Promissory Note as Security: Benefits, Pitfalls and Practical Tips

A promissory note as security (Hungarian: váltó mint biztosíték) is a financial instrument that entitles the holder to fast-track court proceedings, with deadlines that are a fraction of those in ordinary litigation — all without spending a single forint on a notary. Yet most businesses and individuals in Hungary never even consider it when choosing how to secure their contracts. A few lines on a sheet of paper, containing the elements prescribed by law, can be enough.

Why are more and more contracts backed by a promissory note?

Changes in Hungary’s system of contractual securities

The Hungarian Civil Code (Ptk.), which came into force in 2014, eliminated fiduciary securities — including the security-purpose option to purchase — from everyday practice. As a result, businesses and financial institutions turned to alternatives. Issuing a promissory note as collateral for a contract (Hungarian: váltó kiállítása biztosítékként szerződéshez) has since re-emerged as a popular choice, particularly in bank lending and business-to-business transactions.

Who should consider using a promissory note?

Promissory notes are suitable for a wide range of situations: as a cover note in business-to-business transactions involving the supply of goods or services, but equally as security for loans between private individuals. They are especially valuable where the parties are looking for a fast and affordable safeguard without the costs of a notarial deed.

What is a promissory note and how does it work as security?

Own notes and bills of exchange — the two basic types

Act CLXXXV of 2017 on the Rules of the Law of Bills of Exchange (Vt.) regulates two types. With an own promissory note, the issuer personally undertakes to pay at maturity. With a bill of exchange, the issuer instructs a third party to pay. In practice, the own promissory note is far more commonly used for security purposes.

The cover note: a safety net, not a payment instrument

A cover note (Hungarian: fedezeti váltó) is not used for payment — it serves as a backup. The creditor only relies on it if the debtor fails to meet its contractual obligations. This arrangement is particularly popular in ongoing business relationships.

The power of abstraction — why the debtor cannot raise defences from the underlying deal

One of the most important advantages of promissory notes is their abstract nature: once the note is endorsed to a third party, the debtor can no longer invoke defences arising from the original contract. The claim “detaches” from the underlying relationship and takes on a life of its own.

What are the advantages of a promissory note compared to a notarial deed?

Cost: zero forints vs. hundreds of euros in notary fees

Perhaps the most striking of the advantages of promissory notes is the cost difference. Having a HUF 20 million (approx. EUR 51,000) loan agreement notarised can cost HUF 80,000–120,000 (approx. EUR 200–300), whereas issuing a promissory note costs nothing in formal fees — it is a private document. Neither a notary nor a lawyer is legally required, although professional assistance is strongly recommended.

Flexibility and transferability

Unlike a notarial deed, a promissory note can be transferred to a third party by endorsement. The holder may use it to settle their own debts, or have it discounted at a bank. No other form of security offers this kind of flexibility so simply.

Promissory note lawsuit rules — why is it faster than ordinary litigation?

Priority proceedings and tight deadlines

Sections 88–92 of the Vt. set out the rules of procedural rigour specific to promissory note lawsuits. A key principle of Hungarian promissory note law is that the court must act on a priority basis at every stage — including appellate proceedings — and deadlines may not exceed 30 days. The case falls within the competence of the regional court regardless of the amount in dispute, and counterclaims, third-party interventions and joinder are not permitted.

Limited defences and the reversal of the burden of proof

In promissory note proceedings, the creditor essentially satisfies their burden of proof by presenting the note. It is the debtor who must prove that the underlying transaction was invalid. This reversal creates an extremely favourable position for the creditor.

How to properly issue a promissory note as security

Mandatory elements of a promissory note

A promissory note as security will only serve its purpose if it contains all elements required by law: the word “váltó” (promissory note) in the text and language of the document, an unconditional promise to pay a specified sum, the maturity date, the place of payment, the name of the payee, the date and place of issue, and the issuer’s signature. If any element is missing, the document does not qualify as a promissory note.

Common mistakes when issuing a note

In our firm’s experience, the most frequent errors are: failing to state the currency, using a non-existent maturity date (e.g. 31 June), omitting the word “váltó”, or leaving out the place of payment. According to case law (decisions BH 1992/121 and BH 1996/486 of the Hungarian Supreme Court), certain deficiencies may potentially be remedied even during litigation — but why take the risk?

How does an aval endorsement strengthen the security?

The concept and use of the aval note

An aval endorsement means that a third party assumes surety for the note by writing “per aval” or an equivalent expression and signing the note. This is particularly recommended where the debtor’s ability to pay is uncertain — typically, a financially stronger member of the debtor’s group of companies provides the guarantee on the note.

What risks should you be aware of when using a promissory note?

Protest, enforcement and the limits of procedural rigour

If the note is not paid at maturity, the holder must have the refusal of payment certified by a notarial protest — within two business days of maturity. Unlike a notarial deed, a promissory note does not in itself constitute a directly enforceable title; in case of non-payment, proceedings must be brought before the court. Although the law prescribes priority treatment, the workload of the courts means that promissory note lawsuits do not always conclude within weeks. This does not diminish the value of the note as security, but realistic expectations should be set.

When should you choose a promissory note and when a notarial deed?

Decision criteria: which security fits the transaction

The advantages and disadvantages of a promissory note versus a notarial deed depend on the nature of the transaction. The note is cheaper, more flexible and transferable, but requires litigation in case of non-payment. The notarial deed is more expensive, but allows direct enforcement without a lawsuit. For smaller-value deals and loan agreements, the promissory note is usually the more sensible choice, while for high-value, long-term credit facilities, a notarial deed may offer greater security.

Why it pays to consult a lawyer when issuing a promissory note

Although no legal requirement mandates a lawyer’s involvement in issuing a promissory note, the pitfalls outlined above — missing elements, incorrect wording, failure to observe protest rules — can all be avoided with professional assistance. A promissory note only serves its purpose if it is drafted flawlessly.