Promissory Note

Essential Ingredients (Section 4):

(1) It must be in writing – A mere verbal promise to pay is not a

promissory note – The method of writing (either in ink or pencil or
printing, etc.) or language is unimportant, but it must be in any form
that cannot be altered easily.

(2) Signed by the maker – form or place not important – signature by

agent

(3) It must contain an unconditional and definite promise to pay a

certain sum, and nothing more – Express undertaking to pay and not
a mere acknowledgment – Further, the promise to pay must not
depend upon the happening of some outside contingency or event. It
must be payable absolutely.

3.1 The promise should be to pay money and money only.

3.2 The amount should be certain (Explanation – Para. 3 to
Section 5).

(4) The maker (debtor) must be certain.

(5) It must be payable either on demand or after the efflux of a fixed

or determinable time in future, as for example „after 6 months‟.

(6) The payee (creditor) must be certain - ascertained by name or by

designation or by evidence – It must be payable to, or to the order
of a specified person named in the note or to the bearer of the note.

(7) Most importantly, an instrument to be regarded as a promissory note

must show a prima facie intention to make such a note and

(8) It must be delivered.

Examples:

a) Mr. X, I.O.U. (I owe you) Rs. 500.

b) I am liable to pay you Rs. 500.
c) I acknowledge myself to be indebted to Mr. Y in Rs. 1000 to be paid on
demand, for the value received.
d) I have taken from you Rs. 100, whenever you ask for it have to pay.

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Specimen – Promissory Note for a Loan

Rs.5000 Bangalore, April 26th, 2015

In consideration of the loan amount of Rs. 10,000 advanced by Mr. XYZ to

me, I promise to repay the said loan of Rs. Ten Thousand with interest at 8
1/2 % annum to Mr. XYZ or order.

Signed

Mr. ABC son of Mr. EFG

resident of _______,

Trichy.

Exceptions (Section 4):

Bank Notes and Currency Notes

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 Bill of Exchange (BoE)

A. Definition (Section 5)

“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.”

B. Essential Ingredients:

(1) It must be in writing.

(2) It must be signed by the drawer.

(3) The drawer, drawee and payee must be certain.

(4) It must contain an express order to pay.

Ruff vs. Webb, (1974) 5 RR 773

“Mr. Nelson will much oblige Mr. Webb by paying to J.Ruff or order,
twenty guineas on his account.”

Little vs. Slackford, (1882) 31 RR 726

“Mr. Little, Please to let the bearer have seven pounds, and to place
them to my account, and you will oblige. Yours humble servant, R. Stackford.”

(5) Payment must be money and money alone.

(6) The sum payable must also be certain.

Smith vs. Nightingale, (1818) 20 RR 694

“I promise to pay to JE ... the sum of £65 with lawful interest for the
same, three months after the date, and also all other sums which may be due
to him.”

(7) The order must be unconditional.

Carlos vs. Fancourt, (1794) 5 TR 482

The payment must be made under all circumstances and it should not
be dependent on any contingency.

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 (8) Time of payment:

The BOE must indicate clearly the time of payment. Thus in

Williamson vs. Rider, (1962) 2 All ER 268 (CA) a promise to pay „on or
before‟ December 31, 1956 was held not to be a promissory note payable at
a fixed or determinable future time within the requirement of section 11 of
the Bills of Exchange Act because the option to pay at an earlier date creates
an uncertainty or contingency in the time of payment.

(9) It should be properly stamped:

Bank of Bengal vs. Radhakissen, 3 M.I.A. 19

“An instrument which is bad as a bill, note or cheque by reason of the

inclusion thereon of a condition or any other stipulation may be used as
evidence of an agreement, if properly stamped”.

C. Examples:

a) I shall be highly obliged, if you make it convenient to pay Rs. 1000 to

Mr. ABC.
b) Mr. XYZ, please let the bearer have one thousand rupees, and place it
to my account and oblige.
c) Please pay Rs. 500 to the order of „A‟.
d) Mr. A will oblige Mr. C, by paying to the order of‟ P.

