Concept 1 · free preview
Negotiable instruments: promissory note, bill of exchange, cheque
Understand
A negotiable instrument is a written document that promises or orders payment of money and can be transferred from one person to another simply by delivery or by endorsement and delivery. The person who receives it in good faith and for value — a holder in due course — gets a good title even if an earlier holder's title was defective. This easy transferability is what lets trade run on paper instead of cash. In India these instruments are governed by the Negotiable Instruments Act, 1881. Section 13 names three of them: the promissory note, the bill of exchange and the cheque. A promissory note is a promise to pay; a bill of exchange is an order to pay; a cheque is a special bill of exchange drawn on a specified banker and payable on demand. Each of them must be in writing, signed, unconditional and for a certain sum of money only. A paper that says 'I will pay ₹10,000 if my crop sells' is not a negotiable instrument, because the payment depends on a condition.
Rule
Promissory note (Section 4): an unconditional written PROMISE by the maker to pay a certain sum. Two parties — maker and payee. A bank note or currency note is excluded.
Bill of exchange (Section 5): an unconditional written ORDER by the drawer directing the drawee to pay. Three parties — drawer, drawee, payee. A bill payable after a period needs the drawee's acceptance.
Cheque (Section 6): a bill of exchange drawn on a specified banker and payable on demand. It includes the electronic image of a truncated cheque and a cheque in electronic form.
Only a bank can be the drawee of a cheque, and a cheque is always payable on demand, so it never needs acceptance.
Negotiable by statute (NI Act) vs negotiable by custom: instruments such as bank drafts, treasury bills and dividend warrants are treated as negotiable by usage.
Section 138 makes dishonour of a cheque for insufficient funds a criminal offence, subject to notice and time conditions.
Example
Ravi buys goods worth ₹50,000 from Meena on credit and signs a paper: 'I promise to pay Meena ₹50,000 on 30 June.' That is a promissory note (Ravi = maker). If Meena instead writes 'Ravi, pay ₹50,000 to Suresh' and Ravi signs it as accepted, it is a bill of exchange (Meena = drawer, Ravi = drawee, Suresh = payee). If Ravi gives Meena a cheque on his SBI account, SBI is the drawee and must pay on demand.
| Point | Promissory note | Bill of exchange | Cheque |
|---|---|---|---|
| Nature | Promise to pay | Order to pay | Order to a bank to pay |
| Parties | 2 (maker, payee) | 3 (drawer, drawee, payee) | 3 (drawer, bank, payee) |
| Acceptance | Not needed | Needed (usually) | Not needed |
| Drawee | None | Any person | Only a specified banker |
| NI Act section | 4 | 5 | 6 |
Common mistake
A currency note is NOT a promissory note under Section 4, even though it carries a 'promise to pay'.
Every cheque is a bill of exchange, but not every bill of exchange is a cheque.
A cheque is payable on demand; a bill of exchange may be payable on demand or after a fixed period.
Only RBI (and the Central Government for currency) may issue a bill or promissory note payable to bearer on demand (RBI Act, 1934, Section 31).