Promissory Note

 Sec. 4: “Promissorynote.”—
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.
 Illustrations:
A Signs instruments in the following terms:
 (a ) “I promise to pay B or order Rs. 500.”
 (b) “I acknowledge myself to be indebted to B in Rs. 1,000,
to be paid on demand, for value received.”
 (c) “Mr. B, I O U Rs. 1,000.”
 (d) “I promise to Pay B Rs. 500 and all other sums which
shall be due to him.”
 (e) “I promise to Pay B Rs. 500, first deducting there out
any money which he may owe me.”
 (f) “I promise to Pay B Rs. 500 seven days after my
marriage with C.”
 (g) “I, promise to Pay B Rs. 500 on D's death, provided D
leaves me enough to pay that sum.”
 Requisites of promissory note
 1. Promissory Note must be in writing.
 Exclude an oral engagement to pay form purview of
the Act.
 It may be handwritten or typed and may be in any
language.
 It may be written on a paper or cloth or any other
material that can be used for such purposes.
 It is not necessary to use the word promise.
 No particular form of writing is necessary for the
validity of promissory note.
 To find out whether a particular document is
promissory note –
 Surrounding Circumstance under which it came to be
executed.
 Intention of the parties manifest from language of the
instrument read as a whole.
 Where the document is in the form of an
acknowledgement coupled with a promise to pay by a
particular day, it is a promissory note though stated as
hundi.
Thus mere nomenclature given to instrument
does not determine the nature of instrument.
 Negotiable instruments include promissory notes: but an
instrument to be known as promissory note need not be
negotiable instruments.
 Sec. 4 did not lay down any rule that an instrument in
order to be promissory note must be negotiable.
 2. A promissory note must contain an undertaking to
pay.
 A mere acknowledgement of indebtedness without an
express promise to pay the debt is not a promissory note.
 Examples:
 I have received Rs. 1000/ which I have borrowed from
you, and I have to be accountable to you for the same
with interest.
 Deposited with me Rs. 2000/ to be returned on
demand.
 A holder, who sues on demand instrument without
having first demanded payment thereon, may have to
bear cost of the action, if debtor shows that he is ready
and willing to pay.
 A promise to pay on demand necessarily implies a
promise to pay.
 A promissory note need not be payable on demand. It
may be made payable on a fixed future date or on
expiry of a specified date.
 Promise to pay at certain place…
 3. the promise to pay should be unconditional
 If a payment is contingent upon the happening of an
uncertain event, it would be invalid even if the event
occurs before the expiry of period fixed for the
performance of the obligation.
 A letter requesting a loan stating that the amount lent
would be repaid is not promissory note.
 Examples of instruments not held as promissory
instruments:
 An instrument containing a promise to pay an
settlement of account when litigation comes to an end.
 I promise to pay on demand at my convenience.
 I promise to Ramesh of Rs. 500 out of money due to
me from Suresh as soon as Suresh pays.
 A note contained an undertaking to pay on or before
specified date and the actions on the note is subject to
jurisdiction of India and Singapore, is an
unconditional undertaking.
 A promise to pay the amount after receiving a months
notice held to be an unconditional promise.
 A note is not invalidated by a default clause that
allows the promisee to realize the amount from certain
properties of promissor, in the event of default to pay.
 4. promissory note must be signed by the maker
 5. maker must be certain
 Clear indication as to who undertakes to pay.
 A promissory note may be made by several persons
jointly or jointly and severally.
 Where a note is made in the form: I promise to pay
and is signed by A & B, it is deemed to be made by
them jointly and severally liable.
 I promise to pay A Rs. 1000 & all fines according to
rule.
 Where the rate of interest was not mentioned, a rate
of six percent would be applicable under S. 80 of the
Act.
 7. Instrument must contain a promise to pay
money and money only
 An agreement to containing an undertaking other than
to pay money cannot be a pronote.
 A document containing a promise to pay money in a
currency, which is not that of a country where note is
made & payable notwithstanding that is a pronote.
 8. payee must be certain
 Where a debtor made an entry of receipt of money in
creditor’s book & stated that the borrowed money by
him would be repaid on certain date, without stating
as who was to be payee
 a pronote can not be made payable to the maker
himself.
 the requirement as to certainty of the payee does
not apply if the note is payable to bearer.
however u/s. 31(2) of RBI Act, 1934, no
person in India except the RBI or Central Govt as
expressly authorized by the Act shall make or
issue note payable to bearer.
 It is usual and proper to state in a note the place
where it is made. However omission to do so does
not make instrument invalid.
 An undated instrument is deemed to have been
dated on date of delivery.
 S.5. “Bill of exchange”.—A “bill of exchange”
is an instrument in writing containing an
unconditional order, signed by the maker,
directing a certain person to pay a certain sum
of money only to, or to the order of, a certain
person or to the bearer of the instrument.
 Requisites of Bill of Exchange
 1. Bill of Exchange must be in writing.
 2. Bill of Exchange must contain an order to
pay.
 3. the order contained in bill is unconditional.
 4. Bill of Exchange must be signed by the
drawer.
 5. The Drawee must be certain.
 payable at certain place
 bill cannot be addressed to two or more drawees in the
alternative.
 P. Chandrabose v. C. Gopalan 2008 CrLJ 953 NOC
Mad.
 Accused had handed over duely filled withdrawal slip
to the complainant & the same was dishonoured.
 It was held that withdrawal slip is not a cheque as it
cannot be used in favour of any person other than the
account holder.
 It is not a negotiable instrument as it can not be
negotiated.
 Hence accused cannot be prosecuted for offence under
S.138 upon a withdrawal slip being dishonoured due
to insufficient funds.
 Death of the drawer of the cheque
 Vijay Singh & Ors. v. Manali & Malik & Ors.
 If the cheque was not presented during the life
time of the drawer, it ceases to be a cheque after
demise of the drawer since it ceased to be an
order to be an order of a person entitled to make
order to the bank to pay the money.
 7. “Drawer.” “Drawee”.—The maker of a bill of
exchange or cheque is called the “drawer”; the
person thereby directed to pay is called the
“drawee”.
 “Drawee in case of need”.— When in the Bill or
in any endorsement thereon the name of any
person is given in addition to the drawee to be
resorted to in case of need, such person is called a
“drawee in case of need.”
 “Acceptor”.—After the drawee of a bill has signed
his assent upon the bill, or, if there are more parts
thereof than one, upon one of such parts, and
delivered the same, or given notice of such signing
to the holder or to some person on his behalf, he is
called the “acceptor”.
 “Acceptor for honour”.— When a bill of exchange
has been noted or protested for non-acceptance or
for better security, and any person accepts it supra
protest for honour of the drawer or of any one of
the indorsers, such person is called an “acceptor
for honour”.
 “Payee”.—The person named in the
instrument, to whom or to whose order the
money is by the instrument directed to be paid,
is called the “Payee”.
 In Pratap Singh Yadav & Anr . v. Behari
Pandey
 son has issued a cheque to discharge debt of his
father.
 Upon cheque being returned dishonored,
complaint U/S.138 is filed against the father as
well as son.
 It was held that only son was liable & not father
since offence U/S. 138 is essentially against the
drawer of the cheque.
 A conjoint reading of S. 7 and S. 138 clearly
indicates that it is only the drawer of the cheque
who can be held responsible for offence under
S.138.
 In a case, allegation was that the accused gave a
cheque.
 There was no proof of the fact that the cheque was
drawn and executed by accused.
 It was held that execution is different from
issuance of cheque.
 Acceptance:
 The acceptance of bill of exchange is the
signification by the drawee of his assent to the
order of the drawer..
 Where the drawee writes on a bill accepted but
does not sign it, it not an acceptance.
 The drawee of the bill is not liable on the bill in
the acceptance
 An acceptance by the drawee to perform his
promise by means other than by the payment of
money is invalid.
 For instance a bill is drawn by A on B for Rs.
5000. B accepts it as payable in bills or payable in
goods. This is not a valid acceptance.
 Holder

