Promissory Note

Many a time, people offer to lend money to their close friends or family solely on the basis of mutual trust and regard hoping that the person borrowing will repay the debt sooner or later. Nevertheless, there are cases when the borrower forgets to keep his/her promise and it soon becomes a recipe for disaster as there are high chances of the relationship becoming strained. Like the famous screenwriter, Mario Puzo once said, friendship and money are like oil and water. Money is capable of ruining relationships. So, it is advisable you get into an agreement with each other as to the terms of repayment of the money borrowed.

Promissory Notes Defined

A promissory note, as per the definition provided under section 4 of the Negotiable Instruments Act of 1881 is an instrument, made in writing, containing an unconditional undertaking that is signed by the maker, to pay a defined sum of money only to a certain person or to the order of that certain person, or to the bearer of the instrument. Note be made that a bank note or a currency note don’t qualify as promissory notes. A promissory note is a Negotiable Instrument as covered under the Negotiable Instruments Act of 1881. Section 21 of the Indian Currency Act stipulates that a currency note is not a promissory note.

Section 2 (22) of the Indian Stamp Act of 1899 defines a promissory note as : “Promissory note” means a promissory note as defined by the Negotiable Instruments Act, 1881; “It also includes a note promising the payment of any sum of money out of any particular fund which may or may not be available, or upon any condition or contingency which may or may not be performed or happen.”

A promissory note is a signed legal document that contains a written promise to pay a defined sum of money to a defined person on a stipulated date or on demand.

A promissory note is a convenient way of repayment of huge amounts of money taken as loan. By way of a promissory note the mode of repayment of loan gets pre defined. Since, it is in writing and legally binding, both the parties are therefore assured that they are backed by law in case of any future hassles.

Pre-requisites of Promissory Notes

1. Must be in writing – A promissory note should always be in writing. Mere agreement to pay back the debt is not a promissory note. The promise to pay should be lucid and express. Mere acknowledgement is no good.
2. Unconditional promise to pay – The promise to pay should be unconditional, eg : “I promise to pay, on the 5th day after my marriage” is not an unconditional promise to pay. The undertaking to pay must not be contingent on the happening or non-happening of the event.
3. Should be signed by the maker – It is mandatory for the person making the promissory note to sign it. The promissory note can even be signed by maker’s agent, who has been so authorised to do so by the maker himself. The pro note should be clear about the identity of the person undertaking to pay.
4. Maker should be a certain defined person – The person who promises to pay, should be a certain person. Even if the person takes up an assumed name, he’d be bound to pay as the maker.
5. The payee should also be a certain person – Every promissory note should clearly mention the name of the payee or the name of the person to whom the payment is promised.
6. The promise must be to pay money only – “I promise to pay Neha 300 Rs and 10 kgs of rice” shall not be constituted as a promissory note. Only legal tender money is acceptable as promissory note. Rare currencies or coins wouldn’t be taken as valid promissory notes. The amount to be paid should also be certain.
7. It is not payable to bearer – It is illegal to make promissory note payable to bearer under the provisions of the RBI Act.
8. Duly stamped – A promissory note is covered under Section 2 (22) of the Indian Stamps Act and it has to be adequately stamped as per the provisions of the Act. An inadequately stamped promissory note shall not be admissible in evidence.

Types of Promissory Notes

• Secured Promissory Notes and

• Unsecured Promissory Notes

Examples of Valid and Invalid Promissory Notes

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