TABLE OF CONTENTS

1. INTRODUCTION ................................................................................................................................ 1
2. SECTION 4 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881: ................................................. 2
3. ESSENTIALS CHARACTERISTICS OF A PROMISSORY NOTE:................................................. 3
3.1. All kinds of negotiable instruments, including a promissory note, must be in writing: ............... 3
3.2. The instrument must contain an express or unconditional promise to pay: .................................. 3
3.3. This are not the promissory notes: ................................................................................................ 3
3.4. Unconditional:............................................................................................................................... 4
3.5. Valid Conditional Promissory Notes: ........................................................................................... 4
3.6. The promissory note must be signed by the maker, otherwise, it is incomplete and of no
effect with free consent: ............................................................................................................................ 4
3.7. Both the drawer and the payee must be indicated or designated with certainty on the face of
the promissory note: .................................................................................................................................. 4
3.8. Specific Sum: ................................................................................................................................ 5
3.9. Promise to pay must be money only: ............................................................................................ 5
3.10. Stamping: .................................................................................................................................. 5
4. TYPES OF PROMISSORY NOTES: ................................................................................................... 6
4.1. A Promissory Note Payable after Date: ........................................................................................ 6
4.2. Promissory notes payable on demand: .......................................................................................... 6
4.3. Joint Promissory Notes: ................................................................................................................ 7
4.4. Joint and Several Promissory Notes: ............................................................................................ 7
4.5. Promissory Notes Payable After Date Or Sight Without Interest ................................................. 8
4.6. Promissory Notes Payable In Instalments With Enhanced Rate Of Interest On Failer To Pay .... 9
5. PROMISSORY NOTE REQUIRES PROPER STAMP DUTY: ....................................................... 10
6. CONCLUSION ................................................................................................................................... 12
 1. INTRODUCTION

The sum of money promised to be paid must be certain and definite amount. The law relating
to ‘Negotiable Instruments’ 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. To
understand the meaning of negotiable instrument, it is suffice to say that it means a
promissory note, bill of exchange or cheque payable either to order or to bearer. During the
Renaissance, Promissory note was in use in Europe. Later, during 20th century, the
instrument changed substantially both in use and form and certain claused were added.

Common prototypes of bills of exchanges and promissory notes originated in China.

Here, in the 8th century during the reign of the Tang Dynasty they used special instruments
called feitsyan for the safe transfer of money over long distances. Later such document for
money transfer used by Arab merchants, who had used the prototypes of bills of exchange –
suftadja and hawala in 10–13th centuries, then such prototypes had used by Italian merchants
in the 12th century. In Italy in 13–15th centuries bill of exchange and promissory note obtain
their main features and further phases of its development have been associated with France
(16–18th centuries, where the endorsement had appeared) and Germany (19th century,
formalization of Exchange Law). In England (and later in the U.S.) Exchange Law was
different from continental Europe because of different legal systems

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 2. SECTION 4 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881:

"Promissory note".-

A "promissory note" is 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.

To understand the term word ‘promissory note’ clearly, it is apt to refer the following
ruling of the Hon’ble High Court of Andhra Pradesh.

Bolisetti Bhavannarayana v. Kommuru Vullakki Cloth Merchant 1 ;; Bench: K

Agarwal, V R Reddy, N S Reddy; in this case , the following question came for
consideration.

Whether the suit document is a Promissory Note? If not, what is its nature?
To answer this question, it was held as follows: ‘ As to the first question, we may remind
ourselves of the fact that the Indian Stamp Act, 1899, (in short, the "Stamp Act"), levies
stamp duty on various documents at varying rates and, therefore, it becomes necessary first to
determine the nature of any document before deciding the question of proper stamp duty
payable on such document. Accordingly the definition of a 'bond' or a 'promissory note' as
given in the Stamp Act alone is material for the purpose of determination of the nature of any
document. Section 2(22) of the Stamp Act defines 'promissory note' as follows:

"Promissory note" means a promissory note as defined by the Negotiable Instruments Act,
1881;
"It also includes a note promissing 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."

