AN ANALYSIS OF PROMISSORY NOTE AND BILL OF EXCHANGE

UNDER NEGOTIABLE INSTRUMENT ACT, 1881

CHAPTER 1
INTRODUCTION
1.1 NEGOTIABLE INSTRUMENT: DEFINITION
In this project my focus on promissory note and bill of exchange which are an important
part of negotiable instrument. According to Section 13 (a) of the Act, Negotiable instrument
means a promissory note, bill of exchange or cheque payable either to order or to bearer,
whether the word order or bearer appear on the instrument or not. In the words of
Justice, Willis, A negotiable instrument is one, the property in which is acquired by anyone
who takes it bonafide and for value notwithstanding any defects of the title in the person from
whom he took it. One type of negotiable instrument, called a promissory note, involves only
two parties, the maker of the note and the payee, or the party to whom the note is payable.
With a promissory note, the maker promises to pay a certain amount to the payee. Section 4 of
the Act defines, A promissory note is an instrument in writing (note being a bank-note or a
currency note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money to or to the order of a certain person, or to the bearer of the instruments. A mere
verbal promise to pay is not a promissory note. To be valid a negotiable instrument must
meet four requirements. First, it must be in writing and signed by the maker or drawee.
Second, it must contain an unconditional promise (promissory note) or order (bill of exchange)
to pay a certain sum of money and no other promise except as authorized by the Uniform
Commercial Code (UCC). Third, it must be payable on demand or at a definite time. Finally, it
must be payable either to order or to bearer. Promissory notes have a similar effect with bills

of exchange. The difference lies on that promissory notes are prepared by the importer
promising to give a direct payment to the seller on a future specified due day. The note is
not drawn to any intermediate party. Bills and notes may be negotiated to an unlimited
number of successive holders when the current holder wishes to obtain an immediate
discounted cash payment and the new holder wishes to buy the note or draft as a short
term investment. They are transferred either by endorsement and physical delivery or in
the case of bearer instruments merely by delivery and must be drawn in unconditional
terms.
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1.2 CONCEPTUAL FRAMING OF NEGOTIABLE INSTRUMENT

In simple words, a negotiable instrument is a choice-inaction with the characteristics of
negotiability attached to it. Thus, a negotiable instrument is one which when transferred by
delivery or by endorsement and delivery passes to the transferred provided the transferee is a
bonafide holder for vale without notice of any defect in the title of the transferor.The
Negotiable Instrument Act defines only three kinds of negotiable instruments, namely
promissory notes, bills of exchange and cheques. It is however, does not mean that there can
be no other negotiable instrument in use at all. By usage or law other instruments with the
character of negotiability.
Example of Negotiable Instruments
The Negotiable Instruments classified as (a) Negotiable Instruments recognized by status and
(b) Negotiable instruments recognized by usage or custom. The common examples of above
two types of negotiable instruments are given below:(a) Negotiable instrument recognized by Statue: Bills of exchange, promissory notes, cheques
(b) Negotiable instruments recognized by usage or custom: Hundies, Share warrants,
Dividend warrants, Bankers Drafts, Circular notes, Bearer Debentures, Railway Receipts,
Delivery orders etc.

1.3 FEATURE OF NEGOTIABLE INSTRUMENT

The word negotiable means transferable by delivery, and the word instrument means a
written document by which a right is created in favor of some person. Thus, the term
negotiable instrument literally means a written document transferable by delivery.
According to Section 13 of the Negotiable Instruments Act, a negotiable instrument means a
promissory note, bill of exchange or cherub payable either to order or to bearer. The Act,
thus, mentions three kinds of negotiable instruments, namely notes, bills and cherubs and
declares that to be negotiable they must be made payable in any of the following forms:
A) Payable to order: A note, bill or cherub is payable to order which is expressed to be
payable to a particular person or his order. But it should not contain any words prohibiting

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transfer, e.g., Pay to A only or Pay to A and none else is not treated as payable to order and
therefore such a document shall not be treated as negotiable instrument because its
negotiability has been restricted. There is, however, an exception in favor of a cherub. A
cherub crossed Account Payee only can still be negotiated further; of course, the banker is to
take extra care in that case.
b) Payable to bearer: Payable to bearer means payable to any person whom so ever bears it.
A note, bill or cherub is payable to bearer which is expressed to be so payable or on which the
only or last endorsement is an endorsement in blank. The definition given in Section 13 of the
Negotiable Instruments Act does not set out the essential characteristics of a negotiable
instrument. Possibly the most expressive and all encompassing definition of negotiable
instrument had been suggested by Thomas who is as follows:
A negotiable instrument is one which is, by a legally recognized custom of trade or by law,
transferable by delivery or by endorsement and delivery in such circumstances that (a) the
holder of it for the time being may sue on it in his own name and (b) the property in it passes,
free from equities, to a bonfire transferee for value, notwithstanding any defect in the title of
the transferor.

