Page 88 - DMGT407Corporate and Business Laws

Unit 4: Law of Negotiable Instruments

A promissory note cannot be drawn payable to the maker himself. Such a note is nullity. Notes
But if it is endorsed by the maker to some other person, or endorsed in blank, it becomes
a valid promissory note.
6. The sum payable must be certain or capable of being made certain. Where rate of interest
is specified, the sum shall be deemed to be certain. But, expressions like ‘market rate of
interest’ do not make the amount certain since ‘market rate’ may vary with the source of
borrowing, purpose of borrowing, financial standing of the borrower and so on. However,
a promissory note containing an undertaking to pay the amount 2% above the ‘bank rate’
shall be valid. It’s because there is only one ‘bank rate’ (i.e., the rate at which Reserve Bank
of India lends to commercial banks) at a given point of time.
7. It must contain a promise to pay money only. If the instrument contains a promise to pay
something in addition to money, it cannot be a promissory note. Thus, the following
instrument is not a promissory note: “I promise to pay B ` 50,000 and also deliver him a
Maruti 800”.
8. The number, place, date, etc., of a promissory note are usually found but are not essential
in law. The date of note is not material unless the amount is made payable at a certain time
after date. But even if it does not bear a date, it is deemed to have been made when it was
delivered.

9. It may be payable in installments (s.5, para 3).
10. It may be payable on demand or after a definite period. Payable ‘on demand’ means
payable immediately or any time till it becomes time-barred. A demand promissory note
becomes time barred on expiry of 3 years from the date it bears.
11. It cannot be made payable to bearer no matter whether it is payable on demand or after a
certain time. (s.31 of RBI Act).
12. It must be duly stamped under the Indian Stamp Act. It means that the stamps of the requisite
amount must have been affixed on the instrument and duly cancelled either before or at the
time of its execution. A promissory note which is not so stamped is a nullity.
13. It cannot be payable to bearer on demand (s.31 of RBI Act).
14. It cannot be crossed unlike a cheque.

Notes Specimen of a Promissory Note
` 10,000 New Delhi - 1100 01
Jan. 10, 2006
On demand [or six months after date] I promise to pay X or order the sum of rupees ten
thousand with interest at 12 per cent per annum only for value received.
To X Sd/-A
Address……………....................... Stamp

Parties to a Promissory Note

1. Maker: It is the person who makes the note promising to pay the amount stated therein.
2. Payee: It is the person to whom the amount of the note is payable.

3. Holder: It is either the original payee or any other person in whose favour the note has
been endorsed.

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