D. Differences between Bill of Exchange and Promissory Note

I. Number of Parties:

In a promissory note, there are only two parties – the maker

(debtor) and the payee (creditor). In a bill of exchange, there are three
parties; drawer, drawee and payee.

II. Payment to the Maker:

A promissory note cannot be made payable the maker himself,

while it is possible in BoE, i.e., the drawer and the payee, may be one and
the same person.

III. Unconditional Promise or Unconditional Order

A promissory note contains an unconditional promise by the maker

to pay to the payee or his order, whereas in a bill of exchange, there is an
unconditional order to the drawee to pay according to the direction of the
drawer.

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IV. Prior Acceptance Before Payment:

A note is presented for payment without any prior acceptance by the

maker. A bill of exchange is payable after sight must be accepted by the
drawee or someone else on his behalf, before it can be presented for
payment.

V. Relation:

The maker of the promissory note stands in immediate relation with

the payee, while the maker or drawer of an accepted bill stands in
immediate relations with the acceptor and not the payee.

VI. Protest for Dishonour:

Bill of exchange must be protested for dishonour when such protest is

required to be made by the law of the country where they are drawn, but no
such protest is needed in the case of a promissory note.

E. Specimen

I. BOE payable after date (with interest)

Trichy Jan 19, 1991

Rs................

............. days (months) after date pay to XY, etc., or order (or, pay to XY,
etc., or bearer) (or, pay to my order) (or, pay to bearer) the sum of Rs ...........
(in words), with interest at .... percent per annum.

To CD, etc AB (drawer)

(drawee)

II. BOE where drawer & drawee is the same person

Trichy

May 19, 1991

Pay self (or, to my order) the sum of Rs......... (in words) only.

To

(Sd.) AB

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Summary

A bill of exchange, therefore, is a written acknowledgement of the

debt, written by the creditor and accepted by the debtor. There are usually
three parties to a bill of exchange drawer, acceptor or drawee and payee.
Drawer himself may be the payee.

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 Holder

A. Holder (Section 8)

 legally entitled to the possession of the NI

 in his own name and

 to receive the amount thereof.

B. Who can be a Holder?

The first holder of an instrument is the ‘payee’ of that instrument

and he is obviously entitled to be in possession of it. Such payee has two
options:

1. he can himself present it to the drawee or maker for payment; or

2. he can transfer the instrument to a third person in satisfaction of
his own debt. Such a transfer can be done in two ways:

(i) Payable to Bearer: simple delivery in case the instrument is

payable to the bearer; or
(ii) Payable to Order: endorsement and delivery.

If the NI is lost or destroyed, its holder is the person so entitled at

the time of such loss or destruction.

C. What happens after transfer? (Section 14)

When the payee transfers the instrument, he is said to have

„negotiated‟ and the person to whom the instrument is delivered becomes
the holder of it. As per Section 14, “when an instrument is transferred to
any person so as to constitute that person the holder thereof, the
instrument is said to be negotiated.”

D. Comparison with English Law

Section 2 of the English Bills of Exchange Act provides that, “holder

means the payee or endorsee of a bill or note, who is in possession of
it or the bearer thereof.” The Indian definition is similar to this definition,
except for the use of the phrase “entitled in his own name”.

Sarjio Prasad vs. Rampayari Devi, AIR 1950 Pat 493 – Importance
of the term „entitled in his own name‟ – benamidar is not a holder.

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 E. Rights of a Holder

i) To present the note or bill for payment;

ii) To negotiate the bill by delivery or endorsement, unless his right

to do so is restricted;

iii) To claim compensation from the drawer, in case the bill or note is
dishonoured by non-acceptance;

iv) To sue either the drawer or the drawee or both in case the bill is
dishonoured by non-payment after the drawee‟s acceptance of it.

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 Holder in Due Course

A. Definition (Section 9)

(i) Any person for valuable consideration,

(ii) becomes the possessor of a negotiable instrument payable to bearer

or the endorsee or payee thereof,

(iii) before the amount mentioned in the document becomes payable, and

(iv) without having sufficient cause to believe that any defect existed in
the title of the person from whom he derives his title.

B. Essential Ingredients

1. Consideration

Every NI consists of a contract between the parties and should

therefore be supported by real and valuable consideration (as defined under
Section 2(d) of the Indian Contract Act).

