Section 4 of the Negotiable Instrument Act 1881, deals with the term promissory note. It says that “A Promissory note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.
A promissory note is a kind of informal loan or a document of informal note. For example, “A” wants to buy a certain good which he needs urgently but he doesn’t have the money to pay. So he will make a promissory note to the seller that he will pay the amount on such date or whenever he needs the money. But there should not be any condition made in order to return the money back.
The Section requires that the Instrument can contain an undertaking to pay a certain sum of money to:
• A certain (or specified) person
• The order or such of a person
• To the bearer of the instrument
Parties to Promissory Note
i. Drawer: The person who makes the promise to another to pay the debt is the drawer of the instrument and he is called the debtor or borrower.
ii. Drawee: The person in whose favour the note is drawn and he is the creditor who gives goods on credit.
iii. Payee: The person to whom the payment is to be made is the payee of the negotiable instrument.
Types of Promissory Note
i. On-Demand: Whenever the creditor demands for the money, the debtor is obliged to pay at that particular time only.
ii. Usance: It is specified on a future date.
iii. Installments: When the amount is paid in parts for a specified period of time. Payable installment or lump sum
iv. Interest bearing and Interest-Free: Creditor can put some interest in the money or it can be interest-free.
v. Single or Joint borrowers: Single or multiple people can also sign the promissory note.
vi. Non- Negotiable or Negotiable: It can be negotiable and non-negotiable both. If “or to the order of” is not written it is non-negotiable and if it is written then it is negotiable.
Characteristics of Promissory Note
i. Writing: The very first essential of the promissory note is it should be in writing. Any oral agreement can never be an instrument, much less negotiable.
ii. Promise to pay: It must have the promise to pay. A mere acknowledgement of debt is not a promissory note.
iii. Unconditional: There should not be any condition overpaying of the money.
iv. Money Only: The instrument must be payable in money only. If the instrument contains a promise of exchanging some other materials other than money then it can not be a promissory note.
v. Certain Parties: There are two parties one who makes the note and is known as the maker and other the payee to whom the promise is made. Both the payee and maker must be indicated with certainty on the face of the instrument.
vi. Signed by the maker: It is not a promissory note unless it is signed by the maker.
Promissory Notes- Illustration
X signs instruments in the following terms:
a. “I promise to pay Z or order Rs. 1000.”
b. “I acknowledge myself to be indebted to Z in Rs. 20,000, to be paid on demand, for value received.”
c. “Mr Z I.O.U Rs 20,000.”
d. “I promise to pay Z Rs. 1,000and all other sums which shall be due to him.”
e. “I promise to pay Z Rs 1,000, first deducting there-out any money which he may owe me.”
f. “I promise to pay Z Rs 1,000 seven days after my marriage with C.”
g. “I promise to pay Z Rs 1,000 on D’s death, provided D leaves me enough to pay that sum.”
The instruments respectively marked (a) and (b) can only be termed as promissory notes.
Y. Venkiah v. M/S Margudarsi Chit Fund (P) Ltd 1989 (2) CCC 98 (AP); 1989(2) Bank CLR 90 (AP)
The court held that in order to make a document as “promissory note” then it must contain a promise to pay on demand a defined sum and must not be something else and if it is a document guaranteeing payment of a fixed sum on some date after a certain period of time. It becomes “Promissory note payable otherwise than on-demand”
Kadori Lal v. Shukh Pal AIR 1968 MP 4 (DB)
The court held that the instrument which doesn’t have the negotiability on the face of it a requirement under Section 4 of the act may still become negotiable by reason of Section 13 read with Explanation 1 so far as the Negotiable Instruments Act is concerned: but for that reason, the instrument cannot be treated as a promissory note under the stamp Act.
Gay v. Rooke held that the sum of rupees two hundred for value received. Holding that it was not the promissory note.
The usual form of Promissory note
|Rs 1000 Bangalore, January 2, 2020 Two months after date, I promise to pay XYZ or Bearer/Order the sum of rupees one thousand. ABC
A promissory note is a legal financial instrument issued by one party promising to pay the debt owed to another party. It is a short term credit instrument which does not amount to a banknote.
“The views of the authors are personal“
Frequently Asked Questions
What does promissory note mean?
A promissory note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument
What are the essential requirements of the Promissory note?
• In writing
• Unconditional promise to pay
• Drawer- a certain person
• Sum Payable- certain
• Interest- In case of Interest bearing promote
• Date of issued and place of issue
• Maturity Date
• Stamped- Revenue or Stamp Paper
• Signed by the Drawer.
3. What are the legal actions?
A legal case can be filed up to 3 years from:
• The maturity date in case of fixed date Promissory Note
• The date of execution- in case of a demand of Promissory Note.