This article is written by Ashutosh Singh, a student at Amity law school, Kolkata. The article explains the salient features of three negotiable instruments, promissory note, a bill of exchange and cheque, highlighting the differences between them.
It has been published by Rachit Garg.
Table of Contents
Introduction
Paper money, in the modern sense, originated in the late 18th century and the note was issued by private banks as well as semi-government banks. Other payment instruments in the Indian money market were introduced by the private banks and the Presidency Banks. Cheques were introduced for the first time in India by the Bank of Hindoostan, in 1770. In 1827, the British introduced “post bills” that were Inland “promissory notes” issued by the bank at a distant place. The holder of the post bill would be paid on acceptance after a specified number of days and was similar to muddati hundis already existing in India. To formalise the use and standardise the characteristics of instruments like the cheque, the bill of exchange and promissory note, the Negotiable Instruments Act (NI Act) was enacted in 1881.
Negotiable instruments
Negotiable instrument is a piece of paper that entitles a person to a certain sum of money, transferable from one person to another by mere delivery or by endorsement and delivery. The person on transfer of the negotiable instrument also becomes entitled to the money and the right to further transfer it. Negotiable instruments are documents that are exchangeable and have a monetary value which is two of their main characteristics. The negotiable instruments and all their aspects are governed by the Negotiable Instruments Act, 1881 in India. This Act defines these instruments and has provisions for each type of them individually. Negotiable instruments must contain important information such as the date, the signature of the payer, the principal amount and also the interest rate.
Promissory note
A promissory note is basically an informal loan or the document of an informal loan. It is an instrument given in writing with an unrestricted guarantee to pay a certain amount of money to a certain individual or to the bearer of the instrument and signed by the maker of it. It thereby creates a debt on the maker of the promissory note.
According to Section 4 of the Negotiable Instruments Act, 1881 a note is an instrument in writing but not being a bank or a currency note that contains an unconditional undertaking, signed by the maker to pay a certain amount of cash, or to the order of, to a particular person or the bearer of the instrument. The limitation period for a promissory note to file a suit is three years from the date of execution or from the date of acknowledgement.
Example: Sometimes we take or give loans to our friends, relatives and known people. But in the case of failed payment, there are chances of getting a dispute in the relations, so in such a situation a promissory note that is a proper legal financial instrument can be used to recover the amount from the defaulter. Ajay wants to purchase some goods from Ashok and has an immediate requirement for them, but he has no money to pay Ashok for the goods instantly. So, in such a situation, he can issue a promissory note to Ashok that makes a written promise that he will pay the specific money on a particular date or on the demand to Ashok.
Parties to a promissory note
There are mainly three parties in the promissory note, that are a drawee, a payee, and a drawer:
- Drawer: An individual who makes the written promise to pay the amount on a certain date or on the demand by the drawee is called the drawer. The drawer is also known as, the maker, or promisor,
- Drawee: The person to whom the promise has been made, or the person in whose favour the promissory note is drawn is called drawee or promise.
- Payee: A payee is a third party to whom the payment is made. The payee and drawee are the same people to whom the amount is paid.
Features of a promissory note
- Written or printed agreement: A promissory note should always be written and cannot be an oral promise to pay money.
- Pay defined amount: It’s a promise to pay the money on a particular date or when demanded by the drawee. However, the amount mentioned can neither be subtracted nor added.
- Detailed Information: A promissory note must have all the specified information such as the name of the drawer, drawee and payee, date of maturity, terms of repayment, issue date, name, and signature of the drawer, the principal amount, and the rate of interest.
- Unconditional promise: The promise to pay the drawee the amount of money mentioned in the promissory note must be unconditional because a conditional instrument will not be negotiable even after the fulfilment of the condition.
- Duly signed and delivered by the maker: A promissory note is incomplete without the signature of the drawer and it is required to authenticate and give effect to the contract contained in the document. The promissory note can be signed in any part of the document. In case the maker cannot write their name, it may have their thumb impression also.
- Stamp duty for promissory note: A promissory note must be stamped with revenue stamps available from the post office. In case of a promissory note made for a large sum of money, a non-judicial stamp paper should be used. It is important for all promissory notes to be stamped with the proper revenue stamp or non-judicial stamp paper as per Section 13 of the Indian Stamp Act, 1899, a promissory note that is not properly stamped or insufficiently stamped is considered an invalid document and not admissible in Court.
