A promissory note is an unconditional promise in writing given by the buyer (or creditor) to the seller (or debtor) to pay the amount of money specified therein to the seller or to the order of seller or to bearer.
As per the Negotiable Instrument Act, 1881, “A promissory note is an instrument in writing (not being a banknote 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”.
For Example, Shri Amal sold goods to Shri Ram worth Rs 10,000 on July 12, 2013. On the same day, Shri Ram drew a promissory note of Rs 10,000 to be paid 3 months after the date. Below is a representative format of the bill.
Features of Promissory Note
- It is anunconditional promisein writing.
- It is a promise to paySpecified Amount on demand or at a determinable future date.
- It pays amount to the personwhose name is specified (Payee) or to his order (Endorsee) or to bearer.
- It is drawn as well assigned by maker.
Parties to Promissory Note
Maker: He is the person who creates Promissory Note and promises to pay the amount to the debtors.
Payee: He is the person who is entitled to receive payment. A payee can be a seller or person who is specified by the seller or bearer.
The distinction between Bills of Exchange and Promissory Note
The major points of difference between Bills of Exchange and Promissory Note have been tabulated below.
| Basis of Distinction | Bills of Exchange | Promissory Note |
|---|---|---|
| Number of Parties | Parties involved: a. Drawer b. Drawee c. Payee | Parties involved: a. Maker b. Payee |
| Drawn by | Creditor or Drawer or Purchaser | A debtor (Maker) |
| Order / Promise | It is an order to pay the debt. | It is a promise to pay the debt. |
| Requirement of Acceptance | It attains validity only when it is accepted by the drawee. | It does not require any acceptance. |
| Liability of drawer | The drawer’s liability is of secondary nature i.e. it will arise only if the acceptor fails to pay. | Drawer (maker) Liability is of primary nature. |
| Drawer and Payee | The drawer and payee can be the same person. | Drawer (maker) and payee cannot be the same person |
| Noting in case of Dishonour | Compulsory | Not compulsory |
| Number of Copies | If there are foreign bills, three copies are required and in other cases, only one copy is required. | A single copy is prepared; whether it is a foreign bill or any other type of bill. |
| Stamping | The stamp is necessary for all types of bills. However, if the bill is payable on demand, then a stamp is not required. | The stamp is required for promissory notes. |
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