Promissory Notes Payable on Demand in Indian Law

Promissory Notes Payable on Demand in Indian Law: A Comprehensive Analysis

Introduction

A promissory note, as defined under Section 4 of the Negotiable Instruments Act, 1881 (hereinafter "NIA, 1881"), is a fundamental instrument in commercial transactions, signifying an unconditional undertaking to pay a certain sum of money.[13] A critical variant of this instrument is the promissory note "payable on demand." Such instruments carry specific legal implications regarding their maturity, the accrual of cause of action, liability for interest, and stamping requirements. This article undertakes a comprehensive analysis of promissory notes payable on demand under Indian law, drawing upon statutory provisions, landmark judicial pronouncements, and relevant legal principles. The discussion will explore the definition and characteristics of these notes, the presumptions attached to them, issues concerning interest, stamping, and procedural aspects in enforcement.

Defining "Payable on Demand": Statutory and Judicial Interpretations

Section 19 of the NIA, 1881, provides that a promissory note or bill of exchange, in which no time for payment is specified, is payable on demand.[9] The expression "on demand" has acquired a technical legal meaning through judicial interpretation. It signifies that the instrument is payable "at once," "forthwith," or "immediately."[6], [15]

In Aiyappankutty v. Mathoo Mathai & Others, the Kerala High Court clarified that "the words 'payable on demand' occurring in a promissory note mean payable 'at once', 'forthwith' or 'immediately' and a promissory note payable on a specified date or after a specified period or within a certain time can hence be considered only as a promissory note payable otherwise than on demand."[6] This principle was reiterated in Sree Visalam Chit Funds Ltd. v. T.V Kumar & 2 Others, where the Madras High Court observed that even the explicit words 'on demand' are not strictly necessary if no time for payment is specified, as Section 19(a) of the NIA, 1881 would render it payable on demand.[9]

The Madras High Court in Muthu Gounder v. Perumavammal further elaborated that the technical meaning of "on demand" is "payable immediately or forthwith," and in such cases, no actual demand is necessary to make the money due under the promissory note exigible.[7] However, the court also noted that if the promise to pay on demand is qualified by a condition, such as being payable only after a certain period, the technical meaning of "on demand" (i.e., immediately payable) might be altered by the specific terms of the instrument.[7] This contrasts with instruments where payment is deferred. For instance, in Alamelu Ammal v. P. Rangai Gounder, a promissory note stipulating payment "within two years" was held not to be payable on demand, as it allowed the debtor a period within which the promisee could not enforce the debt.[16]

The Andhra Pradesh High Court in The State Bank Of Hyderabad v. Ranganath Rathi cautioned that while "on demand" means "payable immediately or forthwith," every document containing a promise to pay on demand is not necessarily a promissory note if other essential characteristics are missing or if, for instance, it is attested and not payable to order or bearer, potentially classifying it as a bond for stamping purposes.[10]

Maturity and Enforceability

A significant characteristic of a promissory note payable on demand is its immediate maturity. The Bombay High Court in Ganpat Tukaram Mali v. Sopana Tukaram Mali, citing English authorities, held that a promissory note payable on demand "matures within the meaning of section 62 as soon as the note is made and delivered to the payee."[8] This means the debt becomes due and payable instantly upon execution and delivery, without the need for a prior demand.[6], [15]

This immediate maturity has implications for the rights of endorsees. In Aluri Venkataratnam v. Alluru Kanakasundara Rao, the Madras High Court opined that "the question of maturity does not arise in the case of a promissory note payable on demand" in the same way it does for time-bound instruments.[18], [21] An endorsee of a promissory note payable on demand who is unaware of any prior discharge or demand can still be a holder in due course. If it were otherwise, "it would be impossible to imagine that there could be any holder in due course in the case of a promissory note payable on demand."[18], [21] This contrasts with the view expressed in Uppalapati Hemadri v. Kodali Seshamma, where it was suggested that Section 35 of the NIA, 1881 (dealing with transfer before maturity) might not apply to promissory notes payable on demand because the concept of "maturity" as a future event is not applicable.[20] However, the prevailing view supports the negotiability and the possibility of a holder in due course for such notes, provided the endorsee acts in good faith and without notice of defects.

