What is Promissory Note? Kinds of Promissory Note.

Definition Of Promissory Note

A Promissory Note, sometimes which is called as Pro-note, is a central document in dealing with the bank advances (loan). It is a prima facie evidence that the person who signed it actually borrowed money unless the contrary is proved. The Promissory Note is valid for 3 years from the date of execution which can be varied on demand.

Hence, A promissory note is a financial instrument that contains a written promise where one party (the note issuer, or maker) promise to pay another party (the note’s payee) a certain sum of money, either on demand or at a specified future date. This note contains all the necessary terms pertaining to the indebtedness such as principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.

Section 4 of the Negotiable Instrument Act defines Promissory Note as

” an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.”

Kinds of Promissory Note

The following three kinds of promissory notes are normally obtained by banks:

  • Single Party Demand Promissory Note
  • Double Party Demand Promissory Note
  • Joint and Several Demand Promissory Note

Single Party Demand Promissory Note:

This type of promissory note is applicable where the borrower is either a sole proprietor of a firm or borrower in his personal name.

Double Party Demand Promissory Note:

This type of Promissory note is obtained when the guarantor is either made the principal debtor or he is shown as the payee of the Promissory Note.

Joint and Several Demand Promissory Note:

This type of Promissory Note is obtained when the loan is granted to the borrowers jointly or where it is considered expedient to make the officials severally liable. For Example, In the case of Limited Companies, it is essentials that the directors or managing agents of the company should be made personally liable to bring home to them their personal liability in order to introduce a further element of security to the bank’s advance.

Special Points on Promissory Note

  1. A Promissory Note is said to be dishonored by non-payment when the maker makes a default to pay on being duly required to pay. The Holder of Promissory note must give immediate notice to the concerning parties whose signature appear on the pro-note whether as endorser or payee. The notice may be oral or written.
  2. A minor may draw, endorse, deliver and negotiate any negotiable instrument so as to bind all except himself.
  3. A promissory Note if not properly Stamped, cannot be admitted in evidence and the collector has no power to validate it. If it is attested and is payable to order it becomes a bond and will be admitted like other insufficiently stamped instruments.
  4. When several persons signed on Promissory note each one of them is liable for the full amount. If they don’t admit several liabilities they are jointly liable for the amount. In this case, each may be sued for the whole amount or may be sued jointly and decree may be obtained against each for the full amount.
  5. Interest is provided in the body of the Promissory Note
  6. It is very necessary to obtain the letter of guarantee from the guarantor when he signed a Pro-Note as an endorser.
  7. A blank appropriately stamped Pro-Note signed by the maker is valid but it should be completed before it is delivered to a holder in due course.