Promissory Note

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Definition of Promissory Note

Promissory Notes are defined as written documents (since these are not currency notes or bank notes). These instruments consist of an unconditional responsibility which has been signed by a maker to pay a specific amount of money either to or to the order of a person or to the bearer of the document.

As per the section 4 of the Indian Negotiable Instruments Act of 1881, these promissory notes are a promise to make the definite payment of a specified amount by a debtor to the creditor. This payment should be made once the specified time expires.

Parties involved in Promissory Note

Promissory Notes involve two parties. These parties are-

  1. Payee

A person or the party who is set to receive the specified payment as per the promissory note is known as the ‘payee.’ In the event of promissory notes, a payee is an individual whose name has been addressed in the written instrument or who is its holder.

  1. Maker

A debtor, who promises that he will be making the necessary payment to the payee, is known as the maker of a promissory note. He agrees to pay the specific amount of money on the date of maturity. Further, a maker needs to sign the promissory note so that it is valid.

Promissory Note: Special Features

The features of a promissory note are as follows-

  1. It is a promise which needs to be expressed as it cannot be implied.
  2. The instrument needs to be in writing. Thus, it cannot be verbal.
  3. It is a promise to repay a specific amount of money.
  4. This promise of payment is unconditional.
  5. This payment can be made either by demand or after a specific period of time
  6. It needs to be signed by its maker. This can be a rubber stamp signature too. Even an agent who has the authority on behalf of a company can sign it.
  7. It should be payable to the ordered person or a definite person.

Promissory Note: Advantages

  1. Free from obligations

A promissory note is a written document. With all its terms, provisions and conditions being clearly described in that note, both the lender, as well as his borrower, can be free from obligations.

  1. It is duly signed

Since a maker signs the promissory note, it gives self-assurance against false loans or alterations to the agreement of loan.

  1. Provides time for repayment

A borrower benefits from promissory notes as it provides him sufficient time for repayment without worrying about any immediate deadlines.

  1. Flexibility

Promissory Notes involve flexibility in repayment. A borrower can easily make arrangements so that he is free from paying a hefty amount at one time.

Differences between Bills of Exchange and Promissory Notes

 

Sl.No. Points of difference Promissory Notes Bills of Exchange
1. Parties involved These have 2 parties- payee and maker. These have 3 parties- drawer, drawee and payee.
2 Drawer A debtor draws a promissory note. A creditor draws a bill of exchange.
3. Acceptance Acceptance is not mandatory here. Acceptance is a must in bills of exchange.
4. Nature It is a promise to repay the money. It is an order to a debtor for making the payment.
5. Receiver The maker cannot act as a payee of a promise note. Drawers canact as a payee of a bill. Even an endorsee can be the payee.
6. Copies Only one copy of thepromissory note is prepared. For foreign bills- three copies.

For national bills- one copy.

7. Stamps Stamps are fixed. Stamps on bills of exchange are not fixed.
8. Liabilities When made jointly, its liability will be both individual and joint. Bills which are accepted jointly will have joint liability between their drawees.
9. Noting These written instruments cannot be noted. When bills are dishonoured, they are protested and noted.

 

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