Debt instrument

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article provides a detailed analysis of the concept of a promissory note which is a financial instrument that contains a written promise by one party to pay another party a definite sum of money.

This article has been published by Sneha Mahawar.

Table of Contents


A promissory note is a debt instrument that contains a written commitment by one party (the note’s issuer or maker) to pay another party (the note’s payee) a specific amount of money, either immediately or at a later date. A promissory note usually includes all the details of the debt, including the principal amount, interest rate, maturity date, date and location of issuance, and the signature of the issuer. Although they may be issued by financial institutions, for example, you may be asked to sign a promissory note in order to obtain a small personal loan. Promissory notes typically allow businesses and people to obtain funding from sources other than banks. This source could be an individual or a business prepared to carry the note (and supply the funding) on the agreed-upon terms. Promissory notes, in effect, allow anyone to be a lender.

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What is a promissory note

A promissory note is a legal document that outlines the terms of a loan and binds a borrower to repay a quantity of money to a lender within a certain time frame. Promissory notes are one of the most straightforward ways to secure funding for your business. Frequently, they are simple documents with a few procedures. If the required provisions are provided, even a promissory note scribbled on a napkin could also be considered legitimate. IOU, personal notes, loan agreements, notes payable, promissory note forms, promise to pay, secured or unsecured notes, demand notes, or commercial papers are some of the other names by means of which promissory notes can be recognised. As a result, a promissory note must meet all the regular contract conditions, such as consideration, agreement, and capacity. If the note’s authenticity is challenged, the same defences, such as fraud or misrepresentation, may apply.

History behind promissory notes

The history of promissory notes is fascinating. They have circulated as a sort of alternative currency that is not controlled by the government at times. In some countries, like the United States, the official currency is a demand note, which is a type of promissory note (one with no stated maturity date or fixed-term, allowing the lender to decide when to demand payment). Promissory notes are normally exclusively given to corporate clients and sophisticated investors in the United States. Promissory notes, have recently become more popular as a means of selling property and securing mortgages.

Legal historians have debated the origins of the negotiable promissory note extensively. The concepts underpinning the negotiable promissory note, according to Brunner, may be traced back to Germanic law, and the essential features of the negotiability clause can be found in the Lombard documents from the eighth, ninth, and tenth centuries. ‘ According to Brunner, the emphasis in Germanic procedural law was on the legality or invalidity of the defendant’s defence rather than the plaintiff’s claim. 

In the thirteenth century, evidence of Jews using the promissory note with the alternate bearer clause is still more plentiful in Spain than in England. This evidence is all the more significant because it includes a full examination of the grounds behind the legitimacy of the promissory note with the alternate bearer clause by some of Spain’s top Jewish jurists. Grace is another criterion that applies to negotiable instruments and has a similar analogue in Jewish sources. The debtor on a negotiable instrument is entitled to several days of grace after the due date of the note under the law merchant.

In Jewish law, a comparable norm is known as seman beth-din, which can be loosely translated as a judicial extension of time. A debtor in default may request an extension of time from the court to allow him to raise the funds necessary to settle the debt.

How promissory notes work

The Geneva Convention of Uniform Law on Bills of Exchange and Promissory Notes of 1930 governs both promissory notes and bills of exchange. Its guidelines further provide that the term “promissory note” must be written in the instrument’s body and that it must include an unequivocal promise to pay. Promissory notes fall midway between the informality of an IOU and the rigidity of a loan contract in terms of legal enforceability. An IOU simply admits that a debt exists and the amount one party owes another, whereas a promissory note includes a specific promise to pay and the steps required to do so (such as the repayment schedule).

A loan contract, on the other hand, normally specifies the lender’s right to recourse—such as foreclosure, in the case of a borrower’s default; such clauses are typically lacking in a promissory note. While the paper may include the penalties of non-payment or late payments (such as late fees), it rarely goes into detail about how to get your money back if the issuer doesn’t pay on time. Unconditional and saleable promissory notes become negotiable documents that are widely employed in international commercial transactions.

Necessities of a promissory note

  1. The document must contain an unconditional undertaking to pay.
  2. The undertaking must be to pay money only.
  3. The money to be paid must be certain.
  4. It must be payable to or to the order of someone in particular or to the bearer.
  5. The record must be signed by the creator.

Parties in a promissory note

  1. Drawer or Maker: The promisor, also known as the maker or issuer of the promissory note, is the person who creates or issues the promissory note that specifies the sum to be paid.
  2. Drawee or Payee: It is the individual on whose behalf the promissory note is made or issued, also known as the promisee. Unless the note specifies a different person as the payee, the said individual is also the payee.

Methods of repayment of a promissory note

A promissory note is repaid in full at the end of the term listed on the note. There are three methods of repayment that have been provided hereunder:

  1. Lump-sum payment: This means that at the end of the period, the full note is paid in one payment. Only if you are interested.
  2. Interest-only: This means that the regular payments are applied only to the interest that has accrued, not to the principal.
  3. Interest and principal repayment:  The funds are being applied to both the accrued interest and the note’s principal amount.

