C9 Promissory Notes

Background

A promissory note is a written undertaking to pay money on demand, up to a specified limit, to a named recipient.

The governing bodies of the development banks from time to time pass Resolutions requiring member states to pay, by a certain date, assessed contributions, perhaps to the capital stock of the bank, or to a development fund set up by the bank (DFID's legal powers to make these payments are set out in the International Development Act 2002). Some Resolutions stipulate payment in full in cash, but most often, they allow member states to pay some or all of the contribution by way of a promissory note, the essential text of which is usually stipulated in the Resolution.

If DFID choose to use Promissory Notes these do not always need to be underpinned by a Statutory Order laid before Parliament. Orders are required when DFID are bound to make a contribution towards the establishment or capital stock of the bank. Contributions to development funds held by the bank do not require orders to be placed before Parliament.

The deposit of a promissory note is counted as `official development assistance' (ODA) at the time of deposit, not when it is encashed.

The Director of Finance and Corporate Performance Division signs promissory notes issued by DFID. DFID uses them mainly, but not exclusively, as part of the arrangements whereby we pay certain sums to International Development Banks and Funds.

Compliance Tasks

1. The Director of Finance and Corporate Performance Division (FCPD) signs Promissory Notes on advice from Financial Accounting.

Task assigned to: Director

2. A payment schedule must be agreed in writing with the beneficiary before a promissory note is issued

Task assigned to: Project staff

3. Before a promissory note can be issued, Project Staff must send a letter to the Bank nominated by the beneficiary appointing them (or referring to their existing appointment) as depository for the promissory note or series of notes in question, and summarising the content of the note that DFID will shortly be sending them

Task assigned to: Project Staff

4. The promissory note must contain wording stating that it is non-interest bearing and non-negotiable

5. Shortly before a promissory note is due for deposit the spending department must send the original promissory note to Financial Management Group (FMG) for onward transmission to the Director of Finance and Corporate Performance (FCPD), with a minute indicating:

a. The Resolution under which the payment is being made, where applicable
b. The replenishment, or fund contribution, etc., to which the payment relates
c. The total amount of the UK commitment of which the promissory note forms a part
d. The date by which, in accordance with the Resolution, the deposit of the promissory note is required
e. That any Ministerial and Parliamentary approval required in accordance with the 2002 Act has been given
f. That the Bank (of England) has been duly appointed as depository, and that they are aware that this note is being deposited
g. That there is aid framework provision for the scheduled expenditure
h. That the beneficiary has been notified that the note is being deposited
i. Either that the text of the promissory note has received Foreign & Commonwealth Office (FCO) legal advisers' approval, or that it follows a format to which FCO legal advisers gave approval on an earlier occasion, and that their approval is still valid
j. That although the promissory note is non-negotiable, i.e. it cannot be used by other than the recipient, the Director of FCPD may wish to send the signed note to the originating department by hand for security reasons.

Task assigned to: Director

Risks of non-compliance

Failure to agree a payment schedule with the beneficiary may result in a demand for funds in excess of the aid framework and also payment in advance.

Last updated: 03 Oct 2011

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