Promissory Note: Features and Parties

What is a Promissory Note?

When the purchaser of the goods or debtor of any business himself writes a note, signs it, and gives it to the seller of the goods, the note signed by the debtor becomes a promissory note. It can also be described as a verbal or written unconditional promise by the debtor to the seller to pay a specific amount of money to or on behalf of a specific person or to the bearer upon demand at a specific future time.

Promissory Note

A promissory note can be used between sellers and buyers as well as between family and friends. Promissory Note serves as a promise by the person to whom money is lent to pay a certain amount of money to the lender.

According to Section 4 of the Negotiable Instruments Act of 1881, “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 a certain person or to the bearer of the instrument.”

Features of a Promissory Note:

1. A promissory note should be in writing.

2. There must be a promise to pay the amount to the seller by the debtor. It should be clearly stated by the maker of the Promissory Note that he is willing to pay a certain amount on a fixed date.

3. A promissory note should be an unconditional written promise. There should not be any condition attached to it. 

4. It is created and signed by either the debtor (maker) or the party to whom credit is extended.

5. It is directed to the creditor or seller or the person who extends credit.

6. The payment is due immediately or at a specific future date.

7. The amount of money to be paid should be clearly mentioned.

8. The name of the payee should be clearly mentioned.

Parties to a Promissory Note:

1. Maker: The maker is the person who writes a promissory note and duly signs it. Generally, the maker is the debtor of a company or anyone to whom money is lent.

2. Payee: Payee is the person for whom the promissory note is written. He is the person who is entitled to get the payment.

3. Holder: A holder essentially acts as the custodian of a promissory note. Sometimes a note is endorsed to any other person. The person who has the promissory note at the date of payment is called the Holder. He could be the payee or anybody else.