If the lender approves, the borrower may be able to repay the remaining amount without penalty. If the note is viewed as an investment, the lender may not authorise this choice. They can impose a penalty in this situation to avoid losing income when they reinvest the funds. If the borrower defaults on the note, the lender may additionally request a type of collateral as an insurance policy. This will necessitate legal action, but it will assist the lender in recouping any funds that have been lost. The collateral does not have to be equal to the note’s value, it can be any quantity. If the collateral is less than the loan amount and the borrower defaults, the lender may seize the collateral and sue for the balance. If the collateral is worth more than the note, the extra money from the sale of the collateral must be refunded to the borrower.

Promissory notes, such as corporate bonds and retail investment loans, can be resold at a discount in specific instances. On the date of maturity, the new owner of the note can get the full face value or a reduced amount if it is before the due date. The new owner of the note will get interested as well as the appreciated difference in price on a regular basis. Additional clauses, such as late penalty charges, attorney fee provisions, and other note-specific restrictions, may be included in a promissory note.

Advantages of a promissory note 

  • Flexibility: Flexibility is a crucial benefit of a promissory note, whether you are the borrower or the one supplying the funds. You can select how payments will be made in instalments, at a later date, or on-demand using a promissory note. You could, for example, make interest-only instalments with a balloon, a one-time payment, at the end. You can either fully amortise the loan and make monthly payments, or you can make equal quarterly or semi-annual instalments. This flexibility allows you to choose loan terms that best suit your or your company’s needs.
  • Convertible: A convertible promissory note can be used to entice potential investors if your company operates as a corporation, LLC, or other separate legal entity. Investors may be interested in your firm if they believe you have sufficient cash flow to repay the principal plus interest. They may not believe in your firm enough to invest in its stock outright, or they may not know how to value it. An investor can convert a convertible promissory note into preferred stock or a preferred interest in your firm at a later date or when a specific event occurs.
  • Brief and often unsecured: Unlike traditional loans, which can be hundreds of pages long, promissory notes are usually only a few pages long. As a result, the legal fees associated with preparing a promissory note are typically substantially lower than those associated with preparing a regular loan agreement. It is not necessary to have a promissory note notarized or recorded in order for it to be valid. As a result, you can use a promissory note as an unsecured loan while securing bank or other loans with your assets.

Disadvantages of a promissory note

  1. Short-term service: It is only suitable for short-term services. It cannot be used as a source of capital for large projects.
  2. Detriment to new borrowers: For new borrowers, it is a dangerous credit instrument because the note’s seemingly short and straightforward language may conceal certain unfavourable provisions. As a result, the borrower may be forced to pay a large sum to cover the responsibilities incurred.

Difference between a mortgage and a promissory note

  1. A ‘promissory note’ is like an IOU which includes the borrower’s agreement to pay off the debt as well as meet all the repayment terms. Only those who sign the promissory note are legally responsible for repaying the lender. The note is inclusive of borrowers’ names, property’s address, interest rate (fixed or adjustable), the late charge amount, amount of the loan, and term (number of years). The promissory note, unlike a mortgage, is not recorded in the county land records. While the loan is in progress, the promissory note is held by the lender. The note is marked ‘paid in full’ and returned to the borrower when the loan is paid fully.
  2. The borrowers’ names, the property address, and the legal description of the property are all listed on the mortgage. It also includes all of the deal’s major terms and conditions. The mortgage has an ‘acceleration clause’ in addition to conventional lender-borrower conditions. If the borrower defaults, such as by not making payments, the lender might demand that the whole loan sum be repaid. Before accelerating a loan, the lender must usually give the borrower notice. If the borrower fails to correct the default, the lender may pursue foreclosure. Foreclosure refers to the legal process of selling real estate that is secured by a mortgage in order to pay off the debt.
  3. The promissory note is endorsed (signed over) to the new owner of the loan when it changes hands. The note may be endorsed in blank, making it a bearer instrument in some instances. As a result, anyone who has possession of the note has the legal ability to enforce it. The legal record of a mortgage transfer from one holder (loan owner) to another is called a ‘mortgage assignment.’ In most cases, each assignment is required to be recorded in the country land records.

Types of promissory notes

The different types of promissory notes that the readers must be acknowledged are listed hereunder. 

Corporate credit promissory notes

  1. Promissory notes are a type of short-term borrowing often employed in the business. For example, if a company sells a lot of things but doesn’t get paid for them, it may run out of funds and be unable to pay its creditors. In this scenario, it may request that they accept a promissory note that may be swapped for cash after it collects its receivables. It might also ask the bank for the money in exchange for a promissory note that will be paid back later.
  2. Companies who have exhausted all other options, such as corporate loans or bond issuance, can use promissory notes as a source of credit. In this case, a note issued by a firm has a higher chance of default than, say, a corporate bond. This also indicates that a corporate promissory note’s interest rate is more likely to generate a larger return than a bond issued by the same company as high-risk means higher potential rewards.
  3. Typically, these notes must be registered with the government of the state in which they are sold, as well as the Securities and Exchange Commission (SEC). Regulators will go to the memo to see if the company can deliver on its commitments. If the note isn’t registered, the investor must conduct their own due diligence to determine whether the company is capable of repaying the debt. In this instance, the investor’s legal options in the event of default may be limited. Insolvent businesses may hire high-commission brokers to sell unregistered notes to the general public.

