Banking, Business, Commerce

PROMISSORY NOTE DEFINITION

Promissory note is a credit instrument in which the debtor or the buyer promises to pay a certain amount of money to the creditor or seller on demand or at a fixed future time.

DEFINITIONS:

1.  “A promissory note is a negotiable instrument in writing containing an unconditional declaration 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, on demand or at a fixed future time”.

2. “lt is a negotiable instrument in which the debtor makes a promise for the payment of a certain amount of money to a creditor or to the bearer of the instrument, on demand or after the expiry of a certain period”.

PARTIES OF PROMISSORY NOTE

There are two main parties of the promissory note.

  1. Maker (Drawer): The drawer or the maker of promissory note is that person who borrows money or purchases goods on credit.
  2. Payee (Drawee): He is the person who receives the amount of the promissory note or who lends the money (creditor).

OTHER PARTIES

There are two secondary parties of the promissory note.

  1. Endorser: Endorser is a person who signs on the back of promissory note to transfer his rights to another person.    
  2. Endorsee: He is the person in whose favour the rights of promissory note are transferred.

FEATURES OF PROMISSORY NOTE

1. In Writing: It is a promise in writing for the payment of money.

2. Unconditional: It only contains an unconditional promise for the of money.

3. Certain Amount: The promissory note is always for a certain amount, is on note in words and figures.

4. Signature: Promissory note must be signed by the drawer otherwise it will be invalid.

5. Drawer: The drawer of the promissory note is specified or certain.

6. Parties: There are two parties of the promissory note. One is the maker (debtor) and second is the payee (creditor).

7. Consent of Parties: The promissory note requires the consent of parties.

8. Payee to-be Certain: The name of the payee is clearly written on the instrument.

9. Specified Person: The promisor must be a specified person because he is for the payment of money.

10. Date of Payment: It can be paid on demand or at a fixed future time.

11. Revenue Stamps: Revenue stamps are pasted on the promissory note according to its value.

12. Stamp Paper: Normally, a promissory note is drawn on the stamp paper to give it legal weight.

TYPES OF PROMISSORY NOTE

There are following two types of promissory note:

1. INLAND PROMISSORY NOTE: If the maker (drawer) and the payee belong to the same country and the instrument is made and paid in the same country then it is called inland promissory note. It has two kinds.

  • Individual Promissory Note: If the promissory note is written or drawn by an individual and he is alone responsible for the payment then it is called individual promissory note.
  • Joint Promissory Note: If two or more persons draw the instrument and they collectively accept the responsibility for the payment then it is called “Joint Promissory Note”.

2. FOREIGN PROMISSORY NOTE: If the maker (drawer) and the payee belong to two different countries or the promissory note is made and paid in two different countries then it is called foreign promissory note.

  • Individual Promissory Note: If an individual makes the promise and he accept the responsibility for the payment then it is said individual promissory note.
  • Joint Promissory Note: If two or more persons make the promise then it is called joint promissory note.
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