Format of a promissory note
Promissory NoteAmount: _______________ Date of making_________Place: _______________ I (name of drawer), hereby acknowledge and make a commitment to pay (name of drawee), the sum of (mention the amount in rupees). Repayment is to be made in the form of (mention the payment schedule) at the interest rate of (mention interest rate of the amount payable), making the total amount due as (mention the final amount which is to be repaid after the interest is applied) on (mention date of each month when payment is to made or one-time payment date) until the total amount of debt is paid. Notwithstanding any contrary statements contained in this promissory note, if the drawer defaults on payment of this promissory note or any other obligations set forth herein, and the default continues after the drawee notifies the drawer of the default and the period within which it must be corrected, as may be required by law, then this drawee may declare the unpaid principal balance, and any accrued interest, immediately due and payable IN WITNESS WHEREOF, I set my hand under seal this __________(the date and day) of (month and year) and I acknowledge receipt of a completed copy of the instrument. _______________ Signature of the drawer Stamp ______________________________ Name and Address of the drawer |
Bill of Exchange
A ‘bill of exchange’ is one of the most common types of negotiable instruments and a type of written order/notice used for international trade that binds one party to pay another party a definite amount of money on demand or at a pre-decided date. It is mostly used in international trade to help importers and exporters fulfil their transactions. A bill of exchange however is different from a contract but can be used by the parties involved to specify the terms and conditions of a transaction. Although bills of exchange are similar to the promissory note, many differences exist between them. The definition of a bill of exchange is given in Section 5 of the Negotiable Instruments Act, 1881 as a negotiable instrument that is in writing and holds an unconditional order by the bill’s maker to pay a certain amount of money either to a specific person or its bearer. Bill of exchange is also defined in Section 2(2) of the Indian Stamps Act, 1899 and the bill of exchange payable on demand has been explained in Section 2(3) of the Indian Stamps Act, 1899.
Example: Ajay sold goods to Ashok on credit for Rs. 50,000 for six months. To ensure the return of his payment on the due date Ajay draws a bill of exchange upon Ashok for Rs. 50,000 payable after six months. Before it is accepted by Ashok the document will be called a draft. It will become a bill of exchange only after Ashok writes the word “accepted” and appends the draft with his signature to communicate his acceptance.
Parties to a bill of exchange
- Drawer: This person is the maker of a bill of exchange, who is a seller/creditor and who is authorised to receive money from the debtor.
- Drawee: In contrast to the drawer, the drawee is the person, who is a purchaser or debtor who has been directed to pay the sum of money mentioned in bill
- Payee: Either the drawee or a person who will be receiving the money is called the payee. The drawer of the bill becomes the payee if he/she keeps the bill with him/her till the date of its payment.
- Acceptor: This is the person who signs the bill of exchange as a mark of his acceptance and generally, the acceptor is the drawee but a stranger may accept it too.
- Holder: Payee of the bill of exchange is generally the holder. It may also be another person to whom the payer endorses the bill. In the case of the bearer of the bill, the bearer himself is the holder.
- Endorser: A bill holder becomes an endorser when he endorses the bill to another person.
- Endorsee: This is the person to whom a bill of exchange has been endorsed by the endorser.
Features of a bill of exchange
- Written or printed agreement: To be a valid bill of exchange it must be in writing. An oral direction to make the payment cannot be considered a bill. The language of the bill has no bar but the document so reduced to writing must adhere to all the conditions laid down in Section 5 of the Negotiable Instruments Act, 1881.
- Unconditional order to pay: The order to pay must be without any condition whatsoever except under certain circumstances. However, the direction of the drawer to the drawee must be unconditional. The acceptor or the endorser may make his own liability conditional in a bill. When a negotiable instrument becomes bad as a bill it may still be used by the drawee as an authority to make payment to the payee. If properly stamped, even a bad bill can be used as evidence of an agreement between the parties. So, a bill of exchange needs to have an order to pay and the order should be express and unconditional.
