What is Promissory Note

Promissory note :

Promissory note is a written promise made by a debtor to pay certain sum of money due to a creditor. It is used to settle a business transaction.

Sector 4 of the Negotiable instruments Act, 1881, defines a promissory note as an “instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of the certain person, or to the bearer of the instrument.

Features of Promissory note :

A)It must be in writing. A negotiable verbal guarantee to pay is not a promissory note.

B) It must contain a clear promise to pay. A mere acknowledgment to pay is not a promise to pay and hence note promissory notes.

C) It must be unconditional. The payment should not be depended upon possibilities that may or may not happen.

D) The promise should be to pay money and nothing else.

E) The money of the note must be certain.

F) The maker and the payee must be a certain person.

G) It must be signed by the maker. It may be in ink, thumbmark or initials. There is no restriction regarding the form or place of a signature on the instrument.

H) It must be stamped as prescribed by the Indian stamp act.

Kinds of Promissory Notes:

There are two types of these notes:

A) Single or sole notes: When one person makes a promissory, it is called a single or sole promissory notes.

B) Joint promissory notes: When two or more persons jointly make notes, it is known as joint promissory notes. The makers of such note shall be liable :

a) Jointly or

b) Several to make payment

Advantages of Promissory note:

The Advantages of these notes may be summarised as follows

A) These notes are written acknowledgment of debts.

B) It helps in easy and quick settlement of mutual indebtedness.

C) It is easy to draw a promissory note.

D) Since it is transferable from one person or place to another, the value can be transferred without the use of cash.

Parties to a promissory Note :

There are two parties :

  1. Maker: The maker is the debtor who makes and signs the notes and who promises to pay.
  2. Payee: The payee in the creditor to whom the promise is made for the payment.

Difference between Promissory note and Bill of Exchange :

1. Nature: This note contains an unconditional promise by the maker to pay a certain sum of money.

A Bill of exchange contains an unconditional order to the drawee to pay a certain sum of money.

2. Parties: There are two parties to a promissory note – the maker and the payee.

There are three parties to a bill of exchange the drawer, drawer & payee.

3. Acceptance: This note doesn’t need any acceptance.

A Bill of exchange requires acceptance of the drawee to be a valid document.

4. Liability: The liability of the drawer of these notes is primary and absolute.

The liability of the drawer of the bill of exchange is secondary and conditional upon nonpayment by the drawee.

5. Payee: The maker of this note cannot be the payee.

The maker of a bill of exchange can be the payee.

6. Drawing in sets: This note is not drawn in sets.

The bill of exchange may be drawn in sets.

Difference between Promissory note and Cheque :

1. Nature: This note contains an unconditional promise by the maker to pay a certain sum of money.

The cheque is an unconditional order to the bank to pay a certain sum of money.

2. Payment: It may be payable on demand or after a certain period of time.

A cheque is always payable on demand.

3. Parties: There are two parties to a promissory note – the maker and the payee.

There are three parties to a cheque the drawer, drawer & payee.

4. Payee: The maker of this note cannot be the payee.

The drawer of a cheque can be a payee.

5. Days of grace: In the case of these notes three days of grace are allowed for payment.

No days of grace are allowed for payment of a cheque.

6. Crossing: It cannot be crossing.

A cheque may be crossed.

7. Stamping: It requires stamp according to its value.

A cheque does not require any stamp.

Frequently Questions And Answers :

1. Is currency notes promissory?

Ans: Currency notes negotiable instruments and hence currency notes a promissory.

2. Can you cancel a promissory note?

Ans: Yes, you can cancel a promissory note.

3. How long promissory notes valid?

Ans: A promissory notes are valid for 3 years from the date of issuing.

4. Are promissory notes transferable?

Ans: A promissory notes can be transferable from one person to another.

5. Who is the maker of promissory notes?

Ans: Drawer is the maker of promissory notes.

Related:

WHAT IS BILL OF EXCHANGE?

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