Essential requirements that should be fulfiled by an instrument to become valid promissory note are given below:
1. It must be in writing.
A promissory note has to be in writing. An oral promise to pay does not become a promissory note.
ADVERTISEMENTS:
The writing may be on any paper, on any bahi or book. It may be in pencil or in ink and includes printing or typing. No particular form of words is necessary, even a promise contained in a letter will suffice, provided the other requirements of Section 4 are complied with.
Of course the words used must import a clear undertaking to pay, but it is not necessary that the word ‘promise’ should be used (Balmukund vs. Munnalaf).
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Illustrations:
ADVERTISEMENTS:
A signs the instruments in the following terms:
(a) “I promise to pay B or order Rs 500”.5
(b) “I acknowledge myself to be indebted to B Rs 1,000 to be paid on demand, for value received.”
Both the above Instruments are valid promissory notes:
ADVERTISEMENTS:
2. It must contain a promise or undertaking to pay:
There must be a promise or an undertaking to pay. The undertaking to pay may be gathered either from express words or by necessary implication. A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an agreement and may be sued upon as such.
Illustrations:
A signs the instruments in the following terms:
(a) “Mr. B I.O.U. (I owe you) Rs 1,000.”7
(b) “I am liable to pay to B Rs 500.”
(c) “I have taken from B Rs 2,000 and I am accountable to him for the same with interest.”
The above instruments are not promissory notes as there is no undertaking or promise to pay. There is only an acknowledgement of indebtedness.
Where, however, the acknowledgement of indebtedness contained in the document is in a defined sum of money payable on demand, there is a valid promissory note even though the words ‘promise to pay’ may not have been used.
It is so because the phrase ‘payable on demand’ necessarily implies ‘a promise to pay at once or immediately.’
Illustration:
Where A signs the instrument in the following terms: “I, acknowledge myself to be indebted to B in Rs 1,000, to be paid on demand, for value received,” there is a valid promissory note.8
3. The promise to pay must be unconditional:
Certainty is very necessary in the commercial world. As such a promissory note must contain an unconditional promise to pay. The promise to pay must not depend upon the happening of some uncertain event, i.e., a contingency or the fulfillment of a condition. It must be payable absolutely.
If an instrument contains a conditional promise to pay, it is not a valid promissory note and will not become valid and negotiable even after the happening of the condition (Hill vs. Half or if).
Illustrations:
A signs the instruments in the following terms:
(a) “I promise to pay B Rs 500 seven days after my marriage with C.”10
(b) ‘”I promise to pay B Rs 500 on D’s death, provided D leaves me enough to pay that sum.”
(c) “I promise to pay B Rs 500 as soon as I can.”
The above instruments are not valid promissory notes as the payment is made dependent upon the happening of an uncertain event which may never happen and as a result the sum may never become payable.
But a promise to pay is not conditional if the amount is made payable at a particular place or after a specified time or on the happening of an event which must happen, although the time of its happening may be uncertain (Sec. 5, PARA 2).
Thus, if A signs an instrument stating: “I promise to pay B Rs 500 seven days after C’s death,” the promissory note is valid because it is not considered to be conditional, for it is certain that C will die, though the exact time of his death is uncertain.
4. It must be signed by the maker:
It is imperative that the promissory note should be duly authenticated by the’ signature’ of the maker.’ Signature’ means the writing or otherwise affixing a person’s name or a mark to represent his name, by himself or by his authority with the intention of authenticating a document.
The signature may be in any part of the instrument and need not necessarily be at the bottom. The intention to sign, however, must in all cases be proved. It may be in pencil or in ink. When the maker of a pronote is illiterate, his thumb mark is sufficient.
But facsimile impressions, whether affixed in printing or by perforation or in some other form, and impressions by a rubber stamp are not recognised as signatures unless the parties specifically agree to treat them as such.
5. The maker must be a certain person:
The instrument itself must indicate with certainty who is the person or are the persons engaging him or themselves to pay. In case a person signs in an assumed name, he is liable as a maker because a maker is taken as certain if from his description sufficient indication follows about his identity.
Where there are two or more makers, they may find themselves jointly or jointly and severally. But alternative promisors are not permitted in law because of the general rule that “where liability lies no ambiguity must lie.” Thus a Note in the form “I Alok Kumar promise to pay” and signed by Alok Kumar or also Satish Chandra is a good note as against Alok Kumar only.
6. The payee must be certain:
Like the maker the payee of a pronote must also be certain on the face of the instrument. A note is valid even if the payee is misnamed or indicated by his official designation only (Sec. 5, para 4), provided he can be ascertained by evidence. It may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two, or one or some of several payees [Sec. 13(2)].
Thus alternative payees are permissible in law. But it must be made payable to order originally. A note originally made payable to bearer is illegal and void as per Reserve Bank of India Act, 1934.
Also, a note in favour of fictitious person is illegal and void, for it is treated as payable to bearer. A pronote made payable to the maker himself is a nullity, the reason being the same person is both the promisor and the promisee.
7. The sum payable must be certain:
For a valid promissory note it is also essential that the sum of money promised to be payable must be certain and definite. The amount payable must not be capable of contingent additions or subs tractions.
Illustrations:
A signs instrument in the following terms:
(a) “I promise to pay B Rs 500 and all other sums which shall be due to him.”
(b) “I promise to pay Rs 500, first deducting there out any money which he may owe me.”
(c) “I promise to pay B Rs 500 and all fines according to rules.”
(d) “I promise to pay 5 Rs 100 on or before 15 August, 2004, and a similar sum monthly every succeeding month.”
The above instruments are invalid as promissory notes because the exact amount to be paid by A is not certain.
But, according to Section 5, para 3, the sum does not become indefinite merely because:
(i) There is a promise to pay the amount with interest, provided the rate of interest is stated;
(ii) The amount is to be paid at an indicated rate of exchange or according to the course of exchange; or
(iii) The amount is payable by instalments, even with a provision that on default being made in payment of an installment, the balance unpaid shall become due.
8. The amount payable must be in legal tender money of India:
A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of goods is not a promissory note.
Similarly, a promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note. Thus, an instrument signed by A, saying, “I promise to pay B Rs 500 and to deliver to him my black horse on 1st January next” is not a valid promissory note.
9. Other formalities:
Though it is usual and proper to state in a note the place where it is made and the date on which it is made but their omission will not render the instrument invalid. Even where the amount is made payable at a certain time after date, omission of date does not invalidate the instrument and the date of execution can be independently ascertained or proved.
The words “value received” is also not an essential part of the form of a pronote, because, as per Section 118, consideration is presumed until the contrary is proved. But a promissory note must be properly stamped as required by the Indian Stamp Act and each stamp must also be duly cancelled.
The maker’s signature with the date across the stamp cancels the stamp effectively. Although an unstamped or inadequately stamped promissory note is invalid, but the amount of loan can be recovered if proved otherwise.