A Promissory note is the simplest and earliest kind of credit instrument. It is an unconditional written promise by one person to another in which the maker (payer) promises to pay on demand or at a fixed or determinable date in the future, a stated sum of money to or to the order of a specified person or to the bearer of the instrument. A promissory note in order to be negotiable must fulfill the following conditions.
The following are the essential features of a promissory note.
(1) The promise to pay must be in writing.
(2) The promise to pay must be signed by the maker or payer.
(3) The promise to pay must be unconditional. An instrument containing a promise to pay a sum after deducting necessary expenses or imposing any other condition is not a promissory note. I promise to pay B or order Rs.5000 (promissory note). I promise to pay Mr. B. Rs.5000 seven days after my marriage with C (Not a promissory note).
(4) The amount to be paid must be definite in terms of money.
(5) The promissory note must be payable on demand or at a fixed or determinable future date.
(6) The promissory note must be payable to a definite person. The payee must be certain. The promissory note can’t be made payable to the maker himself.
(7) It must bear stamp at the rate prescribed by law of the country.
(8) There are two parties to a promissory note.
(i) Maker. He is the person who draws and signs the promissory note and promises to pay the amount.
(In the specimen of promissory note given below Rafiq Ahmad is the maker).
(ii) Payee He is the person to whom the amount of the promissory note is payable (In the specimen below Mr. Akram Khan is promised payment. He is thus payee).
The main advantages or the use of promissory note are:-
(i) Promissory note is an easy and simple method of borrowing and repaying a debt.
(ii) It is an acknowledgement of debt which is duly stamped.
(iii) It helps in quick settlement of indebtedness arising out of commercial transactions.
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