A person in possession of a bill or note without having given any

consideration for it cannot enforce it, unless the lack of consideration falls
under the exceptions given under Section 25 of Contract Act.

a) Consideration is always presumed to have been given, unless proved

otherwise [Talbot vs. Van Boris, (1911) 1 KB 854].

b) It is immaterial in case of NI‟s to ascertain as to where or from whom

the consideration has moved – what is essential is that there should
be a consideration.

c) Past consideration is treated as good consideration [J.M.S. Punto vs.

A.C. Rodrigues, AIR 1976 Goa 8].

d) Once the holder acquires the instrument for good consideration the
liable party will not be allowed to plead any defect and want of
consideration at any earlier stage.

2. Before Maturity

It is essential that the holder must have acquired the instrument

before its maturity date before he can be treated as holder in due course.

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Dawn vs. Halling, (1825) KB 107 ER 1082

“If a bill or a note or cheque be taken after it is due, the person taking it,
takes at his own peril. He can have no better title to it than the party from
whom he takes it, and, therefore, cannot recover upon it, if it turns out that it
has been previously lost or stolen.”

Section 59 of our Act embodies this principle in the following words,

“the holder of a negotiable instrument, who has acquired it after dishonour,
whether by non-acceptance or non-payment, with notice thereof, or after
maturity, has only, as against the other parties, the right thereon of his
transferor.”

3. Complete and Regular

An NI should be complete and regular in all respects, i.e. it should not

contain any patent (easily visible or identifiable) defects. An instrument may
be incomplete because the drawer‟s name is not there or it is not dated and
stamped etc. Similarly an improper endorsement can render the whole
instrument irregular [Arab Bank Ltd vs. Ross, (1952) 2 QB 216], but a
mere spelling mistake in the endorsee's name will not affect the endorsee
and the bill remains valid [Leonard vs. Wilson, [1834] 39 RR 855].

4. Good Faith

i. whether he/she had acted honestly ? and

ii. whether he/she had acted as a reasonable and careful or prudent
man would have acted in a similar situation?

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 DRT ACT – SUMMARY

A. Relevant Legislations

 Recovery of Debts Due to Banks and Financial Institutions Act, 1993 &
 Debts Recovery Tribunal (Procedure) Rules, 1993.

B. Need for DRT’s

Recovery of the dues of loans from the borrowers through Courts was
a major issue for the Banks and Financial Institutions due to

 huge back log of cases and

 the indefinite time involved.

C. Preamble and Objectives

“An Act to provide for the establishment of Tribunals for expeditious

adjudication and recovery of debts due to banks and financial institution and
for matters connected therewith or incidental thereto.”

 Special „Debt Recovery Tribunals‟ for speedy recovery.

 Applicable to the whole of India except the State of Jammu &
Kashmir.
 The Act came into operation from 24th June, 1993.
 Based on various Recommendations of the Committee on the Financial
System – M. Narasimham Committee and T. Tiwari Committee.

D. Outline

Chapter I – Preliminary (Sections 1 – 2)

Chapter II – Establishment of Tribunal and Appellate Tribunal

(Sections 3 – 16)

Chapter III – Jurisdiction, Powers and Authority of Tribunals

(Sections 17 – 18)

Chapter IV – Procedure of Tribunals (Sections 19 – 24)

Chapter V – Recovery of Debt Determined by Tribunal (Sections 25 – 30)

Chapter VI – Miscellaneous (Sections 31 – 37)

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 E. Constitutional Validity

The legality and constitutional validity of DRT Act as a whole and the
Central Government‟s power to constitute DRT and DRAT, tribunals other
than tribunals constituted under Articles 323A and 323B of the
Constitution have been upheld in Delhi High Court Bar Association vs.
Union of India, AIR 1995 Delhi 323

Similarly, the constitutional validity of the SARFAESI Act except then

Section 17(2) has been upheld by the Supreme Court in Mardia Chemicals
Ltd. vs. Union of India, SC 8th April 2004

F. Who can file cases before the DRTs?

Where a Bank or Financial Institution or a Consortium of them

has to recover any debt from any person, it makes an application called
Original Application (OA) to the Tribunal against such person.

