A Promissory Note is a fundamental negotiable instrument in the world of finance and commercial transactions. It is a written promise to pay a certain sum of money to a specific person or bearer either on demand or at a fixed future date.
What is a Promissory Note?
Legal Definition (Section 4, Negotiable Instruments Act, 1881):
“A Promissory Note is an instrument in writing (not being a bank-note or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument.”
Key Features of a Promissory Note
- Written Document: Must be in writing, oral promises do not qualify.
- Unconditional Undertaking: The promise to pay must be unconditional.
- Signature of Maker: Must be signed by the person who makes the note (maker).
- Definite Payee: The name of the person to whom the payment is to be made must be clear.
- Certain Amount: The amount payable must be certain and specified.
- Payable on Demand or Fixed Time: It may be payable on demand or after a specific period.
- Stamp Duty: It must be adequately stamped under the Indian Stamp Act.
Types of Promissory Notes
- Demand Promissory Note: Payable on demand by the payee.
- Time Promissory Note: Payable after a fixed period or date.
- Joint Promissory Note: Made by more than one person, all of whom are jointly liable.
- Secured Promissory Note: Supported by collateral security.
Essentials for a Valid Promissory Note
| Requirement | Explanation |
|---|---|
| Writing | Must be written, typed, or printed |
| Signed by Maker | Without the signature, it is not legally enforceable |
| Definite Sum of Money | The amount must be exact and not vague or variable |
| Payee Must be Certain | Should clearly mention to whom payment is made |
| Legal Consideration | Must be made for a lawful consideration |
| Proper Stamping | Must be properly stamped as per Indian Stamp Act |
Legal Provisions and Applicability
- Negotiable Instruments Act, 1881
- Section 4 – Definition
- Section 118 – Presumption of consideration
- Section 20 – Inchoate instruments
- Section 32 – Liability of the maker
- Indian Stamp Act, 1899 – Prescribes stamp duty on promissory notes
Parties Involved
- Maker – Person who makes and signs the note, promising to pay.
- Payee – Person to whom the payment is to be made.
- Holder – The person in possession of the note.
- Endorsee (if applicable) – The person to whom the note is transferred.
Important Case Laws
Syndicate Bank v. Maganlal (1983 AIR 1182)
Held that a promissory note, once executed, raises a presumption under Section 118 that it was made for consideration.
Kundan Lal Rallaram v. Custodian, Evacuee Property (1961 AIR 1316)
Established that consideration is presumed unless rebutted by the defendant.
Difference Between Promissory Note and Other Instruments
| Instrument | Payable To | Parties Involved | Transferability |
|---|---|---|---|
| Promissory Note | Payee or order/bearer | Maker & Payee | Can be endorsed |
| Bill of Exchange | Third party to pay payee | Drawer, Drawee, Payee | Can be endorsed |
| Cheque | Bank pays the payee | Drawer, Drawee (Bank) | Easily transferable |
Advantages of Promissory Notes
- Legally enforceable
- Written evidence of debt
- Easy to draft and execute
- Encourages formal credit transactions
Limitations
- Cannot be made payable to bearer on demand (as per RBI regulations)
- Needs proper stamp duty
- Not suitable for small or informal loans
- Risk of forgery if not securely handled
Format of a Simple Promissory Note
textCopyEditDate: [DD/MM/YYYY]
Rs. [Amount in figures]
On demand, I promise to pay [Name of Payee], or order, the sum of [Amount in words] only, for value received.
(Signature)
[Name of Maker]