Promissory Note UK: Company Interest & Instalments

Overview

A promissory note is a written, signed undertaking by one party (the maker) to pay a defined amount to another party (the payee), either on demand or by a set date. When the maker is a company and the terms include interest plus instalments, the document sets out three things in particular: the total sum owed, the rate at which interest accrues on that sum, and the schedule of payments the company will make until the debt is cleared.

Unlike a full loan agreement, a promissory note is usually shorter and less complex. It's most often used where the parties know and trust each other, or where the sum involved doesn't justify a heavily negotiated facility. That said, it still creates a legally binding debt obligation under English law.

If the company fails to pay, the holder can sue on the note, and in practice that's often more straightforward than proving a broader contractual dispute. Directors signing on behalf of a company should check they have authority to do so under the company's constitution and any shareholder arrangements.

Key steps

1. Identify the parties properly. Set out the full registered name of the company (the maker), its company number, and registered office address. Do the same for the payee, whether that's another company or an individual. Getting the legal identity right avoids arguments later about who owes what to whom. 2. State the principal sum and interest. Write the principal amount in both words and figures to prevent disputes. Then specify the interest rate, whether it's fixed or variable, and whether interest is simple or compound. Make clear when interest starts running, how often it's calculated, and whether it's paid alongside each instalment or rolled into the balance. 3. Set out the instalment schedule. Define how much the company will pay, how often (monthly, quarterly), and on which dates. Include the first payment date and the final one. If there's a larger balloon payment at the end, spell that out clearly. A table or schedule attached to the note often works better than burying the detail in prose. 4. Cover late payment and default. State what happens if the company misses a payment: a higher default interest rate, acceleration of the whole balance becoming due, or the holder's right to recover reasonable enforcement costs. Make clear that time is of the essence for payments so there's no argument about what counts as late. 5. Sign, date, and keep proper records. The note should be signed by someone authorised to bind the company, typically a director, with the date of signing clearly recorded. Both parties should keep originals or certified copies. If the note is being given as security for something else, reference that underlying arrangement so the paperwork hangs together.

Common questions