What is a Promissory Note?

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What is a Promissory Note? Blog Image

Overview:

The Karnataka High Court has held that a mention in promissory note, that the payer is at liberty to proceed against the note creator's property if he fails to repay, is an additional condition that does not contravene Section 4 of the Negotiable Instruments Act.

About Promissory Note

  • A promissory note is a written and signed promise to repay a sum of money in exchange for a loan or other financing. 
  • Promissory notes are binding legal documents used to protect both the lender and the borrower.
  • It is issued by the debtor and states that he will pay the requisite amount within a certain time frame.
  • The person making the promise is called the ‘maker,’ and the person to whom the payment is to be made is called the ‘payee.’ 
  • It typically contains all the terms involved, such as the principal debt amount, interest rate, maturity date, payment schedule, the date and place of issuance, and the issuer's signature.
  • Promissory notes can also be divided into secured and unsecured notes.
    • In the case of a secured promissory note, the borrower must provide collateral to the lender to secure the amount.
    • Unsecured notes do not require collateral and are issued based on trust. Unsecured notes are very common among friends and family.
  • Promissory notes in India:
    • In India, a promissory note can be issued under Section 4 of the Negotiable Instruments Act, 1881, therefore making it a legal instrument and binding the parties by law.
    • Promissory Notes issued in one Indian state, can be presented in another state provided that the note bears a valid stamp. There is no requirement for additional stamp duty to be paid.
    • A Promissory Note must always be written by hand.
    • It must include all the mandatory elements, such as the legal names of the payee and maker's name, amount being loaned/to be repaid, the full terms of the agreement, and the full amount of liability, beside other elements.
    • The note must clearly mention only the promise of making the repayment and no other conditions.
    • After issuance, a Promissory Note must be stamped according to the regulations of the Indian Stamp Act. It can also be issued on a stamp paper in case revenue stamps are unavailable.
    • All Promissory Notes are valid only for a period of 3 years starting from the date of execution, after which they will be invalid.
    • There is no maximum limit in terms of the amount which can be lent or borrowed.
    • The issuer/lender of the funds is normally the one who will hold the Promissory Note. When the loan amount has been disbursed or repaid fully, the Promissory Note must be cancelled and marked "Paid in Full", after which it can be returned to the borrower / payee.
    • While the signature of a witness is not a mandatory requirement, it is advisable to have a note signed by a witness who is independent of the transaction.

Key Facts about Negotiable Instruments Act, 1881

  • The Act was enacted to provide a uniform legal framework for the use of negotiable instruments in India.
  • It governs the use of negotiable instruments in India.
  • It provides for the regulation of promissory notes, bills of exchange, and cheques. 

Q1) What is a bill of exchange?

A bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at some point in the future. A bill of exchange often includes three parties—the drawee is the party that pays the sum, the payee receives that sum, and the drawer is the one that obliges the drawee to pay the payee.

Source: NI Act | Promissory Note Conferring On Payer A Right To Recover As Per Law Does Not Dilute Unconditional Undertaking: Karnataka HC