 S.8. “Holder”.—The “holder” of a

promissory note, bill of exchange or
cheque means any person entitled in his
own name to the possession thereof and
to receive or recover the amount due
thereon from the parties thereto.
 Where the note, bill or cheque is lost or
destroyed, its holder is the person so entitled
at the time of such loss or destruction.
 Essentials:
 Entitled to possession in his own name.
 Right to receive or recover the amount due
 The Bill of Exchange Act, 1882
holder means the payee or indorsee of a bill or
note who is in possession of it, or the bearer there of.
Comparison:
While possession is essential in case British
legislation.
 A person may be entitled to possession of the
instrument although he does not actual
possession.
 Example, where the bill is payable is without
indorsement, entrusted by the payee to his
agent, agent does not become the holder & the
payee is entitled in his own name to the
possession of the bill.
 The holder of an instrument should be owner
thereof.
 Holder means only a dejure holder & not de
facto holder.
 the assignee of a note or bill is not a holder,
unless the instrument is indorsed in his favour
or payable to bearer & in his possession.
 Right to recover or receive implies that he has
right to sue on the instrument.
 Holder does not include a person who does not
have a right to recover the amount due thereon
from the parties thereto, though he is
possession of the instrument.
 To qualify as a holder, a person should have
derived title to the instrument in a lawful
manner.
 A person who takes instrument from a person,
who forges an indorsement or from thief or
from a finder of a instrument or
 a payee or indorsee, who is prohibited by the
court order from receiving the amount is not a
holder.
 A, a debtor of B, executed a note in favour of
C in discharge of B’s debt to C.
it was held that C could sue A on the note
& A could not avoid liability by pleading that
he had only executed the note on behaf of B &
later repaid debt to B.
Material alteration