promissory note

Promissory Note

Introduction

Many a time, people offer to lend money to their close friends or family solely on the basis of mutual trust and regard hoping that  the person borrowing will repay the debt sooner or later. Nevertheless, there are cases when the borrower forgets to keep his/her promise and it soon becomes a recipe for disaster as there are high chances of the relationship becoming strained. The sum of money promised to be paid must Negotiable Instruments be certain and definite amount in a Bills of Exchange Act is codified in the commonwealth. Almost all jurisdictions, including in New Zealand, UK, Mauritius, codified the  law  as  to negotiable Instruments. In India, The Negotiable  Instrument  Act, 1881 came into force.

Definition

A promissory note, as per the definition provided under section 4 of the Negotiable  Instruments Act of 1881 is an instrument, made in writing, containing an unconditional  undertaking that is signed by the maker, to pay a defined sum of money only to a certain person or to the order of that certain person, or to the bearer of the instrument. Note be  made that a bank note or a currency note don’t qualify as promissory notes. A promissory note is a Negotiable Instrument  as covered under the Negotiable Instruments  Act of 1881. Section 21 of the Indian Currency Act stipulates that a currency note  is not a promissory note.

Section 2 (22) of the Indian Stamp Act of 1899 defines a promissory note as: “Promissory note” means a promissory note  as defined by the Negotiable Instruments Act, 1881; “It also includes a note promising the payment of any sum of money out of any particular fund which may or may not be available, or upon any condition or contingency which may or may not be performed or happen.”

Further Explanation of the Term

A Promissory note in India sometimes alluded to as a note payable, is a legal instrument, in which one party (the issuer)  guarantees or promises in writing to pay a  determinate amount of cash to the other (the payee), either at a fixed or definable future time or on demand of the payee, under particular terms. The terms of a note, as a rule, incorporate the principal amount, the interest rate if any, the parties, the date, the  terms of repayment and the maturity date. In some cases, provisions are incorporated concerning the payee’s rights in case of a default, which may incorporate abandonment  of the issuer’s assets. For loans between people, writing and signing a promissory note  is frequently instrumental for tax and record keeping. A promissory note alone is normally unsecured.

A note is of two kinds secured and unsecured promissory note. An unsecured promissory note isn’t attached to anything; the loan is made dependent on the issuer’s capacity to repay. A secured promissory note may likewise be made dependent on the issuer’s capacity to repay, however, it is secured by a thing of value, for example, a vehicle or a house. If your house is utilized for security and you default on the note, you could lose your home. Most promissory notes joined to a property are secured by either a trust deed, a mortgage or a land contract, and those instruments are recorded in public records. Promissory notes are often unrecorded.

Essential Characteristics of Promissory Note

1. Must be in writing – A promissory note should always be in writing. Mere agreement to pay back the debt is not a promissory note. The promise to pay should be lucid and express. Mere acknowledgement is no good.

2. Unconditional promise to pay – The promise to pay should be unconditional, e.g.: “I promise to pay, on the 5th day after my marriage” is not an unconditional promise to pay. The undertaking to pay must not be contingent on the happening or non-happening of the event.

3. Should be signed by the maker – It is mandatory for the person making the promissory note to sign it. The promissory note can even be signed by maker’s agent, who has been so authorised to do so by the maker himself. The pro note should be clear about the identity of the person undertaking to pay.

4. Maker should be a certain defined person – The person who promises to pay, should be a certain person. Even if the person takes up an assumed name, he’d be bound to pay as the maker.

5. The payee should also be a certain person – Every promissory note should clearly mention the name of the payee or the name of the person to whom the payment is promised.

6. The promise must be to pay money only – “I promise to pay Neha 300 Rs” shall not be constituted as a promissory note. Only legal tender money is acceptable as promissory note. Rare currencies/coins won’t be taken as valid promissory notes. The amount to be paid should also be certain.

7. It is not payable to bearer – It is illegal to make promissory note payable to bearer under the provisions of the RBI Act.

8. Duly stamped – A promissory note is  covered under Section 2 (22) of the Indian Stamps Act and it has to be adequately stamped as per the provisions of the Act. An inadequately stamped promissory note shall  not be admissible in evidence.

Case  Law: Generally, no attesters are necessary to execute a promissory note. In Chandabolu Bhaskara Rao v. Betha Saidi Reddy [2006 (4)  ALD 572], the Honourable High Court of A.P held that ‘Since promissory note is not a compulsorily attestable document, even if  the signatures of the attesters are taken,  after its execution, it does not amount the material alteration, and so it does not get vitiated. Therefore, whether there were attesters or not at the time of its execution is  immaterial, more so when its execution is  admitted.

Conclusion

Businesses commonly use promissory notes for immediate, short-term funding. For example, if a business is delayed collecting money owed for products sold to customers,  they might issue a promissory note to a creditor promising money by a certain date. In the past, such documented agreements  were used as a form of private money. Today, Promissory Notes are regulated more thoroughly, but there is still an amount of risk  in using them that does not exist in loans, which is why companies that could not otherwise secure loans or bonds use promissory notes.

Another common use for promissory notes is for students seeking loans to pay for their higher education. Both private lenders and the federal government hold promissory notes in exchange for students and ex-students promising to pay the principal amount plus regular interest. Although promissory notes have certain attractive features, they are not the solution to every debt. If it meets certain stipulations, it can also be legally used as a negotiable instrument in financial transactions.

Aishwarya Says:

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