Student loan promissory notes

  1. Deciding on the college or university of your choice and enrolling in that institution can be an exciting time, but it can also feel overwhelming with so much to plan and do before your first semester. If you are like the majority of students who will need to borrow student loans to cover some or all of the cost of higher education, it may also lead to your first encounter with any type of loan or credit product. When you sign a student loan contract, known as a promissory note, you agree to all of the terms and conditions laid out by the lender. As with any legally binding document, it’s important to read a student loan promissory note carefully and be aware of and understand your rights, responsibilities and obligations before moving forward.
  2. When a student takes out a loan for student financial aid, they usually sign a promissory note to formalise the debt. Interest does not usually begin to accrue until after the student graduates, according to the promissory note agreement. Students can typically sign a master promissory note that covers the duration of their education and eliminates the need to re-sign each year they take out a school loan.
  3. You can sign a contract called a Master Promissory Note, or MPN, for federal student loans that permit you to borrow multiple loans over a 10-year period. Depending on whether you wish to borrow federal direct loans for undergraduate or graduate students, PLUS loans for graduate students, Parent PLUS loans, or a combination of loan types, you will need to sign a new Master Promissory Note for each form of a loan. Your terms and conditions will not change if you enter into this form of agreement. You won’t have to sign a new agreement every year as long as you keep taking out federal student loans.
  4. A variable interest rate or a fixed interest rate can be applied to student loans. Your interest rate on a fixed-rate loan will remain the same for the duration of the loan. A variable interest rate loan has an interest rate that fluctuates based on a market benchmark or index that changes on a regular basis.

Informal promissory notes

An informal promissory note, also known as a personal promissory note, is used when two people, such as friends or family members, need to borrow money. It is a written agreement between the payor and the payee that a quantity of money will be reimbursed within a specified time period, and it may not contain as many repayment stipulations as other more formal promissory notes.

Real estate promissory notes

  1. People who might have qualified for a mortgage previous to the recession are having a hard time finding lenders prepared to lend to anyone other than highly qualified buyers. This condition not only prohibits good potential buyers from acquiring a home, but it also disadvantages sellers because it is considerably more difficult to find purchasers who qualify for traditional financing. This has led to an increase in the number of sellers marketing their own homes and using legal promissory notes to sell their properties to potential buyers.
  2. At the beginning of a mortgage for a real estate home loan, a bank may issue a real estate promissory note. This is especially important if the lending partner is not a bank but a private individual. These promissory notes state that the borrower’s home as collateral for the loan and that the creditor or issuer can place a lien on the property if the borrower fails to pay by a certain date or defaults on the loan.
  3. Promissory notes are perfect for people who don’t qualify for typical mortgages since they allow them to buy a home with a loan from the seller and collateral from the purchased home. The buyer makes a down payment to the seller as a sign of good faith and as a guarantee that the debt will be paid back. The deed to the house serves as collateral on the loan, and if the buyer defaults, the seller keeps the deed and the down payment. The promissory note stipulates all of the loan’s repayment terms, as well as the repercussions of defaulting on the loan.

Commercial promissory notes

  1. Commercial paper, often known as CP, is a short-term financial instrument used by businesses to raise capital over a one-year period. It is an unsecured money market instrument in the form of a promissory note that was first established in India in 1990.
  2. A commercial promissory note is a formal type of promissory note that is often issued to borrowers by institutions such as credit unions or banks. These could be used by commercial lenders to make auto loans, personal loans, or business loans to private individuals.

Investment promissory notes

  1. Even in the case of a take-back mortgage, investing in promissory notes entails risk. To assist mitigate these risks, an investor should register or notarize the note so that the obligation is both publicly recorded and lawful. In the case of a take-back mortgage, the note purchaser may even go so far as to purchase a life insurance policy on the issuer. This is fine because if the issuer dies, the note holder will inherit the house and all associated expenses, which they may not be prepared to handle.
  2. These notes are only available to corporate or sophisticated investors who are ready to take on the risks and have the funds to purchase the note (notes can be issued for as large a sum as the buyer is willing to carry). After agreeing to the terms of a promissory note, an investor might sell it (or individual payments from it) to another investor, similar to a security.
  3. Because the value of future payments is eroded by inflation, notes are sold at a discount to their face value. Other investors can buy a portion of the note by purchasing the rights to a specific number of instalments at a discount to the true value of each payment. This allows the note holder to raise a lump sum of money quickly, rather than waiting for payments to accumulate.

