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Promissory notes

A Promissory Note is a legal financial instrument which is issued by one party, promising to pay the debt owed to another party.

It is written as well as a negotiable instrument that is duly signed it’s maker and contains an unconditional promise of paying the stated amount of money to a particular person(exporter), either on demand, specified date or within then given time as per the given terms.

A promissory note consists of various terms and conditions which are related to the indebtedness such as principal amount to be paid, date of maturity, rate of interest on amount to be paid, terms and instructions of repayment, issuing date, name along with the signature of the drawer, name of the drawee and many more. No acceptance is needed by a promissory note.

Characteristics of promissory note:

  • It is a written legal document.
  • There must be a clear, point to point and unconditional promise of paying a certain amount to a specified person.
  • It should be drawn and signed by the maker.
  • It should be stamped properly.
  • It specifically identifies the name of the maker and payee.
  • The amount that is to be paid should be certain, written in both figures and words.

Parties involved in promissory note:

  • 1) Drawer: The one responsible for making the promise to another, about paying the debt is the drawer of the promissory note. It is considered to be the debtor or borrower.
  • 2) Drawee: The one, in whose favour the promissory note is being drawn, is the drawee. It is considered to be a creditor who has provided consignment on credit, who lends money.
  • 3) Payee: The one, to whom payment has to be made, is known to be the payee of the negotiable instrument.

In promissory note drawee as well as the payee can be the same person. This happens when the amount has to be paid to the same person in whose favour the promissory note has been drawn.

Moreover, the party that owes money to the other party is the one who holds the promissory note and after the discharge of the obligation completely, the payee is supposed to cancel the note and return it to the drawer.

Essential elements of promissory note

A promissory note contains several elements that separate it from other negotiable financial instruments. The following are a few such distinct elements:

  • Written notes:A promissory note should always be in written form. It can never exist as an oral contractual promise to pay money. This can be taken as most appropriate legal as well as a customary requirement for financial instruments.
  • Express undertaking:The undertaking is the element for forming the base of a promissory note and must be expressive enough. Thus, inferring an acknowledgement or a note to pay and calling it a promissory note would not be enough. For example, writing “I owe X Rs. 5000” does not amount to such notes. They have to be expressive enough.
  • Unconditional promise:The promise for paying a specific amount of money should be unconditional for all cases. Thus, a conditional promise can never form the basis for such promissory notes. For instance, one cannot promise of paying the amount only if he has it, as it amounts to a condition. Moreover, promising to pay on a particular is fine. For example, one can promise to pay other, 3 months from the date of the note’s execution.
  • Specific amount:Promissory note must include a specific amount. There can be no additions or subtractions to them.
  • Legal tender:The amount payable under a promissory note should always be expressible in legal tenders in terms of Rupees or Dollars.

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