissory note null and void, proper documentation can help reduce the risk of disputes.
Second, it is important to consider who signed the promissory note and in what capacity they assumed the obligation. The fact that an individual is a founder or director of a company does not, in itself, mean that they are liable for all of the company’s debts. In the case at hand, the fact that the individual had personally signed the promissory note and that the court assessed their liability under the promissory note was of particular significance.
Third, banks must ensure that promissory notes are properly completed and pay particular attention to the maturity date and the time limits for exercising rights under the promissory note. In this case, the Supreme Court also specifically examined the three-year limitation period applicable to claims under promissory note law against the acceptor or the issuer of a promissory note payable by the issuer’s own order, and concluded that the claim in question was not time-barred.
Why Is It Important to Keep Up with Case Law?
Court decisions illustrate how statutory provisions are applied to specific situations and which circumstances may prove decisive in enforcement proceedings.
In our legal insights, we examine case law and legal issues of practical relevance to banks, companies and other creditors, with the aim of providing insight into the legal risks and challenges that arise in debt recovery proceedings.
Source: Supreme Court of the Republic of Serbia, Rev 26537/2023.
The full judgment is available on the official website of the Supreme Court: https://www.vrh.sud.rs/sr-lat/rev-265372023-3121125