Promissory notes in India

In India, a promissory note, also known as a note payable, is a legal instrument in which one party (the issuer) guarantees or promises in writing to pay a specific sum of money to the other (the payee) at a specific time or on the payee’s demand, under specific circumstances. The amount of money promised to be paid must be exact and precise. The commonwealth has codified the legislation relating to ‘Negotiable Instruments’ in the Bills of Exchange Act, 1882. Almost every country, including New Zealand, the United Kingdom, and Mauritius, has codified the law governing negotiable instruments. The Negotiable Instrument Act of 1881 went into effect in India. To comprehend what a negotiable instrument is, all you need to know is that it’s a promissory note, bill of exchange, or check payable to order or to bearer. Promissory notes were widely used in Europe throughout the Renaissance. Later in the twentieth century, the instrument underwent significant changes in both use and form, as well as the addition of some clauses. 

The governing laws 

  1. Under Section 4 of the Negotiable Instruments Act, 1881, a “promissory note” is a written instrument (not a banknote or currency note) that contains an unconditional undertaking signed by the maker to pay a specified quantity of money solely to, or on the order of, a specific person, or to the bearer of the instrument.  
  2. The meaning of “promissory note” in Section 2(22) of The Indian Stamp Act, 1899 states that “Promissory note” means a promissory note as defined by the Negotiable Instruments Act, 1881; it also includes a note promising the payment of any sum of money out of any particular fund that may or may not be available, or subject to any condition or contingency that may or may not be performed or occur.
  3. This definition of a promissory note suggests that there are various different kinds of promissory notes. Some promissory notes may be classified as ‘negotiable instruments’ under Section 13 of the Negotiable Instruments Act, 1881, while others may not, although the character of the document will not change if it is otherwise a promissory note. To put it another way, if a document is a ‘promissory note’ under Section 4 of the Act, it will remain a ‘promissory note’ whether or not it falls under the definition of the term ‘negotiable instrument’ under Section 13 of the Act. 
  4. As a result, we believe that Section 13 of the Negotiable Instruments Act, 1881 or the definition of the phrase “negotiable instrument,” is completely immaterial for determining whether a particular document is a promissory note or not. Similarly, and for similar reasons, referring to the terms of Section 13 of the Act for determining whether a document is a “bond” or not is completely meaningless. As a result, anything to the contrary maintained by any of the authorities cited in the orders of reference is invalid.

Is promissory note a compulsorily attestable document

It is necessary to note that a promissory note is not a compulsorily attestable document. To execute a promissory note, no attestors are usually required. The Hon’ble High Court of Andhra Pradesh. concluded in Chandabolu Bhaskara Rao’s case  (2006) that “because the promissory note is not a compulsorily attestable instrument, even if the attestors’ signatures are taken, after its execution it does not amount to the material alteration, and therefore it does not become vitiated.” As a result, whether or not there were attestators present at the time of the execution is irrelevant, especially if the execution is admitted.

The Hon’ble Full Bench judgement of Madras High Court reported in Hariram v. I.T. Commissioner, (F.B.) (1952) stated that the document in question was not a promissory note since there was no unqualified pledge to pay a specified sum of money. His Lordship Justice Vradachariar explained the difference between a promissory note and a hundi or bill of exchange as follows by stating that “where the borrower signs his own promissory note as part of the loan transaction, it seems artificial to me to interpret every promise to pay obtained in that note as a payment, and then to try to apply the principle of conditional payment.”

It is essential to know that the promissory note is not a mandatory attestable document. Even if the attesters’ signatures are taken, it does not amount to a material amendment after execution, and so it is not vitiated. As a result, whether or not there were attesters present at the time of execution is irrelevant, especially when the execution is admitted.

Need for proper stamp duty in cases of a promissory note

The Hon’ble High Court of Andhra Pradesh considered the fact of Section 35 of the Indian Stamp Act, 1899 in the case of Venkatasubbaiah v. Bhushayya (1963). It was decided that a promissory executed in another state was subject to stamp duty in the state where it was produced and that if the stamp duty was not paid, the document would be declared inadmissible. Section 19 of the Indian Stamp Act, 1899 was applied in this case. According to this provision, before it is offered for acceptance or payment, or before it is endorsed, transferred, or otherwise negotiated in India, a promissory note drawn or created outside of India must affix the correct stamp and cancel it.

The abovementioned section does not appear to apply to promissory notes executed in India, and any promissory note executed in one state can be submitted in any other state in India with the stamp bearing on the promissory note, with no additional stamp duty payable. Section 19 specifies that a promissory note drawn outside of India and utilised in India or any other state is subject to stamp duty in accordance with Indian law.

