Authors: JUDr. Martin Šubrt, Ph.D., LL.M., Mgr. Ondřej Křížek, Mgr. Lucie Kačerová, Mgr. Tereza Holubová
Secured promissory notes support the creditor’s position in a relationship of obligation in case the debtor does not comply with a demand. For instance, upon submitting it for payment or even finally enforcing performance, the holder of the note has to prove nothing except that he is the holder of a valid note. In addition, a note can easily be used as an instrument of trade.
However, if a note receivable is used in insolvency proceedings, a conflict may arise between the principles for assertion of notes receivable and the review of claims in insolvency proceedings. In this connection, the Supreme Court has now repeatedly confirmed that even upon asserting a claim arising from a note receivable in insolvency proceedings, it is not necessary to specify the details about the claim secured by the promissory note nor, as the case may be, the further circumstances surrounding the origin of the submitted claim.
So, what is unique about claims arising from promissory notes and how should they be asserted insolvency proceedings?
The nature of promissory notes and some of their advantages
A promissory note is a security that upon the fulfilment of strict formal requirements creates a direct, unconditional, indisputable and abstract obligation of a particular person (be it the issuer or a third party) to pay a specified sum of money to the holder of the note at a certain place and time.
Although the issue of a promissory note as a rule is based on a particular reason (cause), there is a specific relationship of obligation arising from the note, whose abstract character consists in the fact that there is no significant cause for the existence of a note, and this cause does not arise from the note. Thus, a securing promissory note that aims to ensure that a certain claim of a creditor is satisfied (e.g. the repayment of a loan) is a separate financial instrument that is independent of the secured obligation. Therefore, a promissory note does not expire when the secured obligation is fulfilled and it can be disposed of independently, which, in comparison to other debt instruments (e.g. guarantees), facilitates the process of satisfying the claim.
The Supreme Court’s case law is consistent in its conclusion that the holder of a note has to prove nothing except that he is the holder of a valid note upon submitting it for payment or even finally enforcing performance, for a valid note itself represents sufficient evidence for making claim to the sum stated in the note. Thus, the holder of a note is not burdened with the need to prove his claim that follows from the underlying obligation relationship.
However, the fact that according to the agreement between the parties the purpose of the note is to ensure the fulfillment of a particular obligation is reflected in the field of “causal objections”, with the help of which the debtor can under certain conditions avoid fulfilling the obligations from the note. Causal objections have their origin in an area outside the relationship of obligation, and the debtor can use them to call into question the economic (causal) basis that served as the cause for issuing the note (e.g. refute the validity of the contractual penalty agreed on within the underlying contractual obligation relationship, etc.). But if the issuer of a note denies his obligations arising from the note before the court, he bears the burden of proof in this respect.
Asserting a claim in insolvency proceedings
If insolvency proceedings are brought against the person who has to fulfill obligations arising from a promissory note, the claim will have to be asserted by proof, for according to Section 109 Par. 1 let. a) of the Insolvency Act, a consequence of the initiation of insolvency proceedings is that the right to payment and other rights concerning assets in insolvency cannot be asserted by an action if it is possible to assert them by proof.
According to Section 147 Par. 2 of the Insolvency Act, besides other general requirements the proof of claim must include the amount of the submitted claim and the reason it arose, i.e. the facts on which a claim is based and from which the existence of the claim can be inferred. With reference to this Section, insolvency trustees sometimes request the creditor to provide the cause for creation of the promissory note. However, this practice is incorrect.
If in insolvency proceedings conducted over the property of the debtor a creditor asserts only a claim arising from a promissory note, with respect to the legal causes of the occurrence of claim, the proof of claim does not have to include details about the claim secured by the promissory note, or about other circumstances surrounding the origin of the submitted claim (e.g. information about whether the note in question was originally issued in the form of a blank note, what the content of the right to complete the note granted according the parties’ agreement was, etc.). The cause for the issue of the submitted note receivable is the promissory note itself.
According to the Supreme Court’s case law, for the purposes of factual specification of proof (if only a claim from a promissory note is being asserted) it is not necessary to provide these details, and the creditor who asserts the claim should bear neither the burden of allegation nor the burden of proof with regard to these facts. This would not be the case only if the creditor asserted in the insolvency proceeding not only the claim arising from the securing promissory note, but also the claim secured by the promissory note (to the extent in which the claims correspond, they would however be considered to be a single claim).
This conclusion has now been confirmed by the Supreme Court in its decision Ref. No. 29 ICdo 14/2019 from 29th of April 2020, where it endorsed the conclusions of the lower courts from incidental disputes about the authenticity of a claim submitted by the creditor, according to which in proof of a claim the creditor sued by an insolvency trustee was not obliged to describe the circumstances under which the disputed promissory note had been issued (particularly to give the reason for the issue of the note) or to further prove that the details about the sum of money, which had been filled in on the blank note, corresponded to the actual amount of debt secured by the note.
Conclusion
The Supreme Court has repeatedly confirmed that the independence, abstractness and indisputability of an obligation arising from a securing promissory note is also preserved within insolvency proceedings. Nevertheless, it is important to pay close attention to the assertion of notes receivable in order to avoid their denial and subsequent incidental disputes about their authenticity or amounts. These disputes may require the creditor to incur additional expenses and mean the failure to satisfy the creditor’s claim in case of an unsuccessful trial.
