What is Promissory Note? Characteristics of Promissory Note.

Promissory Note

As you know, section 4 defines a promissory note as 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. This definition describes the essential characteristics of a promissory note. It also makes it clear that it is not a currency or a bank note which has almost all the characteristics of a promissory note but should not be treated as a promissory note.

 


Essential Characteristics

The essential characteristics of the promissory note, in the light of the above definition, may be listed as follows

1) It must be in writing, which obviously means that an oral promise will not make a promissory note.

2) It contains an unconditional and express undertaking (an unconditional promise).

The maker of the note undertakes or promises to pay, and such an undertaking must be unconditional.

In real life situations people help each other by lending money. A ‘receipt’ or ‘chit’ may also be obtained from the borrower at that time. A receipt is an acknowledgement but it cannot be a promissory note. If a receipt issued contains both an acknowledgement and an unconditional promise to pay, it is treated as a promissory note. For example, in a receipt it is stated ‘we have received the sum Rs. 9,000/- in cash from Mr. X. This amount will be repaid on demand.’ This may be treated as a promissory note. The undertaking referred to here is an unconditional one. The maker, for example, cannot write ‘I promise to pay Mr. X Rs. 500 as soon as he delivers the goods.’ There should be no uncertainty in the promise. For example, ‘I promise to pay to Mr. X Rs. 500 as and when I find it convenient’ cannot make it a promissory note.

3) The promise must be for paying a certain sum of money. There cannot be a promissory note for anything other than money. The amount must be definite. For example, one cannot write ‘I promise to pay Rs. 1000 and some interest thereon’.

4) The maker must sign. Signature is meant to authenticate the instrument. It also means writing a person’s name by the person himself.

5) The note is to be made payable:

i) only to a certain person; or

ii) to the order of a certain person; or

iii) to the bearer of the instrument; or

iv) only to, or to the order of, a certain person, or

v) only to a certain person, or to the bearer of the instrument.

A promissory note cannot be made payable to the maker himself. A note made payable only to a particular person is also a promissory note but will not be negotiable. It must contain, along with the payee’s name, the words ‘or order’. Payable to ‘bearer’ is valid but RBI Act section 31 restricts private parties issuing notes payable to bearer. Bearer promissory notes are, therefore, not found in practice.

6) The time for payment is ‘on demand’ or after a definite period of time as may be stated in the promissory note.

7) Omission of the date will not invalidate unless it is to be proved at what time it is to be paid. The place of signature and signatures of two witnesses are also found in practice, though they are not insisted upon by law for ensuring the validity of the note.

8) In addition to the requirements as per the definition, stamp is necessary as per the requirements of the Indian Stamp Act, 1899. A promissory note can be stamped either with adhesive stamps or engrossed on a stamp paper of proper value. The law requires the cancellation of such stamp which may be done by the maker by writing his name across the stamp or initials with the date of his writing or in any other effectual manner.

 

Some Illustrations

The nature of a document is determined very much by its contents, and merely the description or its form alone cannot change its character or legal effects. The mere description of an instrument stating that it is a promissory note, also cannot make it a promissory note, if it fails to satisfy the various statutory requirements given in the definition. Illustrations provided in the Act itself will be relevant at this point. Some illustrations to show how a promissory note may be drawn in different forms and at the same time fulfilling the requirements of law may be helpful for drawing a valid promissory note. Study the following illustrations carefully:

‘A’ signs instruments in the following terms:

1) ‘I promise to pay B or order Rs. 500’.

2) ‘I acknowledge myself to be indebted to B in Rs. 1,000 which I promise to

pay on demand, for value received’.

3) ‘Mr. B, IOU, Rs. 1,000’.

4) ‘I promise to pay B Rs. 500 and all other sums which shall be due to him’.

5) ‘I promise to pay B Rs. 500, first deducting thereby any money which he may owe me’.

6) ‘I promise to pay B Rs. 500 seven days after my marriage with C’.

7) ‘I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum’.

8) ‘I promise to pay B Rs. 500, and to deliver to him my black horse on 1st January next’.

In the above illustrations, instruments 1 and 2 are promissory notes but the rest are not. In instruments 3 to 8 the maker promised to pay subject to some conditions. Hence, not to be treated as valid promissory notes. For your understanding, specimens of varied forms of valid promissory notes are presented below. Study them carefully and note the difference.

 

Specimen 1

 

 

New Delhi

10 March 2019

Rs. 50,000/-

On demand I promise to pay Mr. X or order the sum of Rupees Fifty Thousand with interest at 6 per cent per annum for value received.

Stamp

Mr. Y (Sd/- on stamp)

To

Mr. X

New Delhi

 

 

Specimen 2

 

New Delhi

10 March 2019

Rs. 50,000/-

On demand I promise to pay Mr. X the sum of Rupees Fifty Thousand only.

Stamp

Mr. Y (Sd/- on stamp)

To

Mr. X

New Delhi

 

 

Specimen 3

 

New Delhi

17 March 2019

Rs. 50,000/-

Two months after date I promise to pay Mr. X the sum of Rupees Fifty Thousand only.

Stamp

Mr. Y (Sd/- on stamp)

To

Mr. X

New Delhi

 

 

Specimen 4

 

New Delhi

10 March 2019

Rs. 50,000/-

Three months after date I promise to pay Mr. X or the bearer the sum of Rupees Fifty Thousand only.

Stamp

Mr. Y (Sd/... on stamp)

To

Mr. X

New Delhi

 

 

Specimen 5

 

New Delhi

10 March 2019

Rs. 50,000/-

Three months after date I promise to pay Mr. X or the bearer the sum of Rupees Fifty Thousand only.

Stamp

Mr. Y (Sd/ on stamp)

To

Mr. X

New Delhi

 

 

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