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Understanding Promissory Notes: A Human Guide to Secure Financial Transactions

Promissory Note
Section 4: A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of certain person, or to the bearer of the instruments.

A promissory note is a legal document that secures funding for the business. The document must contain an unconditional undertaking to pay and the money to be paid must be certain. The record must be signed by the creator and it must be payable to or to the order of someone in particular or to the bearer.

Parties to a Promissory Note:

There are mainly three parties in the promissory note, that are a drawee, a payee, and a drawer:
  • Drawer: An individual who makes the written promise to pay the amount on a certain date or demand by the drawee is called the drawer. The drawer is also known as, the maker, or promisor,
  • Drawee: The person to whom the promise has been made, or the person in whose favor the promissory note is drawn is called drawee or promise.
  • Payee: A payee is a third party to whom the payment is made. The payee and drawee are the same people to whom the amount is paid.


  1. I promise to pay B or order Rs. 1000
  2. I promise to pay B Rs. 500 and all other sums which shall be due to him.
  3. Raju is a wholesaler of pens, and Kanju has his stationery shop. Kanju ordered 500 pens worth Rs 5000. Raju sold 500 pens to Kanju but Kanju did not have money to pay, Kanju made a promissory note that he would pay all the outstanding amount in the next month and signed the promissory note.
  4. Ajay wants to purchase some goods from Ashok and has an immediate requirement for them, but he has no money to pay Ashok for the goods instantly. So, in such a situation, he can issue a promissory note to Ashok that makes a written promise that he will pay the specific money on a particular date or demand to Ashok.

Essential Features:

  • There should be an unconditional undertaking to pay.
  • The sum should be a sum of money and should be certain.
  • The payment should be to the order of a certain person or the bearer of instruments.
  • The maker should sign it.

Kinds of Promissory:

  • A promise to pay a certain sum of money to a certain person
  • A promise to pay a certain sum of money to the order of a certain person
  • A promise to pay the bearer.

Promissory Note: Requirements To Be Satisfied

To be labeled as a promissory note not only must the documents be negotiable and not only should they satisfy the 4 requirements referred to in S.14 the documents must also pass 3 further tests,
  • The promise to pay must be the substance of the instrument.
  • Nothing else inconsistent with the character of the documents as substantially a promise to pay.
  • The instruments must be intended by the parties to be a promissory note.

Need For Proper Stamp Duty In Cases Of A Promissory Note

The Hon'ble High Court of Andhra Pradesh considered the fact of Section 35 of the Indian Stamp Act, 1899 in the case of Venkata Subbaiah v. Bhushayya (1963). It was decided that a promissory executed in another state was subject to stamp duty in the state where it was produced and that if the stamp duty was not paid, the document would be declared inadmissible.

Section 19 of the Indian Stamp Act, 1899 was applied in this case. According to this provision, before it is offered for acceptance or payment, or before it is endorsed, transferred, or otherwise negotiated in India, a promissory note drawn or created outside of India must affix the correct stamp and cancel it.

The abovementioned section does not appear to apply to promissory notes executed in India, and any promissory note executed in one state can be submitted in any other state in India with the stamp bearing on the promissory note, with no additional stamp duty payable. Section 19 specifies that a promissory note drawn outside of India and utilized in India or any other state is subject to stamp duty in accordance with Indian law.

Does Section 35 Of The Indian Stamp Act, Of 1899 Require An Amendment

Section 35 of the Indian Stamp Act of 1899 states that "no instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authorized to receive evidence, or shall be acted on, registered, or authenticated by any such person or by any public officer, unless the instrument is duly stamped".

Different Forms Of Promissory Note

After analyzing the details required for a Promissory note what is a Promissory note and from where it originates now, we are going to see different types of Promissory note. Some forms of the Promissory note are:
  • Simple Promissory Note: This Promissory note is for a lump sum repayment on a particular date as per the terms and conditions mentioned. In this, interest rate may or may not be charged on the loan amount, depending on the agreed terms and conditions.
  • Demand Promissory Note: As the name suggests, it is totally based on demand and made on demand. This Promissory note is one in which payment is due when the lender asks for the money back after the finish of the stipulated time period.
  • Secured Promissory Note: A Secured Promissory Note is a type in which there is an obligation to pay the amount which is taken as a loan which is secured, or we can say that for which collateral has been put down. If the person who takes the loan fails to pay within the stipulated period of time, then that collateral is seized. The collateral is anything of the same value as a loan taken, like real estate or personal property. Secured Promissory notes are most often used in loans of fairly large sums borrowed from commercial lenders and are mostly prevalent in the money market. So, it is also called a Money market instrument.
  • Unsecured Promissory Note: An Unsecured Promissory note is an obligation on the person who has taken a loan for payment, but there is no requirement of collateral or seizure of property earlier as a security. In this type, if the payer fails to pay the required sum of money within the stipulated period of time, the payee has the full right to go for legal action and file a lawsuit against him. But if it is found that the property available to the person who has taken the loan is not sufficient to make repayment, then it's bad luck for the person who has given the loan to that person. This type of promissory note is uncertain, and nothing else can be done.
  • Convertible Promissory Note: Convertible Promissory Note is not like an ordinary one. This type of Promissory Note is issued against the loans made to businesses and the Corporate Sector. This Promissory Note has an additional provision that allows the debt to be converted, as the name itself suggests, into the business instead of being repaid. This Convertible Promissory Note can be either a Secured Promissory Note or an Unsecured Promissory Note.

Case Laws:
Bharat Barrel And Drum Manufacturing ... vs Amin Chand Payrelal 18 February, 1999
Commissioner Of Income-Tax, Bombay ... vs Public Utilities Investment Trust Ltd. on 18 March, 1970
R. Janakiraman vs State Represented By Inspector Of ... on 4 January, 2006
In my view, promissory note plays a major role whenever we are dealing with leading items to someone and they will make a promissory note (by maker) stating that they will pay in the future. This instrument helps to secure the payment

A Promissory note is a type of financial instrument or legal instrument and also a type of money market instrument which is a written promise by an entity to another entity to pay a specific amount of money within the stipulated time. So, it is a very essential instrument in today's market or commercial growing area where finance plays a major role in the development of the commercial field or market or we can say a promise to pay a certain sum of money to a certain person, a promise to pay a certain sum of money to the order of a certain person, a promise to pay the bearer.

Reference: Written By: Prateek Singhal, BA.LLB Final Year, PDM University

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