Does Section 35 of the Indian Stamp Act, 1899 require an amendment

Section 35 of the Indian Stamp Act of 1899 states that “no instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authorised to receive evidence, or shall be acted on, registered, or authenticated by any such person or by any public officer, unless the instrument is duly stamped”. Clauses (a) to (e) of the Proviso to the preceding Section 35 contain provisions that allow the instrument to be used as evidence upon payment of the full stamp duty (where it is unstamped) or the deficient stamp duty (where there is a deficiency in the stamp duty), and the proviso also allows for the collection of penalties up to ten times the stamp duty or deficiency, as the case may be. Penalties are, of course, imposed at the discretion of the court.

However, in the case of a ‘bill of exchange or promissory note,’ Clause (a) of Section 35 prohibits the validation of the instrument as described above. As a result, while there is a method for further validation of the instrument by a collection of the stamp duty or penalty in the case of all other instruments, such a procedure is not accessible in the case of ‘bills of exchange and promissory notes.’ Even if the party who wishes to use it as evidence is willing to pay the stamp tax and penalty, he is not permitted to do so in the case of certain documents. The document is now considered ‘trash paper’. Several debtors have been allowed to escape liability unjustly because this strict approach applied only to ‘bills of exchange and promissory notes.’

In circumstances when one party relies on a “bill of exchange or promissory note” that is not stamped or is deficiently stamped, Indian courts have been unable to provide justice. Furthermore, the provisions of Section 91 of the Indian Evidence Act, 1872  get in the way and make it impossible to provide oral evidence in such circumstances. As a result of these disabilities, there has been a significant amount of litigation in the courts. The Privy Council, the Supreme Court, and the High Court have all stated that they are powerless to intervene.

To ensure that persons who have parted with money under a bill of exchange or a promissory note are treated fairly, this clause in Section 35 should be removed, and the method for paying the stamp duty or penalty should be extended to these instruments as well. This will boost the state’s earnings even more. This method will also prevent superfluous disagreements over whether the plaint can be altered to allow the plaintiff to suit on the debt, as well as disagreements over whether oral evidence is admissible. 

After careful consideration of various factors, including the benefit to the State from stamp duty or penalty collection, and the elimination of unnecessary disputes, the Law Commission was of the considered opinion that the words “any such instrument not being an instrument chargeable with a duty not exceeding ten naya paise only, or a bill of exchange or promissory note, shall subject to all just exceptions be admitted in evidence”, the words “any such instrument shall be admitted in evidence”, shall be substituted.

Promissory note format in India

A promissory note is a document that contains all of the information about a future transaction or credit. A standard promissory note includes the following:

  1. The principal amount, 
  2. Interest rate (if any),
  3. Issuing location and date,
  4. Maturity date, and
  5. Drawer’s signature.

Given below is a general format, in a real promissory note the details may vary with facts and circumstances. You can also refer here for a detailed one. 


I, Sri. ___________________________ S/o. _____________________ promise to pay Sri. _______________________ S/o. _____________________ or order, on demand, the sum of Rs. _____________ (Rupees ______________ only) with interest at the rate of _________ percent per annum from the date of these presents, for value received.


Date:                                                                                                          Signature

Demand promissory notes

Demand promissory notes are those which do not have a set maturity date and are payable when the lender demands them. The borrower is usually only given a few days’ notice before the payment is due. Promissory notes and security agreements can be used together. To put this in a simpler way, a demand note is a loan with no set duration or timetable for repayment. It can be recalled at the lender’s request, provided that the loan’s notification requirements are met. A demand loan (or note) is most popular among family, friends, and close business acquaintances due to its relative informality. 

Both the borrower and the lender are in danger with these types of promissory notes. This type of note makes loan payback planning more difficult and is not a replacement for a formal loan contract.  When a lender calls in a demand promissory note, the borrower is responsible for repaying the loan in full or in part, as specified in the note. The borrower usually has only a few days to find the funds he requires and the borrower must be willing to pay back the loan at any moment.

Purpose of demand notes

A demand loan might be given as a favour to a family member, friend, or business acquaintance who needs money but doesn’t want to deal with the formalities and legal ramifications. The loan is unsecured, usually small in size, has no specified maturity date, and there is no principal and interest repayment schedule. These advantages are available to the borrower, but they must be willing to repay the loan ‘on-demand’ by the lender. In other words, the lender retains the ability to call in the loan at any moment under these flexible terms as long as the advance notice is reasonable.

Is a demand note legally binding

The broad parameters of a demand note are spelt out in a written demand loan agreement, which isn’t necessarily legally binding but functions as a kind of moral contract between the parties. The principal amount to be returned, the interest rate, and the time of notice that a lender must give a borrower before the note is due are all important factors. 

Bank-issued demand notes : an insight

Demand loans are almost always given to clients who have had an excellent connection with the bank, despite the fact that this is not extremely common. The bank is comfortable lending on advantageous conditions to the borrower because the customer’s repayment history demonstrates that he or she is creditworthy. Flexible terms help the borrower, while the bank benefits from a strengthened banking relationship. Unlike a friend-to-friend loan, the official written loan arrangement in this situation is subject to legal enforcement of its provisions and will require the borrower’s signature.

