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Module 2 (B) Promissory Note: Negotiable Instruments Act (Module 2B) The LAW Learners

This document discusses promissory notes under Indian law. [1] A promissory note is a written promise to pay a certain sum of money to a person on a certain date or on demand. [2] There are two types - secured notes require collateral equal to the amount borrowed, while unsecured notes rely on trust between parties like family members. [3] Promissory notes must meet several essential requirements to be valid, such as being in writing, containing an unconditional promise to pay a definite amount of money.

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Abhishek
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198 views5 pages

Module 2 (B) Promissory Note: Negotiable Instruments Act (Module 2B) The LAW Learners

This document discusses promissory notes under Indian law. [1] A promissory note is a written promise to pay a certain sum of money to a person on a certain date or on demand. [2] There are two types - secured notes require collateral equal to the amount borrowed, while unsecured notes rely on trust between parties like family members. [3] Promissory notes must meet several essential requirements to be valid, such as being in writing, containing an unconditional promise to pay a definite amount of money.

Uploaded by

Abhishek
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MODULE 2[B]

PROMISSORY NOTE

1. INTRODUCTION

According to Section 4 of the Negotiable Instruments Act, “A promissory note is an


instrument in writing (note being a bank-note or a currency note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money to or to the order of a
certain person, or to the bearer of the instruments.”1In simple words, it is a document
promising to pay a certain amount of money to a person on a certain date or on demand.

Promissory Notes were a brainchild of China, where, in the 8th century, during the rule of
Tang dynasty an instrument called feitsyan was used for secured transfer of money over long
distances. 2

The parties involved in the procedure of promissory notes are:

 Drawer: The one who promises to pay the debt


 Drawee: The one in whose favour the promissory note is drafted. He/she is the
creditor who lends
 Payee: The one to whom the payment is made

In most cases, the payee and drawee of the promissory note are the same.

1
The Negotiable Instruments Act, 1881, 4, Acts of Parliament, 1881 (India).
2
Kallie Szczepanski, The Invention of Paper Money, THOUGHTCO. (Jun. 23, 2020, 9:10 PM),
https://www.thoughtco.com/the-invention-of-paper-money-195167.

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According to the legislation, there are two types of promissory notes

TYPES
TYPE
SECURED UNSECURED
Collateral is required and should be No collateral has to be provided and the
equal to or more than the amount being transaction is based on trust.
borrowed.
It is usually used for commercial This class of promissory notes
purposes lending large sums of money. agreements is found to exist between
Hence, it is generally prevalent in the family and closed ones.
money market and also called the
Money market instrument.

2. ESSENTIALS FOR PROMISSORY NOTE

1. It should be in the form of a written document so that it cannot be altered easily.


2. The promise to pay should be expressed explicitly and a mere acknowledgement is
not enough.
3. The promise should be expressed without any conditions and should not depend upon
any contingency.

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4. The note has to be signed either by the maker of the promise or any authorized agent
of the same. It can be in the form of ink, thumb mark, pencil, or initials. The purpose
of this is to confirm the identity and intention of the promisor.
5. The maker and the payee must be certain. This implies that the details provided by the
maker and payee should be definite and correct. Also, if the payee is a dead person,
his/her legal representative can enforce the payment.
6. The promise should be regarding payment of money only and not of any kind like
rice, gold, etc.
7. The amount meant to be paid by the payee should be certain.
8. The note should contain other details like the place, date, number, consideration,
although, these are not legally essential to be mentioned.
Eg:“On demand (or one year after the date) I promise to pay Jack or order the sum of
rupees two thousand with interest at 9 % per annum until payment.”

A promissory note is valid upto 3 years, after which a fresh one should be executed.
Primarily, the promissory notes are used for mortgages, car loans, student loans, business
loans and personal loans and short-period financing.
The Promissory note does not necessarily require attestors. This was held in the case of
Chandabolu Bhaskara Rao’s case, wherein, the High Court of Andhra Pradesh held that

“Since the 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.”3

3
Chandabolu Bhaskara Rao v. Betha Saidi Reddy, 2004 (4) ALD 572.

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The Promissory note requires proper stamp duty. In the case of Venkatasubbaiah v.
Bhushayya4, the High Court of Andhra Pradesh, with the help of Section 35 of Indian Stamp
Act held that promissory note executed in any state had to mandatorily have stamp duty in
the State where it was produced. If the above is not implemented, the document would not be
admissible in any court proceeding.

In case there is a breach, there are two ways of ensuring the legal performance of the original
terms of the contract. A secured promissory note agreement can ensure repayment by the
means of possession of the property or other tangible asset kept as a security. However,
unsecured and non-collateralized promissory notes pose a huge problem in this regard. The
legal remedies available to compensate the breach of unsecured notes, mostly between family
and friends, are very less forceful and successful since the option of simply possessing the
secure assets is not available.

The procedure to enforce the unsecured promissory note contracts is as follows:


 The first step involves filing a petition in the court. Resorting to legal avenues can
make the defaulter (payer) perform the contract.
 If the first step fails to serve the purpose, one can enter into collections proceedings
against the opposite party. Since the promissory note is a legally binding instrument,
it falls under the scrutiny of the Fair Credit Lending Act. This avenue, however, does
not ensure sure-shot success.
 After exhausting both the above options, the final resort is to sell the said promissory
note to an entity that carries out operations of buying notes. However, this last step
could provide only a part of the total debt, which is not profitable for the payee.

3. LIMITATION

4
Venkatasubbaiah v. Bhushayya, 1963 (1) A.W.R. (NRC) 31.

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One prominent limitation of adopting payments by promissory notes is the defective Section
35 of the Negotiable Instruments Act, 1881. Clause (a) of Section 35 mentions the procedure
for all negotiable instruments for securing validation by either stamp or penalty, promissory
notes and bill of exchanges lie as exceptions. This rigid mechanism aids several debtors to
escape liability.

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