Arrangements with debtor

Arrangements with debtor

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Acknowledgement of debt

This document records the existence and amount of the debt and why it arose. In the Acknowledgement of debt, which the debtor must sign, the debtor must acknowledge their indebtedness and legal liability to pay the debt to the creditor. This document serves 2 very important purposes:

  • It is a written and signed memorandum of the debt which will make it easier to prove the debt if it is ever disputed. An acknowledgement of debt is however not a guarantee that a claim against a debtor will succeed.
  • It interrupts or suspends the effect of the Limitation Act 1980 whereby a debt may become unenforceable after 6 years from the date that the creditor had the right to recover payment form the debtor. The acknowledgement, if signed before expiry of the limitation period, has the effect of restarting the clock and making the period of 6 years run afresh from the date the acknowledgement of debt is signed.

Part payment of debt

It is up to you, the creditor, whether or not to accept such payments. If you do then you should be careful to accept such payments on account only of the debt and not in full settlement of the debt.

This means that you accept the part payment while reserving the right to commence court proceedings for recovery of the remainder of the debt if the debtor company fails to pay in full.

A part payment interrupts or suspends the effect of the Limitation Act 1980 whereby a debt may become unenforceable after 6 years from the date that the creditor had the right to recover payment form the debtor. The part payment, if made before expiry of current limitation period, has the effect of restarting the clock and making the period of 6 years run afresh from the date the part payment was made.

Promissory notes

A promissory note is an unconditional promise in writing made by one person to another and signed by the person who makes the promise (the 'maker'). The person to whom the promise is made is called the 'payee'. The maker promises to pay a specific amount of money on demand or at a fixed or determinable future time to:

  • The bearer, being any person who is in possession of the promissory note
  • A specified person

A promissory note is negotiable. This means that the note itself has a value and can be bought and sold. The payee, who receives the promissory note and is entitled to payment, may either claim payment or transfer their right to payment to someone else, the 'transferee'. If the promissory note is payable to the bearer, it is negotiated merely by delivery. If payable to a specific person or order, the promissory note is negotiated by endorsing the document in favour of some other person.

The promissory note is usually presented to the maker for payment. It is also presented to the person who has endorsed the promissory note. If the note specifies a place for the note to be presented for payment, the person who requires payment must present the promissory note at that place. If the place specified is not appropriate for some reason, the note can be presented to the maker or the person who endorsed the note at an appropriate place.

A promissory note therefore creates rights and obligations independent of any underlying transaction which brought it into existence. When a promissory note is used, for example, to secure the payment of sums due under a lending agreement or other type of commercial transaction it affords the creditor (bearer or payee) the opportunity to obtain summary judgment for the amount of the note without the debtor (maker or promisor) being able to raise defences based on the underlying transaction.

Under the Limitation Act the bearer has 6 years from the date that the cause of action arose in which to bring a court action for payment of a promissory note.

No right of action can arise until the instrument has been delivered. The time at which the limitation period starts to run may also be affected by any specific conditions in the note as to its presentment (when, typically, the promisor becomes liable). For on demand notes, the limitation period may run from the date of the instrument itself or its delivery, not the time when demand is made.