Advantages of demand notes

The lack of a payment date on a demand promissory note is one of its most distinguishing features. This can sometimes work in the borrower’s favour. If the lender decides that payback is not required right away, the borrower will have additional time to collect repayment funds. However, if the lender calls in the note right away, the borrower may not be able to pay. 

Disadvantages of demand notes

  1. As a sound repayment plan requires the borrower to know when the lender will want his money back, not simply the amount that will be due, these types of notes make it exceedingly difficult to construct any form of real payback plan.
  2. As there is no defined payment date, lenders are taking a chance by accepting these promissory notes. To mitigate this risk, a lender may charge a high-interest rate on the borrowed funds or make other arrangements, such as refusing to accept partial payments. This is at the lender’s discretion. Before signing the note, borrowers must decide if they can reasonably meet the additional note terms.

Essentials of a demand loan agreement

The contents of a demand promissory note can vary based on the lending agreement, but a very basic note always includes the following:

  1. Lender’s and borrower’s names and addresses,
  2. The amount borrowed,
  3. Payback conditions, 
  4. If applicable, the interest rate,
  5. The date on which the note is drawn,
  6. The terms of default, and any laws to which the note adheres 

This sort of promissory note often includes areas for the lender, borrower, co-signers, and witnesses to sign and date the document. A promissory note, particularly a demand promissory note, is not always the same as an IOU or contract, despite the fact that the phrases are commonly used interchangeably. IOUs only admit that the borrower owes money, whereas a promissory note indicates that the borrower is required to pay. Loan contracts often go into far more detail than a promissory note, thus a promissory note isn’t always enough to protect a lender. For this reason, loan contracts and promissory notes are legally distinct in several jurisdictions.

Demand loan agreement template

Hereunder you will find a general format of drafting a demand promissory note. The format is not an exhaustive one, therefore one can also refer to this


THIS AGREEMENT, made this ________ day of _______, 2022, by and between _________(“Borrower”) having his principal place of business at ____________(Address); and _______________(“Bank”), a Company with its principal office located at _______________ (Address).

INTENDING TO BE LEGALLY BOUND, and for value received, Borrower agrees as follows:


BORROWER: ___________(Name)



 Signature of Notary Public

Difference between a demand promissory note and a promissory note

Both a demand note and a promissory note are written agreements between a lender and a borrower. A demand note is one in which the balance owing does not have to be repaid until the lender has ‘demanded’ it, and the note does not have a set end date. When payment is asked, a repayment period will be specified. A promissory note, on the other hand, can be paid ‘on demand’ or at a predetermined date. Unlike a mortgage loan, a demand note does not require a show-cause notice to be delivered to a delinquent borrower.

Who is primarily liable on a promissory note

It is the maker who is primarily liable on a promissory note. The issuer of a note or the maker is one of the parties who, by means of a written promise, pay another party (the note’s payee) a definite sum of money, either on-demand or at a specified future date. Failure to abide by the promise made makes the maker primarily liable on a promissory note.  The provisions relating to the liability of parties to negotiable instruments are under Sections 30 to 32 and 35 to 42 of the Negotiable Instrument Act, 1881. The same has been discussed hereunder.

Liability of Drawer (Section 30)

A drawer is someone who signs a cheque or a bill of exchange instructing his or her bank to pay the payee the specified amount. The drawer of a cheque or bill of exchange must reimburse the holder in the event of the drawee or acceptor dishonouring the cheque or bill of exchange. However, the drawer must be informed of the dishonour. So, the nature of the drawer’s liability on drawing a bill is:

  1. On due presentation:- It should be accepted and paid accordingly.
  2. In the case of dishonour:-  Drawer needs to compensate the holder for such an amount, only when he receives a notice of dishonour by the drawee.

Liability of the Drawee of the cheque (Section 31)

The person who draws a cheque, i.e. the drawer who has sufficient monies in his hands that are lawfully applied to the payment of such cheque, must pay the cheque when duly required to do so, or reimburse the drawer for any loss or harm caused by such default. The following conditions are needed to be satisfied:

  1. A sufficient amount of funds should be available with the banker to credit the customer’s account.
  2. Such funds must be correctly applied against the payment of such a check, e.g., the money must be free of any liens, and so on.
  3. The check must be paid within banking hours, on or after the day on which it is made payable.

If a banker refuses to honour a customer’s check for whatever reason, it will be held accountable for damages.

Liability of acceptor of bill and maker of note  (Section 32)

In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before the maturity of a bill of exchange are liable to pay the amount due at maturity, according to Section 32 of the Negotiable Instrument Act. They must pay the sum based on the apparent tenor of the note or acceptance, as appropriate. At or after maturity, the acceptor of a bill of exchange is obligated to pay the amount due to the holder on demand. The acceptor of a bill or the creator of a note’s liability is absolute and unconditional, but it is susceptible to a contract to the contrary, and it can be eliminated or changed by a collateral agreement.