Presumptions under Section 118 of the NIA, 1881

Section 118 of the NIA, 1881, establishes several presumptions regarding negotiable instruments, including the presumption of consideration. This presumption is rebuttable. The Supreme Court in Kundan Lal Rallaram v. The Custodian, Evacuee Property Bombay extensively analyzed this provision.[1] The Court held that Section 118 creates a presumption that every negotiable instrument was executed for consideration, shifting the burden of proof to the defendant to establish its absence.[1] This presumption is not absolute and can be rebutted by "compelling evidence to the contrary," including direct evidence, circumstantial evidence, or by showing contradictions and improbabilities in the plaintiff's case.[1] The failure to produce relevant documents, such as account books, can weigh against the party relying on the presumption.[1]

The Andhra Pradesh High Court in G. Vasu v. Syed Yaseen Sifuddin Quadri, referencing Kundan Lal, further clarified the standard of proof for rebutting this presumption.[2] The court held that the defendant could rebut the presumption by establishing the improbability of consideration's existence based on a "preponderance of probabilities."[2] It is not necessary for the defendant to prove the absence of consideration beyond a reasonable doubt. The court can consider the entire evidence on record, including the plaintiff's evidence, to determine if the presumption has been dislodged.[2] These principles are equally applicable to promissory notes payable on demand.

Interest on Promissory Notes Payable on Demand

The question of interest on promissory notes payable on demand, especially when the instrument is silent on the rate or payment of interest, is governed by Section 80 of the NIA, 1881. This section provides that when no rate of interest is specified, interest on the amount due shall be calculated at the rate of eighteen per centum per annum (as amended; previously six per centum) from the date at which the amount ought to have been paid by the party charged until tender or realization.

In Ganpat Tukaram Mali v. Sopana Tukaram Mali, a Full Bench of the Bombay High Court held that Section 80 applies even if no interest is mentioned at all in the instrument.[8] Crucially, for a promissory note payable on demand, the amount is deemed "ought to have been paid" from the date of the instrument itself, as it matures immediately.[8] This view was echoed in Prem Lall Sein v. Radha Bullav Kankra by the Calcutta High Court.[11]

The Orissa High Court in Ghasi Patra v. Brahma Thati, following the Bombay Full Bench and a Patna High Court decision, also concluded that for a promissory note payable on demand which does not provide for interest, interest is chargeable from the date of execution of the note under Section 80 of the NIA, 1881.[22]

Stamping Requirements

Promissory notes are subject to stamp duty under the Indian Stamp Act, 1899. Article 49 of Schedule I to the Stamp Act prescribes the duty for promissory notes. A distinction is made between notes payable on demand and those payable otherwise than on demand. Promissory notes payable on demand, when the amount exceeds Rs. 250 but does not exceed Rs. 1000, attract a fixed duty (e.g., twenty-five naye paise, as per older rates often discussed in case law; current rates should be verified). If it exceeds Rs. 1000, the duty is also fixed (e.g., as discussed in Bharat Nidhi Limited v. Shital Prasad Jain where a note for Rs. 2 lakhs was found sufficiently stamped with revenue stamps appropriate for a demand promissory note exceeding Rs. 1,000).[17]

In contrast, a promissory note payable otherwise than on demand (e.g., after a specified period or "within two years") is subject to ad valorem duty, often the same as a bill of exchange or a bond, depending on the specific terms and tenor.[6], [15], [16] As seen in Aiyappankutty v. Mathai (1955 AIR TC 65), a note for Rs. 1,500 "payable on demand after one year" was construed as payable otherwise than on demand, requiring higher stamp duty as a bond.[15] The court in Alamelu Ammal v. P. Rangai Gounder also held that a note payable "within two years" was not payable on demand and thus required duty as per Article 49(b) of the Stamp Act (i.e., as a note payable otherwise than on demand).[16]