- Detailed information: All the entities, payee, drawer and drawee must be definite individuals. Although the drawer and the drawee cannot be the same person the drawer and payee, generally are the same person as the drawer usually draws the bill in his or her favour. Names of the drawer, the drawee and the payee must be definitely mentioned in the bill. The fixed date for the amount to be paid and the date of payment are some other essentials of the bill.
- The drawer must be certain and sign the instrument: The bill is considered complete only after it is signed by the maker. Without his/her signature, it remains incomplete. The amount of money must be certain.
Format of a bill of exchange
Bill of Exchange Stamp Name and address of drawer Date on which the bill is drawn: Amount One month after the date pay to (name and address of payee) or order, the sum of (mention the amount) for value received. Accepted (Signed by the drawer) Signed by the drawee Name and address of drawer Name and address of drawee |
Cheque
A cheque is a negotiable instrument under Section 6 of the Negotiable Instruments Act, 1881. By a cheque one individual/party orders the bank to transfer the money to the bank account of another individual/party in whose name the cheque has been issued. A cheque ensures safe, secure, and stress-free payment because it is a convenient option as there is no involvement of hard cash during the transfer process. In other words, a cheque is a bill of exchange drawn on a bank payable always on demand and the bank is always the drawee in the case of a cheque. It is generally written in a specially printed form. According to Section 6 of the Negotiable Instruments Act, 1881, a cheque is a bill of exchange drawn on a specified banker payable only on demand. In the case of cheques, the drawer and payee may be the same person.
Parties to a cheque
- Drawer: It is the person who draws/writes the cheque, signs it and orders the bank to pay the amount to someone.
- Drawee: It is the banker of the drawer or the bank on which the cheque is drawn or who is directed to pay/transfer the specified sum written on the cheque to somebody.
- Payee: Payee is the beneficiary/person to whom the amount written in the cheque is issued or to whom the amount is to be paid. The payee could draw himself or any other person.
- Endorser: When the payee transfers his/her right to take the payment to another person, he/she is called the endorser.
- Endorsee: The person in whose favour, the right is transferred is called the endorsee.
Features of a cheque
- Written order: A cheque, just like a bill of exchange and the promissory note has to be written and an oral order to pay does not institute a cheque.
- Drawn on a banker: A cheque has to be drawn on a bank where the drawer has an account, be it a savings bank account or a current account.
- Unconditional: A cheque is not a request but an order to pay and it must be unconditional. The order should be to pay a definite amount of money and if the cheque is drawn to do something other than pay money then it cannot be a cheque.
- Signature and date: A cheque without the date and signature of the issuer is invalid.
- Payable to the drawer: Cheques may be payable to the drawer and maybe drawn also payable to the bearer on demand unlike a bill or a promissory note.
- Specific banker only: A cheque is drawn always by a specific banker and these days the name, address of the banker and the bank’s IFS (Indian Financial System) code are printed on the cheque leaf itself.
- Stamp: Unlike a bill of exchange and promissory note, no revenue stamp is required to be affixed on cheques.
