Understanding Promissory Notes & Bill of Exchange: Definitions, Essentials, & Differences, Exercises of Banking and Finance

Download Understanding Promissory Notes & Bill of Exchange: Definitions, Essentials, & Differences and more Exercises Banking and Finance in PDF only on Docsity! LESSON 26 NEGOTIABLE INSTRUMENTS Promissory Note: We have already gone through the definition of promissory note and also had a view of a specimen of a promissory note; we shall continue to explore the other aspects of promissory note. The notes which do not qualify to be called Promissory note: We are discussing below some of the notes which do not qualify to be called promissory note in the light of definition contained in section 4: Thirty days after date, I promise to pay Mr. Ahmad Kamal or order the sum of rupees one hundred thousand only and the amounts which may be due to Ahmed Kamal by due date. --This is not the promissory note since the amount promised is not certain and ascertainable on the date of making the promise/ undertaking. The notes given below do not qualify to be called promissory note in the light of definition contained in section 4 I owe Rs 100,000 to MR. Ahmad Kamal --This is not a promissory note since it is just an acknowledgement not an undertaking I promise to pay Rs 100,000 to Mr. Ahmad Kamal thirty days after getting admission in a University. --This is not a promissory note since the time of payment is not certain/ ascertainable at the time of making the promise. The section 4 of the Act recognizes three kinds of promissory notes:- A promise to pay a certain sum of money to a person. A promise to pay a certain sum of money to the order of a certain person. This is nevertheless payable to the person named or his order. A promise to pay the bearer. The main question in deciding whether a document is a promissory note is to consider not whether it is negotiable or not but to consider whether in substance and primary intention it was a note and whether it contains the necessary recitals and is not intended to record a different kind of transaction altogether. The question whether the words in documents amount to mere acknowledgement or to a promise has to be decided on the intention as mentioned above and the real characteristics of the document. Mere reference to account in the promissory note does not make it any the less a promissory note. When the requirements of the section are satisfied, a promissory note is not the less a note because it contains a recital that the maker has deposited title deeds with the payee; or because it is attested by witnesses, or because it refers to an agreement which does not, however, qualify the note, or because the words “security for overdraft” are found printed upon it or because it contains a promises to pay at certain place. Parties to the Promissory Note As we already know that there are following parties in a promissory note Maker & Payee docsity.com Essentials of a Promissory Note: A promissory note must fulfill the following requirements: It should be in writing There must be promise/ undertaking to pay The promise/undertaking should be unconditional It should be signed by maker Maker must be a certain person Payee must also be a certain person The amount to be paid must be certain Legal tender money is to be paid under a promissory note Time of payment to be ascertainable It should be properly stamped under stamp Act. Promise to pay must be for lawful consideration Promissory note must maintain the date of issue and place of issue. Explanation: Sum to pay must be only money and certain: It is also necessary that the medium of payment must be money only that is specie or other legal currency, and not bonds, bills, notes or any article other than money. But it is not necessary that the money to be paid must be that current in the place of payment, or where the bill is drawn, it may be in the money form of any country whatever. The amount promised to be paid must be certain and incapable of being varied by indefinite editions or deductions. If the amount is not capable of being ascertained of the face of the instrument, that instrument will not be a promissory note. “To or to the order of certain person” An instrument that does not own it face indicate to whom the money is payable is not a promissory note. But where it is clear from the instrument itself who the payee is, it in not necessary that the name of the payee must appear in that part of the note which expresses a promise to pay. Therefore a promissory note made in favor of a person described by his office is one made in favor of certain person and is valid. A promissory note payable to manage of a bank is payable to a certain person. But where the payee is described only as “you” the instrument is not a promissory note. Signature: The Act contains no definition of the term “ signature” it includes the mark made by a person who is unable to write his name such signature need not be al the foot or at any particular part of the document. Where the intention of the parties is clear, the position of a signature on a bill is immaterial; if the maker writes his name to a bill or note on any part of it so as to authenticate it and to give effect to the contract by him thereon. It will be sufficient. A signature to a bill may be in pencil; it may be lithographed, and even printed; in which case however, it must be shown to have been adopted and used by the party as his signature, or again, the affixing of the facsimile of a name ( e.g. by rubber stamp) is good as signature. Plaintiff had established his case on the basis of evidence both documentary as well as oral and the Trial Court decreed the suit against the defendant. Contents of the document would bring the document within the definition of promissory note. Heading given to such document was not legally relevant. Document forming basis of the decree against the defendant was in fact a promissory note as defined in section 4 of negotiable instruments Act, 1881, even though the same was described as a pronote. docsity.com The order must direct to pay or demand or at a fixed or determinable future time. The sum ordered to be paid must be certain. The payment should be ordered to be paid to a certain person, or to his order, or to the bearer. Order should be unconditional: The drawer’s order to the drawee must be unconditional and should not make the payment of the bill dependent on a contingency. Where an instrument is expressed to be payable on a contingency, it does not cease to be invalid by the happening of the event before the expiry of the period fixed for the performance of the obligation, for the instrument must be valid ab initio, and carry its validity on its face. Drafts: A banker’s draft is a bill drawn either on demand or otherwise by one bank on another in favor of third party, or by one branch of a bank on another branch of the same bank, or by the head office on a branch, or vice versa. It is a bill of exchange and therefore a negotiable instrument. The issue of a draft is regarded in banking practice as a matter of purchase and ordinarily the relationship between the holder of a demand draft and the bank issuing it is that of debtor and creditor. Future interest, etc: If the sum payable includes future interest, or is payable at an indicated rate of exchange, or is according to course of exchange, the sum payable shall be considered to be “certain” although the instrument may provide that on default of payment of an installment the whole of unpaid balance shall become due. Certain person: Although a certain person is misnamed or designated by description only, yet the person shall be “certain” if it is clear as to who is the person to whom direction is given or payment is to be made. Instrument must contain an order to pay money and money only: In order that an instrument may amount to a promissory note, it is essential that the medium of payment must be money only. It should not consist in any article of food or any animal or in any bonds, simply or coupled with money in specie. If after issuing a cheque the drawer keeps quiet and takes no steps to inform the bank in time i.e. before the cheque is encased that the cheque should not be according to section 10 of the Negotiable Instruments Act, means payment in accordance with the apparent tenor of the instrument in good faith, the liability for the drawn cheque shall absolutely and squarely fall on the drawer. Difference between promissory note and bill of exchange: In a promissory note the executants promises him to pay while in a bill of exchange he directs another to pay. In a bill of exchange the person liable is responsible to executants and not scribe In a promissory note the maker is the principal debtor. In the case of bill of exchange the drawer is surety. A bill of exchange can be accepted conditionally while a promissory note cannot be so made. A pronote cannot be made payable to the maker himself. In a bill of exchange this is possible and one person may become both drawer and payee or both drawee and payee. In promissory notes there are two parties—the promisor and the promisee (the maker and the payee). In the case of bills of exchange there are three parties—the drawer (who makes the order), the drawee, the bill is drawn). The most important distinction is that in the case of a promissory note the maker unconditionally undertakes to pay the amount mentioned in the pronote while in the case of a bill of exchange the maker gives an unconditional order directing another person to pay. docsity.com If Interest on a promissory note is subsequently increased by agreement of the parties. The guarantors of the promissory note are not discharged if the suit is brought on the original promissory note. docsity.com