Liability of endorser (Section 35)

A person who endorses and delivers a negotiable instrument before it matures is known as an endorser. Every endorser bears the responsibility to the parties who come after him. In addition, if the instrument is dishonoured by the drawee, acceptor, or maker, he is obligated to compensate any succeeding holder for any loss or harm caused by the dishonour. He must, however, compensate only once the following requirements are met:

  1. There is no contract stating otherwise.
  2. The endorser’s own obligation has not been expressly excluded, limited, or made conditional.
  3. In addition, such endorsers shall be informed of the dishonour in a timely manner.

Liability of prior parties (Section 36)

Every prior party to a negotiable instrument has a duty to the holder in due course until the instrument is duly satisfied. The maker or drawer, the acceptor, and all intervening endorsers are all considered previous parties. In addition, they are jointly and severally liable to a holder in the event of a default. In the event of dishonour, the holder may hold any or all prior parties accountable for the sum in question.

Liability inter-se

With respect to the nature of their liability, each liable party has a different footing or position.

Liability of acceptor when the endorsement is forged (Section 41)

Even if the bill’s endorsement is faked, an acceptor of a bill of the exchange who has previously endorsed the bill is still liable. Even if he knew or had reason to suspect the endorsement was forged at the time he accepted the bill, this is true.

Acceptor’s liability when a bill is drawn in a fictitious name

Any holder will be paid in due course if a bill of exchange acceptor draws a bill in a fake name payable to the drawer’s order. He or she will not be exempt from obligation due to the use of a false name.

Scope of presumptions in a promissory note

Landmark case laws

In Kundan Lal Rallaram v. Custodian, Evacuee Property, Bombay (1961), the Hon’ble Supreme Court analysed the breadth of the presumption and had put down the law as follows:

Section 118 establishes a unique rule of proof for negotiable instruments. The presumption is legal, and a court must presume, among other things, that the negotiable or endorsed for consideration is valid. In effect, it places the burden of proof of lack of concern on the note’s maker or endorser, depending on the situation. The phrase ‘burden of proof’ has two meanings; one is the burden of proof as a matter of law and pleading, and the other is the burden of establishing a case. The former is fixed as a matter of law on the basis of the pleading and thus remains constant throughout the trial, whereas the latter is not constant and shifts as soon as a party adduces sufficient evidence to raise a presumption in his favour. The evidence needed to transfer the burden of proof does not have to be direct evidence or admissions from the other party; it could be circumstantial evidence or legal or factual presumptions. 

A plaintiff who claims that he sold certain goods to the defendant in exchange for a promissory note and that he is in possession of the relevant account books to show that he was in possession of the goods sold and that the sale was reflected for a specific consideration should produce the account books. If the plaintiff refuses to submit such pertinent evidence, Section 114 of the Indian Evidence Act allows the Court to draw a presumption that, if produced, the stated accounts would be unfavourable to the plaintiff. This presumption, if raised by a court, can rebut the presumption of law created under Section 118 of the Negotiable Instrument Act in certain circumstances.” 

It was held in Haribhavandas Parasaran and Co. v. A.D. Thakur (1963) that “the assumption under Section 118(a) must be made unless the contrary is proven. The fact that the nature of the consideration recited in the negotiable instrument differs from that alleged in the plaint may be taken into account by the Court at a later stage, along with all of the evidence in this case, in determining whether the contrary to the statutory presumption has been proven. However, the mere existence of such a fact would not be sufficient for the Court to ignore Section 118 and pose an issue requiring the plaintiff to prove consideration for a negotiable document whose execution has been admitted. The defendant should continue to bear the burden of proving a lack of regard.”

When different cases have been pleaded and evidence has been admitted in support of both of these sets of cases, the true principle is that the entire evidence in the case adduced by the plaintiff and the defendant, as well as the findings entered by the Court or which are to be altered by the Court, as well as the presumptions of law and fact that must be drawn from all of the facts established and attendant circumstances, must be examined as a whole to determine whether the presumptions of law and fact must be examined. It would not be correct to hold that the presumption under Section 118(a) has been rebutted only on the basis of the finding dismissing the plaintiff’s case on consideration.

FAQs related to a promissory note 

Some of the common or frequent questions associated with the concept of promissory notes have been discussed hereunder.

What are the synonymous terms for promissory notes

A promissory note is also known as a/an:

  1. Commercial paper.
  2. IOU.
  3. Note payable.

When should I use a promissory note

Promissory notes are commonly used for loans from non-traditional money lenders such as people or businesses rather than banks or credit unions. These short and long-term loans are frequently used to assist people to attain a variety of personal and corporate objectives. For instance, you can use this document when borrowing or lending a moderate sum of money to:

  1. Purchase real estate.
  2. Start a business.
  3. Buy a vehicle.
  4. Consolidate debt.
  5. Renovate or construct a home. 

