Promissory Note

A promissory note is a signed document which contains a written guarantee or a promise to pay a specific amount to a specified individual at a specified date or on demand. In the Negotiable Instruments Act 1881, a promissory note is defined as an instrument recorded in writing (not being a currency note or a bank note), containing an unrestricted undertaking signed by the maker, to pay a specific amount of money only to or to the order for someone in particular, or to the bearer of the instrument.

However, as indicated by the Reserve Bank of India Act, a promissory note payable to bearer is unlawful. Subsequently, a promissory note can’t be made payable to the bearer.

Promissory note is a type of written guarantee to pay a debt. It is a monetary instrument, wherein one party (maker or issuer) guarantees in writing to pay a determinate amount of money to the other (the payee), either at a fixed, definite future time or on request of the payee subject to explicit terms.

The details of a promissory note generally include the principal sum, the interest rate (assuming any), the detail of the parties, terms of reimbursement (which could incorporate interest) and the maturity date. Sometimes, arrangements are incorporated concerning the payee’s privileges in case of a default, which may incorporate foreclosure of the maker’s assets.

A promissory note is of two kinds; secured and unsecured promissory note. An unsecured promissory note isn’t attached to anything, the loan is made depending on the maker’s capacity to repay. A secured promissory note may likewise be made based on the maker’s capacity to repay, but it is made sure about by a thing of significant worth, for example, a vehicle or a house.

Following are the requisites of a promissory note:

  • The document must contain an unconditional promise or a guarantee to pay.
  • The document must be in writing according to the rules of Negotiable Instruments Act 1881.
  • The document should be signed by the maker for it to be legally binding.
  • The document must be payable to bearer or to the order of a certain person.
  • The amount payable must be certain and should be mentioned in the note.
  • The document shall be properly stamped for it to be valid and legally binding.

A promissory note doesn’t require any acceptance or acknowledgement as the maker of the promissory note himself guarantees to make the payment.

Parties to a Promissory Note: In a promissory note there are two parties; Maker/Drawer and Drawee/Payee.

  • Maker or Drawer is that person who makes or draws the promissory note to pay a specific sum as determined in the promissory note. He is moreover called the promisor.
  • Drawee or Payee is that person in whose favor the promissory note is drawn or made. He is known as the promisee.

The promissory note is a written instrument that contains an unconditional promise to pay by it’s Drawer to the Drawee. It is governed by the Negotiable Instruments Act 1881.

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