Difference between a cheque and bill of exchange
| Aspect | Cheque | Bill of exchange |
| Meaning | By a cheque one individual/party orders the bank to transfer the money to the bank account of another individual/party in whose name the cheque has been issued. | A negotiable instrument is in writing and holds an unconditional order by the bill’s maker to pay a certain amount of money either to a specific person or its bearer. |
| Provision | A cheque is a negotiable instrument under Section 6 of the Negotiable Instruments Act, 1881. | The definition of a bill of exchange is given in Section 5 of the Negotiable Instruments Act, 1881. Bill of exchange is also defined in Section 2(2) of the Indian Stamps Act, 1899 and the bill of exchange payable on demand has been explained in Section 2(3) of the Indian Stamps Act, 1899. |
| Drawn on | A cheque is always drawn on a particular banker. | A bill of exchange can be drawn on anyone, including a banker. It is generally drawn by the creditor upon his debtor. |
| When can it be drawn | A cheque can only be drawn payable on demand. | A bill of exchange may be drawn payable on demand, or the expiry of a certain period after date or sight. |
| Notice of Dishonour | For a cheque, a notice of dishonour is not compulsory. | For a bill of exchange, a notice of dishonour is mandatory and it should be served to all the concerned parties involved in the transaction on dishonouring the bill of exchange. |
| Copies | The cheque allows no copies. | Bill of exchange can have copies. |
| Approval | A cheque does not need any approval from the parties before being presented for payment. | A bill of exchange needs approval from the drawee for the payment. |
| Grace period | A cheque does not have a grace period once it is presented for its payment. | A bill of exchange, however, has a three days grace period. |
| Liability | Parties remain liable to pay and in case notice of dishonour is not given. | As regards a bill of exchange, the parties who don’t get notice of dishonour are free from the liability of paying and the liability of the drawer is secondary and conditional. |
| Discharge | The drawer of a cheque is discharged only if he suffers any damage by delay in presentation for payment. | The drawer of a bill of exchange is discharged, if it is not presented for payment. |
| Acceptance | A cheque does not require acceptance and its object is for immediate payment | A bill of exchange must be accepted first before payment can be demanded on it. |
| Revocability | A cheque being a revocable mandate, the authority can be revoked by countermanding payment and is determined by notice of the customer’s death or insolvency. | This is not so in the case of a bill of exchange. A bill of exchange is not a revocable mandate. |
| Crossing | A cheque may be crossed and it is safer if it is crossed. | A bill of exchange may not be crossed. |
| Stamp | A cheque does not require any stamp except in certain cases. | A bill of exchange must be stamped. |
Difference between a bill of exchange and a promissory note
| Aspect | Bill of exchange | Promissory note |
| Meaning | A negotiable instrument that is in writing and holds an unconditional order by the bill’s maker to pay a certain amount of money either to a specific person or its bearer. | It is an instrument given in writing with an unrestricted guarantee to pay a certain amount of money to a certain individual or to the bearer of the instrument and signed by the maker of it. |
| Legal | The definition of a bill of exchange is given in Section 5 of the Negotiable Instruments Act, 1881. Bill of exchange is also defined in Section 2(2) of the Indian Stamps Act, 1899 and the bill of exchange payable on demand has been explained in Section 2(3) of the Indian Stamps Act, 1899. | The definition of the promissory note is given in Section 4 of the Negotiable Instruments Act, 1881. |
| Drawer of the instrument | Creditor | Debtor |
| Partied involved | Basically, three parties are a drawer, drawee and payee are involved | Two parties involved are the drawer/maker and the payee |
| Payability | The same person can be a drawer and payee.It is payable on-demand or on the expiry of a certain period. | The drawer and payee cannot be the same person. |
| Notice of Dishonour | For a bill of exchange, a notice of dishonour is mandatory and it should be served to all the concerned parties involved in the transaction on dishonouring the bill of exchange. | No notice is served to the drawer in case of dishonouring the promissory note. |
| Copies | Bill of exchange can have copies. | The promissory note allows no copies. |
| Liability | A regards a bill of exchange, the parties who don’t get notice of dishonour are free from the liability of paying and the liability of the drawer is secondary and conditional. | No notice is served to the drawer in case of dishonouring the promissory note. |
| Validity | A bill of exchange has no validity for the payment | A promissory note is valid only for 3 years starting from the date of its execution. |
| Acceptance | A bill of exchange must be accepted first before payment can be demanded on it. | No acceptance is required from the drawee. |
| Stamp | A bill of exchange must be stamped. | A promissory note has to besufficiently stamped |
Difference between a cheque, bill of exchange and promissory note
| Aspect | Cheque | Bill of Exchange | Promissory note |
