This article is written by Rohit Raj, a student of Lloyd law college, Greater Noida.

Introduction 

Promissory Note is a financial instrument or legal instrument that is also called ‘Debt instrument’. Promissory note is not  a new thing, it is a very old concept related to financial transaction and if we look at its emergence then we find that Promissory Note for the first time found in China during the Han Dynasty in 118 BC which was made of leather material. After that Romans also used it as a financial instrument at their time and a proof of the same is found in London. If we look at the Concept of the Promissory Note, then it is said that a Promissory Note is a type of financial instrument or legal instrument and also a type of money market instrument which is a written promise by a entity to another entity to pay a specific amount of money within the stipulated time. 

Promissory Note is issued when a Person gives another person a certain amount of money for a fixed period of time with a written promise that the person whom certain amount of money is being provided will return the money as per the written guidelines in the promissory note. In case if that person does not repay the amount in the stipulated period of time then, a legal action will be brought against that person.

Certain conditions required for issuing of Promissory Note  

Promissory Notes are created to fit the transaction that one is involved in and nothing more than it. Promissory note is used against the loan given and also against loan taken but some particular mentioned area where it is also used like– Mortgages, Student loans, Car loans, and Personal loans between relatives one. During the lending of a large amount of money, need or promissory note template so that promissory note can be made and be prevented from losing their lend money to others.

A promissory note contains all types of guidelines and all types of terms and conditions required for fulfilling the criteria of Promissory note. The Promissory note should include certain details which is required in every circumstances like:

• The name and Address of both the lender and the borrower.
• Total amount which is being borrowed and if any collateral is being put down it should also be mentioned down.
• Time limit and how often payments will be made.
• Signature of both the parties must be there in order to Promissory note enforceable by law.

Different forms of Promissory Note

After analyzing details required for a Promissory note and what is a Promissory note and from where it originates now we are going to see different types of Promissory note. Some  forms of the Promissory note are:

• • Simple Promissory Note: This Promissory note is for a lump sum repayment on a particular date as per the terms and condition mentioned. In this Interest rate may or may not be charged on the loan amount, depending on the agreed terms and condition.
  • Demand Promissory Note: As the name suggests Demand, it is clearly explicit that it is totally based on demand and made on demand. This Promissory note is one in which payment is due when the lender asks for the money back after the finish of the stipulated time period. 
  • Secured Promissory Note: A Secured Promissory Note is a type in which there is an obligation to pay the amount which is taken as a loan which is secured or we can say that for which collateral has been put down and if the person who takes loan fails to pay within the stipulated period of time then that collateral is being seized. The collateral is anything of the same value of loan taken like- real estate or personal property. Secured Promissory notes are most often used in loans of fairly large sums borrowed from commercial lenders and mostly prevalent in the money market. So, it is also called a Money market instrument.
  • Unsecured Promissory Note: An Unsecured Promissory note is an obligation on the person who has taken loan for payment but there is no requirement of Collateral or seizure of property earlier as a security. In this type, if the Payer fails to pay the required sum of money within the stipulated period of time, the Payee has a full right to go for legal action and file lawsuit against him but if it is found that the property available to the person who has taken loan is not sufficient to make repayment then its totally Bad luck of person who have given loan to that person. This type of promissory note is uncertain and nothing can be done else.
  • Convertible Promissory Note: Convertible Promissory Note is not like an ordinary one. This type of Promissory Note is issued against the loans made to businesses and the Corporate Sector. This Promissory Note is with an additional provision that allows the debt to be converted as the name itself suggests in the business, in lieu of being repaid. And this Convertible Promissory Note can be either of them i.e. Secured Promissory Note or Unsecured Promissory Note.

Promissory Note Defined According to Different Countries Act

Section 4 of the Negotiable Instrument Act, 1881

Promissory Note

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.

Section 83, Bills of Exchange Act, 1882 (England & Wales)

A Promissory Note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.

Section 3-104 (d), Negotiable Instrument Act (United States)

A Promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. It defines a Promissory note as an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the Promise or order.

Certain Key Pointers related to Promissory Note

• A Promissory note is only issued under the Section 4 of the Negotiable Instrument Act, 1881 and all the terms and conditions are mentioned in this act for the successful transaction and delivery of a Promissory note.
• Suppose a Promissory note is being issued in one state but now it has to be presented in another state then there will be no problem in dealing in another state with the same Promissory note and with the same stamp as the note bears valid stamp.
• A Promissory note should not be typed or printed, it should be totally hand written and it should contain all the required elements for the valid transfer of Promissory Note.
• Most essential things is that a Promissory note is valid up to the extent of 3 years starting from when the Promissory note is executed and at the end of 3 years that Promissory note becomes invalid and a fresh Promissory note is being executed in favour of that same person.
• And in case of Promissory note execution there is no maximum limit of amount which can be lent or borrowed.
• In many cases, a witness is being taken for the proof but is totally optional and it is not mandatory. It is advisable to have a note signed by a witness who is independent from the transaction.

After analyzing and explaining different elements of Promissory note, what it is, how execution of Promissory notes take place now the different parties involved in the execution of Promissory note will be defined and explained. The Parties involved in Execution of Promissory Note are: (1) Drawer (2) Drawee (3) Payee.

Drawee is the Person in whose favour the Promissory note is prepared and this person is the creditor who provides goods or services on credit or lends capital. It also depends on two things that the drawee is willing to provide and able to provide. After this comes Drawer, it is the person or we can say borrower or debtor who promises to pay the debt to the moneylender within the given time period and as per the terms and condition. Now comes Payee, who takes the money or to whom the money or payment is made. And it is not necessarily required that payee and drawee should be two separate people or entities, both can be the same also. 

Many people get confused between Bills of Exchange and Promissory Note and use them in exchange for each other. Due to this a lot of problems are taking place in the financial transaction. So, it’s very necessary to clear the difference between these both instruments. And this confusion is because there is not a major difference between these two negotiable instruments. A Bill of Exchange is a negotiable instrument which is issued in order to ask the debtor to pay the debt to the creditor the fixed amount of money that has been owed by him for a stipulated period of time. Whereas, Promissory Note is also a negotiable instrument but it is issued by the debtor with a written promise to pay the creditor a certain amount within a specific date or on demand. Bills of exchange is mentioned in the Section 5 of Negotiable Instrument Act, 1881 and Promissory note is also mentioned in Negotiable Instrument Act, 1881 but it is included in Section 4 of this Act. 

Bills of Exchange is issued by Creditor and the Promissory Note is issued by Debtor and this clearly demarcated the difference between these two instruments. In Bills of Exchange, Liability of drawer is secondary and conditional and total liability is on Drawer and in Promissory Note, liability is on the drawer as same as in the case of Bills of Exchange but the liability of drawer is primary and absolute.

Conclusion

A Promissory note is a type of financial instrument or legal instrument and also a type of money market instrument which is a written promise by a entity to another entity to pay a specific amount of money within the stipulated time. So, it is a very essential instrument in today market or commercial growing area where finance is a major paying role in development of commercial field or market. 

Promissory Note which is considered as the most valuable money market instrument should be carried forward but as artificial intelligence, big data is coming into picture these all will certainly lead to back out the system or concept of Promissory note. Also in the digitalization era, it will soon become obsolete and will not be more prevalent in the market with the passage of time. According to my opinion, the Concept of Promissory note should not be removed or back out instead of removing it should be upgraded in the form of digital so that it can cope up with the digitalization area and prevent it from becoming obsolete. This upgrading of this Promissory note system is the best solution in my view and it should be followed to continue it as best.