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It looks like promissory note schemes (the “second birth” for which was given by the financial crisis) will soon be no more as the Ukraine’s government plans to liquidate them: the Verkhovna Rada has approved a new law (№ 3041) in its first reading, which will introduce significant amendments to rules that regulate promissory notes turnover. It is very possible that the law will be approved further (in its second and final readings) and will officially come into force.

A promissory note, referred to as a note payable in accounting, or commonly as just a "note", is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

The main point of the law is in the restriction to use promissory notes to settle accounts with public (including municipal) entities. The first and the most active use of those schemes was during “hot” 90-es (“the era of primitive capital accumulations”, as this period is often referred to in Russia, Ukraine, and other CIS countries that previously formed the Soviet Union). At the beginning of the new century, further progress with those schemes was stalled a bit, but the financial crisis reminded of many things that were done previously, and then forgotten. Some quickly remembered “the good old days”, and shadow outflow of budgetary funds started to accelerate. 

Full-scale restriction on promissory note schemes will hardly be possible even with this new law: one may hope to slow down their turnover a bit, but not to get rid of them completely. The reason for that is the fact that public companies do not have a right to accept promissory notes as payment, but they are allowed to pay with their notes themselves – for works completed, services received, etc. But what is already very important is that mutual settlement of accounts with notes won’t be possible soon: even if a public entity pays with a promissory note, the private sector entity that has business relations with that government structure will have to pay in plain cash anyway.

Another idea is implementation of administrative liability for the so-called “wind-bills” – promissory notes that are not secured on real goods. There will be fines provided for the amount of 4 to 5 hundred minimal untaxed salaries: 6.8 – 8.5 thousand UAH (≈ 850-1000 USD). In fact, today’s legislation already prohibits issuing of such notes, but the probability and the extend of punishment isn’t enough to keep companies’ managers from doing that, thus creating newer tax evasion schemes, presenting fake non-existent assets on their balances, and many other dirty tricks by which we know what the real financial fraud is all about. Tougher punishment for issuing of “wind-bills” should at least in part cover the market from unfair players.

Yet another advantage of the law project is that it contains a list of terms and definitions that are most frequently used in relation to promissory notes. Dual treatment of those terms was one of the main reasons for many cases when one and the same situation was seen differently. As a result, entrepreneurs frequently became victims of claims by tax authorities, and even settlement of those disputes in a court couldn’t help because fully legitimate (and seemingly legal) schemes with promissory notes were found illegal.

The law is not effective yet, but business society of Ukraine is already eagerly awaiting its approval. 

Source: http://economics.unian.net