A Business Encyclopedia

Promissory Note

Definition: A Promissory Note, as the name itself gives a brief description, is a legal financial instrument issued by one party, promising to pay the debt owed to another party.

It is a written negotiable instrument duly signed by the maker that contains an unconditional promise to pay the stated sum of money to a particular person or to any other person, on the order of that particular person, either on demand or on a specified date, under given terms. It is a short-term credit instrument which does not amount to a bank note or a currency note.

Characteristics of Promissory Note

  • It is a written document.
  • There must be a clear and unconditional promise to pay a certain sum to a specified person or on demand.
  • It must be drawn and duly signed by the maker.
  • It must be properly stamped.
  • It specifies the name of the maker and payee
  • The amount to be paid must be certain, given in both figures and words.
  • Payment is to be made in the country’s legal currency.

A promissory note may consist of various terms and conditions related to indebtedness like the principal amount, date of maturity, the rate of interest, terms of repayment, issue date, name and signature of the drawer, name of the drawee and so forth. A promissory note needs no acceptance.

Parties to Promissory Note

  1. Drawer: The one who makes the promise to another, to pay the debt is the drawer of the instrument. He/She is the debtor or borrower.
  2. Drawee: The one, in whose favour the note is drawn is the drawee. He/She is the creditor who provides goods on credit or lender, who lends money.
  3. Payee: The one, to whom payment is to be made is the payee of the negotiable instrument.

The drawee and payee can be the same person when the amount is to be paid to the person in whose favour the note is drawn. However, when the amount is to be paid to another person, on the order of the drawee, meaning that if the drawee transfers the instrument in favour of another person then, in that case, payee would be different.

Further, the party that owes money to another party holds the promissory note and after discharging the obligation completely, the drawee or payee (whatever the case may be) cancels the note and returns to the drawer.

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