G. Pecuniary Jurisdiction of the DRT’s – Section 1(4)

The provisions of the Act shall not apply where the amount of debt
due to bank or financial institution or to a consortium of banks or financial
institutions is

 less than 10 lakhs rupees or

 such other amount, being not less than 1 lakh rupees, as the Central
Government may, by notification, specify.

State Bank of Patiala vs. Mukesh Jain, SC 8th November 2016

Under Section 17 of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act), a DRT is entitled to entertain a matter even
if the debt involved less than Rs. Ten Lakhs (Rs. 10,00,000).

H. Section 2(g) – Definition of ‘Debt’ – Judicial Interpretation

The term „debt‟ covers the following types of debts of the banks and
financial institutions:

 “any liability inclusive of interest, whether secured or unsecured,

 any liability payable under a decree or order of any Civil Court or any
arbitration award or otherwise or
 any liability payable under a mortgage and subsisting on and legally
recoverable on the date of application.”

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(a) United Bank of India vs. DRT (1999) 4 SCC 69

If the bank had alleged in the suit that the amounts were due to it
from Respondents as the liability of the Respondents had arisen during
the course of their business activity and the same was still subsisting,
it is sufficient to bring such amount within the scope of definition of debt
under the DRT Act and is recoverable under that Act.

(b) G.V. Films vs. UTI (2000) 100 Compo Cases 257 (Mad) (HC)

It was held that payment made by the bank by mistake is a debt.

(c) Bank of India vs. Vijay Ramniklal, AIR 1997 Guj.75

If an employee commits fraud and misappropriation of money, the

amount recoverable from him is not a debt within the meaning of DRT Act.

(d) Rajshree Sugar & Chemicals vs. Axis Bank, Madras High Court

The DRT has the power to decide whether a particular claim made by
a bank is a “debt” or not within the meaning of the Act.

I. Section 2(d) – Definition of ‘Bank’ – Judicial Interpretation

(i) A banking company;

(ii) A corresponding new bank;
(iii) State Bank of India;
(iv) A subsidiary bank; or
(v) A Regional Rural Bank;

Phoneix Impex vs. State of Rajasthan AIR Raj. 100 (DB)

A co-operative bank does not fall within the definition of “bank” in

Clause (d) of Section 2.

J. Sections 17 and 18 – Jurisdiction

“A Tribunal shall exercise, on and from the appointed day, the

jurisdiction, powers and authority to entertain and decide applications from
the banks and financial institutions for recovery of debts due to such banks
and financial institutions.”

“On and from the appointed day, no Court or other authority shall have,
or be entitled to exercise, any jurisdiction, powers or authority (except the
Supreme Court, and High Court exercising jurisdiction under Articles 226 and
227 of the Constitution) in relation to the matters specified in Section 17.”

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 K. DRT vs. Civil Courts

S.B. Sinha and A.K. Ganguly Judgement dated August 3, 2009

The Supreme Court has held that DRT cannot be construed as a Civil
Court. Therefore, the Supreme Court or the High Court has no power to
transfer a suit pending in a Civil Court situated in one State to a DRT in
another State.

“No independent proceedings can be initiated before it by a debtor. A

debtor, under the common law of contract, as also in terms of the loan
agreement, may have an independent right. No forum has been created for
endorsement of that right. The civil court will continue to have jurisdiction.”

L. DRT Proceedings – An Analysis

Stage I – Before the Registrar

 Step 1: Filing the application

 Step 2: Scrutiny and Registration by the Registrar
 Step 3: Issue of summons

Stage II – Before the Presiding Officer

 Step 1: Filing of evidence by bank.

 Step 2: Filing of written statement/claims/counterclaims for set off by
the respondent
 Step 3: Arguments by the bank and the defendant, Final order by the
DRT

Stage III – Status & Jurisdiction of Recovery Officer

M. Modes of Recovery of Debts

(a) attachment and sale of the movable or immovable property of the

defendant;

(b) arrest of the defendant and his detention in prison;

(c) appointing a receiver for the management of the movable or immovable

properties of the defendant.

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