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1996 (1) ALD Cri 530, 1996 (1) ALT 917

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 3. ESSENTIALS CHARACTERISTICS OF A PROMISSORY NOTE:

3.1. All kinds of negotiable instruments, including a promissory note, must be in

writing:
The promissory note must be in writing. In a oral form or promise is made, they
all are excluded form this. Whatever the words may be used, it is not compulsory writing by
using pen or pencil or ink pen or even may be printed or cyclostyled. But the important thing
is that the words should be visible. Intention of writing, it should be clear.

3.2. The instrument must contain an express or unconditional promise to pay:

It is not necessary to use the word “promise” but the intention must clearly show
an ‘unconditional undertaking’ to pay the amount. It was held that absence of the word
promise does not mean that a document is not a promissory note, provided it should fulfills
the requirements of this section and there is clear intention on the part of the parties to treat
the document as a promissory note.

 ILLUSTRATIONS:
This are the promissory notes:
 “I acknowledge receipt of Rs. 1,000 for value received.”
 “I promise to pay B Rs. 1,000 on demand.”
 “I promise to pay B or order Rs. 1,000 on demand.”
 “I acknowledge myself to be indebted to B in Rs. 1,000 to paid on demand, for value
received.”
 “Received from X Rs. 1,000, which I promise to pay on demand with interest”.

3.3. This are not the promissory notes:

“I acknowledge receipt of Rs. 1,000.”
“I owe you Rs. 1,000.”
“Mr. Prakash Rs. 1,000.”
A document which is a receipt for money paid by cheque and which incidentally
contains a promise to repay the amount is not a promissory note, as there is no intention of
creating a negotiable instrument at all.

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 3.4. Unconditional:
The undertaking to pay must be definite and unconditional. If the promise is
uncertain or conditional, the negotiable instrument is not valid. Hence, promissory notes,
payable on the death of a person or persons, or at a particular place, or after a specified time,
are valid notes, under Section 5 (2). At a particular place or at a specified time. A promise
given for an executed consideration. Any promise to pay an instrument on lapse of certain
period, after a specified event which is certain to happen.

3.5. Valid Conditional Promissory Notes:

 “I promise to pay B Rs. 1000, three days after the death of X.
 “I promise to pay B Rs. 1000 at Mumbai.”
 “I promise to pay B Rs. 1000 on 31st December 1977.”

3.6. The promissory note must be signed by the maker, otherwise, it is incomplete
and of no effect with free consent:
Person must sign the instrument with the physically and mentally act
with an intention to sign without the signature the instrument is not valid person must sign
with a free consent.

3.7. Both the drawer and the payee must be indicated or designated with certainty
on the face of the promissory note:
Where two or more persons sign the promissory note, their liabilities will
be joint and several.

Two distinct persons should fill in the role of a maker and payee. A note
cannot be made payable to the maker himself. However, if the maker endorses the note, it is
then valid. A note may be made payable to two or more persons jointly. Payee must be a
certain person. If he is capable of being ascertained where he is misnamed or wrongly
described, he will be a certain person.

For example:

A promissory note payable to “my only niece living in England” is a valid promissory note.

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 3.8. Specific Sum:
The sum payable must be certain and must not be capable of contingent subtractions or
additions.

Illustrations:
I promise to pay A Rs. 1000 and all other sums due to him.
I promise to pay A Rs. 2000 together with the fine according to the rule.
The sum payable under a promissory note is certain in the following cases:

 When it is payable with interest. However, if the rate of interest is not mentioned in the
instrument, it is not a promissory note.
 When it is payable by installments, with a provision that on default of payment of an
installment, the balance unpaid shall become due (Sec. 5).
 Thus, the act does require that the amount should be stated in both words and figures
form.

3.9. Promise to pay must be money only:

A promissory note should contains only payment of money rather
than any thing else or other than the money.

Illustrations:
“I promise to pay B Rs. 100 in cash and Rs. 199 worth of cosmetics.”
“I promise to pay B Rs. 299 and to deliver him my black horse.”
“I promise to pay B Rs. 999 in Government Bonds.”
“These above are all invalid promissory notes.”

3.10. Stamping:
As in every instrument which is legal, there are certain formalities which are
compulsory should be included and such formalities are date, place, consideration, etc should
be mentioned in the instrument. Without all this formalities, the instrument is said to be
invalid.

