Promissory Note meaning and its essentials
(1) Promissory Note (Section 4)
Section 4 of the Act defines promissory note as, "A promissory note is an instrument in writing 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."
Essentials of a Promissory Note-
(1) Promissory Note is a Negotiable Instrument-
A promissory note is freely transferable i.e. negotiable therefore is called as a negotiable instrument. A promissory note is freely transferable any number of times before its due date. In other words, it must satisfy all the essentials of a negotiable instrument.
(2) In writing
Every negotiable instrument has to be in writing. That is, therefore, it is one of the essential requirements of a promissory note according to Section 4. An oral promise to pay does not become a promissory note. No particular form is prescribed, a promise contained in a letter will suffice. Writing includes printing or typing.
(3) Is an undertaking i.e. Promise to pay
A valid promissory note must expressly state that it is a promise to pay money to the other. Unless the language used for a promissory note does not make it clear that the make is promising to pay to the payee, it shall not construe a valid promissory note.
For example.
"Received 50,000 from Narayan Shukla which promise to pay to him or order."
(4) Is an unconditional Undertaking
It is also necessary that the promise to pay should be unconditional. If the maker promises to pay on fulfillment of some condition or the happening of some contingency, it would be conditional promise and it will not be a valid promissory note.
A conditional instrument is not considered to be as a valid negotiable instrument because an instrument which is payable upon fulfillment of some conditions or on happening of a contingency do not guarantee whether such instruments shall be paid or not.
(5) Must be signed by the maker
The instrument must be signed by the maker, otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there. Signature means the writing of a person's name in order to authenticate the contract contained in the instrument.
(6) To pay certain sum
It is also necessary that the sum of money promised to be payable in a promissory note must be certain or definite. For example. A signs instruments in the following terms:
(i) "I promise to pay B 500/- and all other sums which shall be due to him."
(ii) "I promise to pay B 500/- first deducting there out any money which he may owe to me."
Both the above stated instruments are not valid promissory notes because the exact amount to be paid by A is not certain.
U/S 18 of the Act, if the amount undertaken (in a promissory note) or ordered (in a bill of exchange or a cheque) to be paid is differently stated in figures and words, the amount stated in words shall be the amount undertaken or ordered to be paid. The amount in words is stated in the body of the instrument and that is deemed to convey the true intentions of the parties.
(7) To pay Money only
Under section 25 of the Indian Contract Act, 1872 "an agreement without consideration is a void agreement." In other words, in every promise consideration must exist. The instrument must be payable in money and money only. If the instrument contains a promise to pay something other than money or something in addition to money, it will not be a promissory note. The sum of money payable must also be certain.
For example:
promise to deliver my I-Phone 6 to Mr. Shakeel for his debt due". "I promise to pay rupees ten thousand to X and to deliver to him my black horse on 26 January 2015"
(8) Payable to order or Bearer
The person to whom the promissory note is payable i.e. the payee, he should be certain In other words, the promissory note must specify clearly the name or the designation of the person who is to receive the payment.
According to Section 4 a promissory note must be payable:
(i) to a certain person, or
(ii) to the order of a certain person, or
(iii) to the bearer of the instrument.
For example:
"I promise to pay Rs.10,000 to the Manager, ICICI Bank, Sector 9, Chandigarh ."
(9) Both parties must be certain
There are two parties in a promissory note, the one who makes the promissory note the "maker" (the debtor who has to pay) and the one to whom the payment is to be made the "payee" (the creditor who has to receive the payment). The promissory note must clearly state that who is the maker and who is the payee. The maker must sign a promissory notes the name of the payee must be clearly mentioned on the promissory note.
10) Promissory Note Payable on demand
A promissory note payable on demand means the maker has to make the payment of the note as and when it is demanded by the payee. In other words, for such an instrument no due date (maturity date) is to be calculated because whenever the payee demands the payment from the maker, the maker has to make immediate payment.
For example:
A signs the promissory note as follows:
I promise to pay X rupees five thousand on demand" In such a case, when ever X demands payment from A, A has to pay to X. Such an instrument is a promissory note payable on demand. No Due Date is ascertained for such an instrument.
(11) Promissory Note payable otherwise than on demand
In some situations, the promissory note clearly states that what is its maturity date. When the due date of a promissory note is clearly specified on the face of the instrument, then it has to be paid accordingly.
Some of the examples are:
"I promise to pay X, 1,000 on 1 April, 2015" Such a note is payable on the date specified i.e. 1 April, 2015.
(12) Maturity of a Promissory Note
Under Section 22 of the Act, the maturity of a promissory note or bill of exchange is the date at which it falls due.
(i) Payable on demand- In this case no maturity date is to be ascertained. Payment is to be made when demanded by the payee.
(ii) Payable otherwise- This maturity date is to be calculated accordingly.
(13) Days of Grace
U/S 22, Every promissory note or a bill of exchange which is :
Not payable on demand;
Not payable at sight;
No payable on presentment.
is entitled to three (3) days of grace while calculating its maturity date. Therefore, the date of maturity for such an instrument is not the date on which the instrument is expressed to be payable, but is on the third day after that day.
Example:
A promissory note payable three months after sight was presented for sight on 15 May 2014. In such a case the due date is calculated as :
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