Promissory Note : Laws Governing it

What is a promissory note?

Promissory Note is a specific written promise to pay a debt. It is a negotiable instrument.

In the instrument, one party (the maker) promises in writing to pay a specific sum of money to the other (the lender) either at a fixed future date or on demand by the lender or his/her orders. The Note is given against the amount of loan the promisor has received.

Laws governing it

The basic law relating to the promissory is governed by Section 4 of the Negotiable Instruments Act, 1881. Other laws applicable are Indian Stamp Act, 1899, The Limitation Act, 1963, The Indian Contract Act, 1872 etc.

A Promissory Note should always be prepared in writing or in print form. The Note must state, in writing, the amount or liability, the maker’s and lender’s name, when the amount is to be paid (on demand or on a specific date) and such other things the law prescribes. In regard to the maximum limit of the amount to be transferred by a promissory note there is no restriction at all.

A person capable of making a contract can only make a Promissory Note. A minor can make a Promissory Note but it shall be binding on all others, except him.

No condition should be mentioned in regard to the payment of the amount. That means it should be an unconditional one. There is no limit in the maximum amount which can be lent or borrowed based on a Promissory Note. When a rate of interest is specified in the Promissory Note then the interest shall be calculated at the rate specified. If no interest is specified the rate of interest, as per the Negotiable Interest Act, shall be eighteen per cent.

Value of stamp needed

A Promissory Note should be stamped as per the Indian Stamp Act. A revenue stamp of Re 1 is affixed on the Promissory Note and sign is put on it by the person making the promise. The value of the stamp is fixed by item 49, Schedule I of the Indian Stamp Act. Even states like Kerala has omitted to include this in Kerala Stamp Act but has adopted this item to the whole area of the state.

Promissory Note executed in one state can be presented in another state in India. There is no need to pay any additional stamp duty.

It is always better to lend the money by cross A/c cheques or electronic transfer. The details of the cheque can be noted in the Promissory Note.

Valid for three years

A Promissory Note is valid for only 3 years from the date of execution or the date on which the Note falls due. In case, the borrower pays a part of the amount in the Promissory Note then the limitation period starts from the last date of payment.

The repayments are usually noted in hand writing on the back side of the Promissory Note with the signature of the lender as a token of receipt.

Promissory Note is held by the Lender till the loan is discharged or fully paid off. After that it should be marked as “Paid in Full” and must be returned to the borrower.

Witness attestation not required

Signature of a witness is not required in a Promissory Note. But there is nothing illegal in getting it signed by a witness who is not a party to the Note. You can consider getting it notarized as well, but it is not mandatory.

The lender of the fund is normally the one who will hold the Promissory Note.

Enforcing the demand

The first step in enforcing a Promissory Note is to send the borrower a Demand Notice. The notice should specify payment terms and the intention to take legal action if the terms are not met on a specific deadline.

If the borrower does not comply with the demand, the lender will have to approach the court for attachment of property and enforcement of repayment of the debt.