How do I make a debt repayment plan

  1. Lenders, for example, can be compensated for lending money by charging interest. Lenders frequently demand an interest rate equivalent to the rate of inflation to compensate for the depreciation of money caused by inflation over time. However, lenders who are concerned about a borrower’s payment failing may demand a higher interest rate.
  2. Another option is to require the borrower to repay the loan all at once (on a certain date or upon demand) or in instalments over time. The borrower’s financial status has a big role in defining this phrase in a promissory note. However, if the borrower has poor credit or an uncertain income, the lender may request some sort of security in the form of collateral.
  3. In some cases, the lender must additionally submit an amortisation schedule to the borrower. This payment plan determines how much of each payment goes toward the principal and interest to determine how long it will take to pay off a debt.

How do I amend a promissory note

  1. If a borrower falls behind on payments, a lender can use an Amending Agreement to change the conditions of their promissory note. It’s vital to note, however, that before any contract amendments can take effect, both parties must give informed approval. Parties usually indicate their agreement by signing the modification form.
  2. Amendments are useful because they can fix concerns that may not be apparent until after a lender has issued a promissory note. Furthermore, if the parties can agree on contract revisions, they can avoid a conflict and the associated costs of litigation by revising their agreement themselves.
  3. Any contract changes should be attached to the original promissory note. This will bolster the validity of the newly agreed-upon agreements and ensure that all parties are on the same page.

How do I enforce a promissory note

  1. A borrower may fall behind on payments or decide to cease repaying a debt entirely. Lenders may need to take legal action to enforce the arrangement. In most cases, the first step in enforcing a promissory note is to send the borrower a Demand Letter that reaffirms the payment terms and threatens legal action if they are not satisfied by a specific deadline.
  2. If the borrower fails to comply with the demand, the lender will likely confiscate any collateral used to finance the loan and pursue debt collection through the courts. To cut their losses and reclaim some money, some lenders may sell the loan to a collection agency. In either instance, it’s critical to familiarise yourself with the laws that govern debt collection in your country to ensure that you follow them correctly.
  3. The judicial process for debt recovery, for example, differs depending on state or territory regulations. Furthermore, any debt collection outside of the courtroom must be fair, flexible, and reasonable. In some situations, a lender may be held accountable for a collection agency’s unethical behaviour (e.g., putting an unfair amount of pressure on a borrower to pay). Lenders can get lawful debt collection instructions from India’s Department of Financial Services. If you’re unsure how to handle an outstanding obligation, see an attorney.

Does a promissory note need to be notarised

Promissory notes do not need to be notarized in most cases. Individuals must typically sign legally enforceable promissory notes that contain unconditional pledges to pay certain amounts of money. In most cases, they also include payment deadlines and an agreed-upon interest rate.

Is the cheque a promissory note

A promissory note is a type of financial promise given by one person to another for a specific sum of money. A cheque, on the other hand, is a customer’s unconditional order for a certain person or bearer.

Do banks accept promissory notes

Individual promissory notes are frequently accepted by banks. One of the most apparent instances is the promissory note that a new homeowner signs when applying for a mortgage.

Can a promissory note be legally accepted in India

As a promissory note, only legal tender money is accepted. Rare coins or currencies would not be accepted as acceptable promissory notes. It’s also important to know how much you’ll have to pay. Under the RBI Act, 1934, it is prohibited to make a promissory note payable to bearer.

How can I recover my money from my promissory note

A civil suit might be filed by the lender to reclaim the money owed to him under a promissory note or loan arrangement. He has the authority to do so under Order 37 of the Code of Civil Procedure, 1908 which authorises the lender to initiate a summary suit. This complaint can be filed in any high court, city civil court, magistrate court, or small claims court.

How do I delete a promissory note

Write or have an attorney write a ‘Cancellation of Promissory Note’ letter for you. The note should include the original promissory note’s details as well as a statement that the original promissory note has been cancelled at the desire of both parties. In the presence of a notary, have the promisee sign the document.

What happens to a promissory note when someone dies

A promissory note is a written commitment or contract to repay a loan. It’s commonly used for family loans. Unless the deceased person makes arrangements for the debt to be forgiven upon death, the estate must repay these loans.

What happens if I don’t pay my promissory note

Promissory notes are documents that are legally binding. Failure to repay a debt described in a promissory note can result in the loss of a secured asset, such as a home, as well as other consequences.

Can a promissory note be forgiven

The obligation owed on a promissory note can be paid off or forgiven by the noteholder, even though the debt has not been entirely paid. In either situation, the noteholder must sign a release of a promissory note.

What happens when a borrower pays off a promissory note

There is no need to do anything extra once a borrower has paid off their obligation. However, if the borrower can only pay back a portion of the loan, the lender can use Release of Liability to free them from their promissory note obligations. The lender indicates in this document that they are happy with a certain amount of compensation and agree not to pursue any legal action against the borrower in connection with the debt.


The present article has aimed to help the readers understand every minute detail of the concept of a promissory note. Starting from the meaning to that of the application of the concept in India, governing statutes, precedent judgments by the Indian courts and the possible queries related to the concept, have been dealt with by the author in this article. 


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