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Promissory Notes

    IndianMoney.com Research Team | Sunday, February 22,2009, 02:38 PM
 

Section 4 of the Negotiable Instruments Act, 1881 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.

Parties to a Promissory Note

Primarily there are two parties involved in a promissory note. They are;

  • The Maker or Drawer – the person who makes the note and promises to pay the amount stated therein.
  • The Payee – the person to whom the amount is payable.

In course of transfer of a promissory note by payee and others, the parties involved may be -

  • The Endorser – the person who endorses the note in favour of another person. For example Mr. X endorses it in favour of Mr. and Mr. Y also endorses it in favour of Mr. Z then X and Y both are endorsers.
  • The Endorsee – the person in whose favour the note is negotiated by endorsement.

Way of writing Promissory note

  • "I promise to pay X or order Rs. 500."
  • "I acknowledge myself to be indebted to X in Rs. 1,000, to be paid on demand, for value received."

Wrong ways of writing Promissory note

  • "Mr. XYZ, I.O.U. Rs. 1,000."
  • "I promise to pay ABC Rs. 500 and all other sums which shall be due to him."
  • "I promise to pay ABC Rs. 500 first deducting there out any money which he may owe me."
  • "I promise to pay ABC Rs. 500 seven days after my marriage with XYZ."
  • "I promise to pay ABC Rs. 500 on XYZ’s death, provided XYZ leaves me enough to pay that sum."
  • "I promise to pay ABC Rs. 500 and to deliver to him my black horse on 1st January next."

Features of a promissory note

Below given are the important features of a promissory note.

  • A promissory note should be in writing, duly signed by its maker and properly stamped as per Indian Stamp Act.
  • It should contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to XYZ’, it is not a promissory note.
  • The promise to pay should not be conditional. For example, if it is written ‘I promise to pay ABC Rs 5,000/- after my sister’s marriage’, is not a promissory note.
  • It should contain a promise to pay money only. For example, if someone writes ‘I promise to give ABC a Maruti car’ it is not a promissory note.
  • The parties to a promissory note, i.e. the maker and the payee should be certain.
  • A promissory note can be payable on demand or after a certain date. For example, if it is written ‘three months after date I promise to pay ABC or order a sum of rupees Five Thousand only’ it is a promissory note.
  • The sum payable mentioned must be certain or capable of being made certain. It means that the sum payable may be in figures or may be such that it can be calculated. (See specimen below).

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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