| Meaning | By a cheque one individual/party orders the bank to transfer the money to the bank account of another individual/party in whose name the cheque has been issued. | A negotiable instrument is in writing and holds an unconditional order by the bill’s maker to pay a certain amount of money either to a specific person or its bearer. | It is an instrument given in writing with an unrestricted guarantee to pay a certain amount of money to a certain individual or to the bearer of the instrument and signed by the maker of it. |
| Legal | A cheque is a negotiable instrument under Section 6 of the Negotiable Instruments Act, 1881. | The definition of a bill of exchange is given in Section 5 of the Negotiable Instruments Act, 1881. Bill of exchange is also defined in Section 2(2) of the Indian Stamps Act, 1899 and the bill of exchange payable on demand has been explained in Section 2(3) of the Indian Stamps Act, 1899. | The definition of the promissory note is given in Section 4 of the Negotiable Instruments Act, 1881. |
| Drawer of the instrument | Creditor | Creditor | Debtor |
| Partied involved | Three parties are involved as a drawn payee. | The three parties are a drawer, drawee and payee. | Two parties involved are the drawer/maker and the payee. |
| Payability | It is payable on-demand only. | The same person can be the drawer and payee.It is payable on-demand or on the expiry of a certain period. | The drawer and payee cannot be the same person. |
| Notice of Dishonour | For a cheque, a notice of dishonour is not compulsory. | For a bill of exchange, a notice of dishonour is mandatory and it should be served to all the concerned parties involved in the transaction on dishonouring the bill of exchange. | No notice is served to the drawer in case of dishonouring the promissory note. |
| Copies | The cheque allows no copies. | Bill of exchange can have copies. | The promissory note allows no copies. |
| Grace period | A cheque does not have a grace period once it is presented for its payment. | A bill of exchange, however, has a three days grace period. | Third day after the day on which it is expressed to be payable. |
| Liability | The parties remain liable to pay even though no notice of dishonour is given. | As regards a bill of exchange, the parties who don’t get notice of dishonour are free from the liability of paying and the liability of the drawer is secondary and conditional. | The liability of the drawer is primary and absolute. |
| Validity | A cheque is generally valid for six months; some cheques issued by the central government may be valid only for 3 months from the date of issue. | There is no validity to a bill. | A promissory note is valid only for a period of 3 years from the date of its execution after which it becomes invalid. |
| Acceptance | A cheque does not require acceptance and its object is for immediate payment. | A bill of exchange must be accepted first before payment can be demanded on it. | No acceptance is required from the drawee. |
| Stamp | A cheque does not require any stamp except in certain cases. | A bill of exchange must be stamped. | A promissory note has to besufficiently stamped. |
| Security and dishonour | A cheque bounce notice is to be given to the defaulter. If it is due to faults of mismatched signature, overwriting etc., the payee can ask for the resubmission of the check to the drawer for clearance. However, if it is due to insufficient funds in the account then a cheque bounce notice is issued under Section 138 of the Negotiable Instruments Act within 30 days of an intimation sent by the bank. 15 days after the notice given, the payee can initiate legal action under Section 138 of the Act and the offence of cheque bounce is a criminal offence under it. | Notice of dishonour must be given immediately to the drawer otherwise to whom such notice for default is not given is discharged. Section 30 of the Negotiable Instruments Act provides that in case of dishonour by the drawee the drawer is authorised compensation if due notice of dishonour has been served to the drawee. Section 92 of the Negotiable Instruments Act says that a bill is dishonoured by non-payment when the acceptor of the bill makes a default in payment after being duly required to pay the amount. | Collateral notes are secured by a piece of property or another tangible asset that can be repossessed if the borrower defaults on the terms of the promissory note. One should also check the verification of the limitation period and file a civil case within a certain time limit as per the Limitation Act, 1963. |
| Types | Bearer ChequeOrder chequeCrossed chequeOpen chequePost-dated chequeTraveller’s chequeSelf-chequeBanker’s cheque | Documentary bill Demand billTrade BillExport billImport bill | Real estate noteCommercial notePerson promissory noteInvestment note |
Conclusion
Negotiable instruments such as cheques, bills of exchange and promissory notes are considered written contracts whose benefit can be passed on from the original holder to a new holder because these negotiable instruments are documents which promise payment to the assignee or a specified person. The advantage that these have is that the final holder collects the funds and can use them as per his/her requirements and once the instrument is transferred, the holder of such instrument gains full legal title to such instrument. The last decade has seen an electronic revolution in the banking sphere in India, but negotiable instruments are still used widely. Their existence depends on people overcoming the problems faced due to digital banking but someday in the future, they may become obsolete.
References
- https://www.brainkart.com/article/Bills-of-Exchange,-Cheque,-Promissory-Note—Comparison_40883/
- https://www.slideshare.net/mohammedshafathkm/1promissory-note-2bill-of-exchange-3cheque
- https://cleartax.in/s/negotiable-instruments
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