Promissory Note for Businesses in India
A promissory note, as per the definition provided under section 4 of the Negotiable Instruments Act of 1881 is an instrument, made in writing, containing an unconditional undertaking that is signed by the maker, to pay a defined sum of money only to a certain person or to the order of that certain person, or to the bearer of the instrument. Note be made that a bank note or a currency note don’t qualify as promissory notes. A promissory note is a Negotiable Instrument as covered under the Negotiable Instruments Act of 1881. Section 21 of the Indian Currency Act stipulates that a currency note is not a promissory note.
Section 2 (22) of the Indian Stamp Act of 1899 defines a promissory note as : “Promissory note” means a promissory note as defined by the Negotiable Instruments Act, 1881; “It also includes a note promising 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.”
How to use it?
We provide you with promissory note format which you can use as a document to promise to pay money in the future with the conditions regarding the same in the note. Such note can be prepared on a blank piece of paper which has to be duly signed by both the parties between whom such promissory note has been prepared.
You can choose which document you want us to draft by our experienced lawyers with a free consultation call to understand the significance and get the document customized as per your business requirement.
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Introduction to promissory note
A promissory note is a legal and a financial instrument that is written between three financing parties: the maker, the lender, and the payee/the borrower. This note contains terms of the issuance, details of the debt like the circumstances of the loan, who the bearer is and from whom, the maturity date, the amount payable with interest or not, and more. It is a written promise by the lender assuring the borrower that they can avail money from the lender as specified after agreement. The maker can be the lender too.
Understanding Promissory Note
Promissory notes are a written promise made by the maker for individuals and companies to see sources of finance from other than just banks. The note attests the validity of the lender and promises the credit worthiness of the borrower, since a promissory note only promises the repayment of the loan or credit that has been lent. In India, a promissory note can be issued under Section 4 of the Negotiable Instruments Act, 1881, therefore making it a legal instrument and binding the parties by law, the source of funds being an unregulated method. Even so, promissory notes are classified into secured and unsecured notes. Secured notes function a lot like bank loans with the requirement of a collateral, whereas unsecured notes require only a healthy credit score. Promissory notes are also considered securities, and are thus traded on the money market in India by banks and traders. They lay alongside bills of exchange, IOUs etc. but in comparison, contain a promise and the steps to fulfil the promise.
Highlights of Promissory Notes
- Promissory notes are subject to 18% GST as of 1st July, 2017 in India.
- A promissory note cannot be valid unless it contains details about the nature of credit, the means to repay it along with the duration given for the repayment, the signatures of all parties, the conditions agreed in the sanction of the loan, the rate of interest and all related terms.
- On its own, a promissory note is unconditional. It is only conditional to the parties mentioned as the lender and the borrower in the note. That is why the note is a great negotiable instrument on the money market.
- The note must be written by hand.
- The note must be stamped by revenue stamps as per the rules of the Indian Stamp Act.
- Promissory notes are valid for three years only.
- There is no limit on the amount to be borrowed for a promissory note to be issued.
Pre-requisites of Promissory Note
- Must be in writing – A promissory note should always be in writing. Mere agreement to pay back the debt is not a promissory note. The promise to pay should be lucid and express. Mere acknowledgement is no good.
- Unconditional promise to pay – The promise to pay should be unconditional, eg : “I promise to pay, on the 5th day after my marriage” is not an unconditional promise to pay. The undertaking to pay must not be contingent on the happening or non-happening of the event.
- Should be signed by the maker – It is mandatory for the person making the promissory note to sign it. The promissory note can even be signed by maker’s agent, who has been so authorised to do so by the maker himself. The pro note should be clear about the identity of the person undertaking to pay.
- Maker should be a certain defined person – The person who promises to pay, should be a certain person. Even if the person takes up an assumed name, he’d be bound to pay as the maker.
- The payee should also be a certain person – Every promissory note should clearly mention the name of the payee or the name of the person to whom the payment is promised.
- The promise must be to pay money only – “I promise to pay Neha 300 Rs and 10 kgs of rice” shall not be constituted as a promissory note. Only legal tender money is acceptable as promissory note. Rare currencies or coins wouldn’t be taken as valid promissory notes. The amount to be paid should also be certain.
- It is not payable to bearer – It is illegal to make promissory note payable to bearer under the provisions of the RBI Act.
- Duly stamped – A promissory note is covered under Section 2 (22) of the Indian Stamps Act and it has to be adequately stamped as per the provisions of the Act. An inadequately stamped promissory note shall not be admissible in evidence.
Types of Promissory Notes
Types of Promissory Notes
- Secured Promissory Notes and
- Unsecured Promissory Notes
Examples of Valid and Invalid Promissory Notes