Promissory Note

A promissory note is an unconditional contract between two parties where one party agrees to pay the other party a promised sum of money at a pre-specified time. The promissory note determines the amount to be paid to the payee, with the interest amount added to the capital. A promissory note is made on the demand of the payee. The payee shall not fail to pay the money by the expiry of the promissory note. The issuer of the promissory note is bound by contract and promise to pay the payee within the stipulated time on the it, failing which the lender can sue the issuer based on the dishonor of the note.

The promissory note concept is pretty old. It has been a legal financial document for the past three centuries. It has been the oldest form of loan document used in the world. Individual loans always used to be sealed by signing of a promissory note. Private lending even today is sealed by the promissory note and is bound by law. Sometimes, these notes are bound by the confiscation of the borrower’s assets in an event of a failure to pay as against the promissory note stipulation.
As per the simplest of definitions, a promissory note is “a document signed by a borrower promising the lender to repay a loan under mutually agreed upon terms between both parties”.
A promissory note falls under the Negotiable Instrument Act 1881. Under Section 4 of this act, a promissory note is not a bank note or currency. Stamp duty is also levied in making of a promissory note. A mutually signed document with no stamp duty cannot be called a legal promissory note.

A promissory note can also be sold to another party as per terms and conditions. Whoever is the official transferee of the note that person is bound to pay the money specified in the promissory note to the lender as per the terms and conditions specified there in.

Linus Orakles
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