Failure to properly stamp a promissory note renders it inadmissible in evidence under Section 35 of the Stamp Act, and this defect generally cannot be cured by paying a penalty for promissory notes.[15], [16] The distinction between a promissory note and a bond can also be critical for stamping, as highlighted in The State Bank Of Hyderabad v. Ranganath Rathi, which noted that for stamp purposes, documents are considered as they appear on their face.[10]

Form, Intent, and Other Considerations

Unconditional Undertaking and Form

For an instrument to be a promissory note, it must contain an "unconditional undertaking" to pay, as per Section 4 of the NIA, 1881.[14] In A. Rangaswamy v. K. Govindaswamy Naidu And Another, the Madras High Court examined Tamil phrasing to determine if it constituted an unconditional promise to pay.[14] The Punjab & Haryana High Court in Bal Mukand v. Joint Hindu Family Firm Known As Munna Lal Ramji Lal And Others, citing Privy Council decisions, emphasized that "before a document can be treated as a promissory note it should be promissory note both in form and in intent."[13] An acknowledgment of indebtedness coupled with words like "to be paid on demand" (as in illustration (b) to Section 4, NIA) is sufficient, and express words like "I promise" are not strictly necessary.[13]

Place of Payment and Cause of Action

In Chunilal Mayachand v. E.E. Millard, the Bombay High Court dealt with a promissory note payable on demand where the money was "payable either in Poona, Bombay or elsewhere."[19] The court held that in such cases, the option rests with the creditor to demand payment at a place he chooses. When the creditor demanded payment in Bombay, it fixed the place of payment, and part of the cause of action arose in Bombay, granting jurisdiction under Clause 12 of the Letters Patent.[19]

Interaction with Other Laws and Agreements

The enforcement of promissory notes can sometimes interact with other specific statutes or subsequent agreements. For example, in Sha Damji Deraj v. Megraj Bhikumchand And Co., the applicability of summary suit procedure under Order XXXVII of the Civil Procedure Code to a suit on a promissory note was contested due to the provisions of the Bombay Money-lenders Act, 1946.[4] The court granted unconditional leave to defend, considering the mandatory provisions of the Money-lenders Act.[4]

Furthermore, the obligations under a promissory note might be affected by subsequent agreements. The Supreme Court in Lata Construction And Others v. Dr. Rameshchandra Ramniklal Shah And Another discussed the principle of novation under Section 62 of the Indian Contract Act, 1872.[5] If a subsequent agreement does not completely substitute the original contract (e.g., a promissory note), the rights under the original contract may remain operative. In that case, a second agreement stipulating payment in lieu of a flat did not extinguish the original rights because the payment was not made, leading to a continuing cause of action.[5] This principle could be relevant if a promissory note payable on demand is part of a larger transaction that is later sought to be modified.

Procedural flexibility, such as the amendment of pleadings, is a general principle of civil litigation. The Privy Council in Charan Das And Others v. Amir Khan And Others affirmed the judicial discretion to allow amendments even if the initial pleadings were flawed, provided it serves substantive justice, a principle that could apply in suits involving promissory notes where procedural issues arise.[3]

Conclusion

Promissory notes payable on demand are vital instruments in the Indian financial landscape, characterized by their immediate maturity and enforceability. Indian law, through the Negotiable Instruments Act, 1881, the Indian Stamp Act, 1899, and a rich body of case law, provides a detailed framework governing their creation, interpretation, and enforcement. Key aspects include the understanding that "payable on demand" means immediately payable without prior actual demand, the immediate accrual of liability for principal and, where applicable under Section 80 NIA, interest from the date of execution. The presumptions under Section 118 NIA aid the holder, though they are rebuttable by the defendant on a preponderance of probabilities. Correct stamping is crucial for admissibility in evidence. The nuanced interpretations provided by various High Courts and the Supreme Court underscore the importance of precise drafting and a thorough understanding of the legal implications associated with these instruments to ensure their efficacy and smooth enforcement in commercial dealings.

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