What is a promissory note?
It is defined under section 4 of the negotiable instrument act 1881. It is a financial instrument that contains a promise, in writing, by one person to pay the specific amount of money to another person, either on specifying the date or on the demand or person and it should be unconditional and signed by the drawer. The promissory note consists of all the conditions, amount, interest rate, dates, and the signature of the person in it. It should be noted that it is not a banknote or currency note.
In simple words, it is a written promise by the person to pay a certain amount of money on a specific date or on the demand of another person. Let’s try to understand this, for example, A, an individual writes on a paper that he will pay the 1000 Rs to B on his birthday on date 24 May of this year. Here, the paper where he wrote his promise is a promissory note.
Parties in the Promissory Note
There are mainly three parties in the promissory note, such as drawee, payee, and drawer. These three parties have a different role in it. Let’s understand the means of these three.
Drawer- The person who makes the written promise on the instrument to pay the money on a certain date or on the demand is called the drawer. It is also known as, payer, debtor, maker, promisor, or issuer.
Drawee- The person to whom the promise has been done is known as the Drawee.
Payee- He is a third party where the drawer will pay the money to him on the order of drawee.
Essentials of Valid Promissory Note
- Printed/Written Agreement – It should be properly written or printed. Any oral promise made by the person is not accepted as a promissory note.
- Unconditional Promise – The promise made by the drawer to the drawee must be unconditional there should not any conditions fixed in the pronote. Though the condition made by drawee to pay the money to payee can be added in the promissory note.
- Signed Documents – the document must be signed by the drawer. It is not compulsory for the drawee to sign the same because it is the liability of the drawer, not drawee.
- Exact names- there must be the exact names of all the parties.
- Interest– if there is any interest rate is applied to the money then it should be mentioned in the pronote.
- Date of issue- the date of issue and the mature date must be specified in the pronote.
- Stamped- the document must be stamped. There can be the revenue stamp of one rupee or the pronote should be on the stamp paper.
- Pay Defined Amount – the total amount which is written in the pronote should be pay by the drawer. The amount is written cannot be subtracted or added.
- Legal Composition – The payment should be made in the legal currency.
- Detailed Information – All the information should be in detail.
All these are the Essentials of Valid Promissory Note.
Types of Promissory Note
Basically, there are two main types of promissory notes
Where the drawer has to pay the money when the seller or drawee asks for money on demand, it is known as an on-demand promissory note.
It is a situation where the money has to pay on the date which was specified in the promissory note at the time of the making of that instrument. Like, there written in the note that the drawer will pay the money on the date of 24 December of 2020; it is the duty of the drawer to pay that money on that date.
These are the Types of Promissory Note.
Features of Promissory Note
- The money can be payable in the instalments or in a lump sum
- It can be interest-bearing or interest-free
- The pronote can be of single or joint borrowers; means there can be multiple persons in one pronote.
- It can be negotiable on the demand or order or drawee.
There is a remedy given under the negotiable instrument act for the failure of a promissory note. The pronote is a legal instrument so the drawee has the right to file the suit in the court for the compensation.
There is a limit on the filing of suit that the drawee cannot file the suit after the expiry of 3 years. The three years will be counted on the maturity date or in the mature date was not mention on the pronote then the time will be counting from the date of the when the pronote was made.