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 4. TYPES OF PROMISSORY NOTES:

There are four kinds of promissory notes, and they are

1. Promissory notes payable on demand;

2. Promissory notes payable after date;
3. Joint promissory notes; and
4. Joint and several promissory notes.

4.1. A Promissory Note Payable after Date:

When the maker or drawer promises, under his signature to pay certain sum of money
to the payee, at a future date, say for example, three months after date, it is called a
promissory note, payable after date, or at a future date.

Promissory Notes Payable After Date With Interest

Nine month after I,……… son of ……. Resident of…. Promise to pay
3
4
Mr.……..son of…….. resident of………or order , the sum of rupees……1(in words,
rupees……..)Only, with interest at rate of5 …..present per annum until realization for value
received.
2
Place ….. 7
Sd/…………..
2
The …….day of……..20…… 6
Stamp (Maker or promise to pay)

Key:

1. The face value of the note ,i.e. , the amount of the note:
2. The date and place where it was prepared;
3. The term of the note , i.e., the duration of the loan;
4. The payee ‘ i.e., the party to whom the payment is promised;
5. The interest rate , i.e., the charge per year for the use of money;
6. The stamp affixed in accordance with the provisions of Indian Stamp Atc 1899;
7. The Maker ,i.e., the person who signs the note and promise to pay.

4.2. Promissory notes payable on demand:

When the drawer or you can say the maker gives an unconditional undertaking, under his
signature, to pay on demand certain sum of money to the payee, it is called a promissory note
payable on demand. In such a note, no time is fixed for payment.

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 Promissory Notes Payable On Demand

On Demand I,……… son of ……. Resident of…. Promise to pay Mr.……..son

of…….. resident of………or order , the sum of rupees……(in words, rupees……..)Only,
with interest at rate of …present per annum until realization for value received.

Place ….. Sd/…………..

The …….day of……..20…… Stamp (Maker or promise to pay)

4.3. Joint Promissory Notes:

When a promissory note is made by two or more persons jointly, it is known as a joint
promissory note. In such a case, the liability of the makers (Promisers) is joint and collective
towards the payee, i.e., in case of a default, the payee can take legal action one or all of them.
If he elects to take action against one of the promisers, it is deemed to be action against all of
them. He cannot, in that case, take action against the remaining promisers. The payee has
only one right of action.

Joint promissory notes may be payable on demand or after date.

Following is a specimen of a joint promissory note:

Joint Promissory Notes

We,………. son of ……. resident of……..and ………son of ……. resident of…. …,

promise to pay Mr.……..son of…….. resident of………, the sum of rupees……(in words,
rupees……..)Only, for value received.

Place ….. 1.Sd/…………..

The …….day of……..20…… Stamp 2.Sd/…………..

(Signed by joint promise to pay)

4.4. Joint and Several Promissory Notes:

When a promissory note is made by two or more persons jointly and severally, it is called
a joint and several promissory notes. The promisers of such a promissory note are not only
collectively liable to the payee but they are also separately and individually liable to him. In
other words, the payee has more than one right of action against the promisers. He can take
action-

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a.Against all the promisers simultaneously, or
b. Against any one of them, or
c. Against one promiser after another till the full amount of the note is recovered.
A joint and several promissory note may be payable on demand or after date. In India,
there is no difference in practice between a joint promissory note and joint and several
promissory notes. A holder of a joint promissory note may, therefore, treat it as a joint and
several promissory note and accordingly proceed as (1) against any one of the promisers, or
(2) against all of them simultaneously, or (3) against one promiser after another till the full
amount of the note is recovered.

Joint And Several Promissory Notes

Two month after date We,………. son of ……. resident of……..and ………son of
……. resident of…..…, jointly or severally promise to pay Mr.……..son of…….. resident
of………, the sum of rupees……(in words, rupees……..)Only.

Place ….. 1.Sd/…………..

The …….day of……..20…… Stamp 2.Sd/…………..

