Negotiable instruments are signed documents that contains a promise to pay a specific amount of money to the bearer or assignee at a specified date or on being demanded. These instruments are transferrable in nature, allowing the person or entity to use the instrument most appropriately.
There are three types of Negotiable Instruments, namely Bill of Exchange, Cheques and Promissory Note.
Meaning of Bill of Exchange
Bill of Exchange is a negotiable instrument which is a legally binding document containing an order to pay a certain sum of money to a person within a pre-determined time frame or on-demand by the bearer of the instrument.
A creditor issues Bill of Exchange to a debtor for payment of money owed by the debtor for the goods and services availed. A prominent feature of Bill of Exchange is, it needs to be accepted by a debtor to in order to be valid.
It is used in business to settle the outstanding debt between the parties involved in the transaction. There are 3 parties involved in the bill of exchange, they are:
- Drawer: Drawer is the person who issues the instrument in order to receive a payment.
- Drawee: Drawee is the person who needs to pay the amount to the drawer.
- Payee: Payee is the person who receives the payment. In most cases, the drawer and the payee are the same individuals unless it is transferred to third party payee by the drawer.
Meaning of Promissory Note
A promissory note is a negotiable instrument containing written promise to pay a certain amount of money to its holder by an individual or an entity either on demand by the holder or at a pre-specified date.
The most important feature of Promissory Note is, once it is drawn by the debtor, it need not be accepted by the creditor.
Two parties are involved in the promissory note. They are:
- Drawer/Maker: Drawer is the debtor who promises to pay the amount to lender or creditor.
- Payee:Â Payee is the creditor who is been promised by the borrower or debtor about the pending payment.
Key Differences between Bill of Exchange and Promissory note represented in a comparison format are as follows
| Bill of Exchange | Promissory Note |
| Definition | |
| A negotiable instrument issued to order the debtor to pay the creditor a certain sum of money within a specific date or on demand. | A negotiable instrument issued by the debtor with a written promise to pay the creditor a certain amount within a specific date or on demand. |
| Section | |
| Mentioned in Section 5 of the Negotiable Instruments Act, 1881 | Mentioned in Section 4 of the Negotiable Instruments Act, 1881 |
| Issued By | |
| Creditor | Debtor |
| Parties Involved | |
| Three parties involved i.e a drawer, the drawee and a payee. | Two parties involved i.e a drawer/maker and the payee |
| Acceptance | |
| Drawee needs to accept the bill of exchange before payment. | No acceptance required from the drawee. |
| Liability | |
| Liability of drawer is secondary and conditional. | Liability of drawer is primary and absolute. |
| Dishonouring of instrument | |
| Notice served to all the concerned parties involved in the transaction on dishonouring the instrument. | No notice served to the drawer in case of dishonouring the instrument. |
| Copies | |
| Bill of exchange can have copies. | The promissory note allows no copies. |
| Is it Payable to drawer/maker | |
| Yes, the same person can be drawer and payee. | The same person cannot be drawer and payee. |
This article covers the concepts and difference between Bill of Exchange and Promissory notes, which is very crucial for commerce students. To learn more such exciting concepts stay tuned to BYJU’S.
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