Promissory Note

A Promissory Note is a financial instrument that contains a written, unconditional promise by one party (the maker) to pay a definite sum of money to another party (the payee), either on demand or at a specified future date. It is a legally binding document and serves as an important tool in credit transactions, commercial dealings, and banking operations.
Promissory notes are governed by the Negotiable Instruments Act, 1881 in India, which also regulates other negotiable instruments such as bills of exchange and cheques.

Definition (As per Section 4 of the 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 only to, or to the order of, a certain person, or to the bearer of the instrument.”

Thus, the essential features are:

• It must be in writing.
• It must contain a clear and unconditional promise to pay.
• The amount payable must be certain.
• It must be signed by the maker.
• The payment must be made to a definite person or their order, or to the bearer.

Essential Features of a Promissory Note

1. Written Document: A promissory note must be in writing. Oral promises do not constitute valid promissory notes.
2. Unconditional Promise to Pay: The undertaking to pay must be absolute, not dependent on any external condition or event. For example:
   • Valid: “I promise to pay ₹10,000 to Rajesh on demand.”
   • Invalid: “I promise to pay ₹10,000 to Rajesh if I win the lottery.”
3. Signature of the Maker: The note must bear the signature or thumb impression of the person making the promise, without which it is invalid.
4. Certain Sum of Money: The amount payable must be specific and stated in clear monetary terms. It cannot be partly in money and partly in goods or services.
5. Payee Must Be Certain: The person to whom payment is to be made (the payee) must be identifiable. The promise must be directed to a definite person or their legal representative.
6. Payable in Money Only: The payment must be in money — not in kind, goods, or services.
7. Stamping: Under the Indian Stamp Act, a promissory note must be duly stamped according to the value involved; otherwise, it is inadmissible in court.
8. Delivery: The note becomes effective only when delivered by the maker to the payee or holder.

Parties to a Promissory Note

A promissory note involves two main parties:

1. Maker: The person who makes and signs the note, undertaking to pay the amount mentioned.
2. Payee: The person in whose favour the note is drawn and who is entitled to receive the payment.

If the note is endorsed or transferred, additional parties may include:

• Endorser: The person who transfers the note to another by signing it.
• Endorsee: The person to whom the note is transferred.
• Holder in Due Course: A person who has obtained the note in good faith and for consideration before its maturity.

Format and Example of a Promissory Note

Example:

Promissory Note
₹10,000
New Delhi, 15 June 2025
On demand, I promise to pay Mr. Rajesh Sharma or order the sum of Rupees Ten Thousand only, for value received.
(Signed)Amit Verma(Address: 23, Green Park, New Delhi)

This simple form satisfies all the requirements of a valid promissory note.

Types of Promissory Notes

1. Demand Promissory Note: Payable immediately or when the payee demands payment.Example: “I promise to pay ₹5,000 to Anil on demand.”
2. Time Promissory Note: Payable after a certain period or on a fixed date.Example: “I promise to pay ₹10,000 to Anil on 30 December 2025.”
3. Joint Promissory Note: Signed by two or more makers jointly, making all of them liable to the payee.
4. Bank Promissory Note: Issued by a bank to a customer or another financial institution, usually as part of loan or credit arrangements.

Legal Characteristics

• Negotiable Instrument: A promissory note is transferable by endorsement or delivery, giving the transferee the same rights as the original holder.
• Written Evidence of Debt: It serves as a formal acknowledgment of debt, legally enforceable in court.
• Unconditional Obligation: The maker is bound to pay the stated amount, irrespective of personal circumstances.
• Presumptions under Law: Under the Negotiable Instruments Act, it is presumed that a promissory note was made for valid consideration, unless proved otherwise.

Differences between Promissory Note and Bill of Exchange

Uses and Importance

Promissory notes play a vital role in business and finance:

• Credit Transactions: Used as written evidence of debt between lenders and borrowers.
• Short-Term Financing: Commonly used in trade finance, personal loans, and business loans.
• Legal Proof: Provides a legally enforceable claim for repayment.
• Banking and Negotiation: Often discounted or used as collateral by banks and financial institutions.

Dishonour of a Promissory Note

A promissory note is said to be dishonoured when the maker fails to pay the amount on the due date. In such cases, the holder can:

• Issue a notice of dishonour to the maker.
• Initiate legal proceedings to recover the amount due.
• Endorse the note to another person for collection or legal action.

Advantages

• Simple and inexpensive form of credit.
• Legally binding document.
• Easy transferability as a negotiable instrument.
• Provides written proof of debt and repayment terms.

Limitations

• Enforceable only if properly stamped and signed.
• Non-payment or dishonour can lead to legal disputes.
• Not suitable for long-term or complex financial transactions.