(Signed by joint promise to pay)

4.5. Promissory Notes Payable After Date Or Sight Without Interest

Promissory Notes Payable After Date Or Sight Without Interest

Nine month after Date (demand or sight as the came may be)I,……… son of …….
Resident of…. Promise to pay Mr.……..son of…….. resident of………or order , the sum of
rupees……(in words, rupees……..)Only.

Place ….. Sd/…………..

The …….day of……..20…… Stamp (Maker or promise to pay)

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 4.6. Promissory Notes Payable In Instalments With Enhanced Rate Of Interest On
Failer To Pay

Promissory Notes Payable In Instalments With Enhanced Rate Of Interest On Failed

To Pay

I,……… son of ……. Resident of…. Promise to pay Mr.……..son of…….. resident
of………or order , the sum of rupees……(in words, rupees……..)Only,which I have
borrowed as follows:

Rupees……(in words rupees…….) with interest at the rate of 12 percent per annum from the
date hearof unit repayment by the 5th of next month and the reduce in four instalment with
interest at the same rate from the date hereof units repayment by the 5th of each subsequent
month.

In failure or delay by one week of any instalment the interest shall be charged at the rate of
18 percent per annum on the remaining instalment/ instalments.

Place ….. Sd/…………..

The …….day of……..20…… Stamp (Maker or promise to pay)

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 5. PROMISSORY NOTE REQUIRES PROPER STAMP DUTY:

Venkatasubbaiah v. Bhushayya2, That was a case in which the Hon’ble High Court of
A.P considered the fact of Section 35 of the Stamp Act. It held that the promissory executed
in other State was liable for stamp duty in the State where it was produced, and for not paying
necessary stamp duty, the document would be inadmissible. For such a contingency Section
19 of the Indian Stamp Act would apply. According to this Section, promissory note drawn or
made out of India shall, before it is presented for acceptance or payment or endorses,
transfers or otherwise negotiate in India, affix thereto the proper stamp and cancel the same.
Prima facie the said section would not apply to the promissory note executed in India, and
any promissory note executed in one State may be presented in any other State in India with
the stamp bearing on the promissory note, no additional stamp duty need be paid. Section 19
contemplates that a promissory note drawn out of India and used in India or any State, it
requires proper stamp duty as per Indian Law.

Section 35 of the Stamp Act, 1899 & ‘Bills of exchange on promissory notes’:

The opening part of sec. 35 of the Stamp Act, 1899 provides as follows: ‘No instrument
chargeable with duty shall be admitted in evidence for any purpose by any person having by
law or consent of parties authorized to receive evidence, or shall be acted upon, registered or
authenticated by any such person or by any public officer, unless the instrument is duly
stamped’.

Clauses (a) to (e) of the proviso to the above sec. 35 contain provisions which permit the
instrument to be used as evidence upon payment of the stamp duty in full (where it is
unstamped) or upon payment of the deficient stamp duty (where there is deficiency in the
stamp duty ) and the proviso permits the collection of penalty up to a maximum of ten times
the stamp duty or the deficiency, as the case may be. Levy of penalty is of course
discretionary

However, clause (a) of sec. 35 does not permit the validation of the instrument as stated
above, in the case of ‘a bill of exchange or promissory note’. The result is that while in regard
to all other instruments there is a procedure prescribed for subsequent validation of the
instrument by collection of the stamp duty or penalty, such a procedure is not available in the
case of “bills of exchange and promissory notes”. Even if the party who wants to use it as

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1963 (1) An.WR (NRC) 31

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evidence is prepared to pay the stamp duty and penalty, he is not allowed to do so, so far as
these instruments are concerned. The document become ‘waste paper’. On account of this
rigid procedure applied only to “bills of exchange and promissory notes”, several debtors are
allowed to escape liablility unjustly.

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6. CONCLUSION

A promissory note is a document that records a promise to pay back money that has been
loaned by one person to another. The party making the promise to repay is known as the
debtor or the maker of the note. The party loaning the money is called the creditor or the
holder of the note. Promissory notes are created when a loan is made, in order to record the
promise to repay the loan.

The legal effect of a promissory note is similar to that of a contract, in that the debtor is
legally bound to hold to their promise as recorded in the note. A default, or failure to make
payments can result in several unwanted consequences such as a lawsuit, bad credit, or
repossession of a home or other property.

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