1.4 CHARACTERISTCS OF NEGOTIABLE INSTUMENT

An examination of the above definition reveals the following essential characteristics of
negotiable instruments which make them different from an ordinary chattel:
Easy negotiability: They are transferable from one person to another without any formality. In
other words, the property (right of ownership) in these instruments passes by either
endorsement or delivery (in case it is payable to order) or by delivery merely (in case it is
payable to bearer), and no further evidence of transfer is needed.
Transferee can sue in his own name without giving notice to the debtor: A bill, note or a
cherub represents a debt, i.e., an actionable claim and implies the right of the creditor to
recover something from his debtor. The creditor can either recover this amount himself or can
transfer his right to another person. In case he transfers his right, the transferee of a negotiable
instrument is entitled to sue on the instrument in his own name in case of dishonor, without
giving notice to the debtor of the fact that he has become holder.

CHAPTER 2

2.1 PROMISSORY NOTE UNDER NEGOTIABLE INSTRUMENT

Section 4. Promissory note A Promissory Note is an instrument in writing (not being a
bank-note or a currency-note) containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of
the instrument.
Essential features

An instrument is a promissory note if there are present the following elements:1. Writing : The first essential is that all negotiable instruments must be in writing. An oral
engagement to pay a sum of money is not an instrument, much less negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere acknowledgement of
debt is not a promissory note. A mere receipt for money does not amount to a promissory
note, even though it might contain the terms of repayment. In Mange Lal Vs. Lal Chand2
Rajasthan High Court

has held that a document which was in the form of a letter

acknowledging receipt of certain sums and affixed with 20 paise revenue stamp was held to be
a receipt and not a promissory note. In the case of Muthu Sastrigal Vs. Visvanatha3 Madras
High Court, it has been held that a document containing the following words Amount of
cash borrowed of you by me is Rs.350. I shall in two weeks time returning this sum with
interest, get back this letter has been held to be a promissory note because there is an
unconditional undertaking to repay the borrowed money.
3. Unconditional: Thirdly, the promise to pay the money should be unconditional, or subject
only to a condition which according to the ordinary experience of mankind is bound to
happen. The court pointed out that if the note had merely been made payable on the death of
G.H., it would have been a good promissory note, because death is an event so certain and
necessary that it is bound to happen and therefore the not must have become payable at one
time or the other. But the other condition that it would be payable provided there would be

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sufficient funds left behind made the instrument bad, because that was an uncertain event, and
a note payable on an uncertain contingency can never be a negotiable instrument.

4. Money only and a certain sum of money:

Fourthly, the instrument must be payable in money and money only. If the instrument
contains a promise to pay something other than money or something in addition to money, it
will not be a promissory note. The sum of money payable must also be certain. Negotiable
instruments are meant for free circulation and if they are value is not apparent on their face,
their circulation would be materially impeded.
5. Certainties of parties:
Fifthly, the parties to the instrument must be designated with reasonable certainty. There are
two parties to a promissory note, the person who make the note and is known as the maker
and the payee to whom the promise is made. Both the maker and the payee must be indicated
with certainty on the face of the instrument. In Brij Raj Sharan Vs. Saha Raghunandan Sharan4
Rajasthan HC, a letter was addressed to A continuing the following statement.In your
account Rs. 4668 15 0 are due from my son Mahesh Chandra, I shall pay the amount by
December 1948. You rest assured.It was contended that it should not be treated as a
promissory note because the person to whom the amount was to be paid was not indicated
therein.
6 Signed by the maker:
Lastly, the promissory note should be signed by the maker. Signature may be on any part of
the document. Where an instrument is in the hand writing of a person and it is addressed by
him to another, that is sufficient evidence of his signature. The Allahabad High Court in the
case of Raj Bahadur Singh Vs. Hari Pd. Mehra5 Patna High Court has held that if a document
satisfies all the requirements of a valid promissory note, it would not make any difference to
its character as a negotiable instrument that it was an attested document.

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2.2 BILL OF EXCHANGE UNDER NEGOTIABLE INSTRUMENT

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. (Section 5). The definition of a bill of
exchange is very similar to that of a promissory note. There are however, certain important
points of distinction between the two.
Parties to bills of exchange
The following are parties to a bill of exchange:
(a) The Drawer: the person who draws the bill.
(b) The Drawee: the person on whom the bill is drawn.
The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a stranger
may accept it on behalf of the drawee.
(d) The payee: one to whom the sum stated in the bill is payable, either the draweror any other
person may be the payee.
(e) The holder: is either the original payee or any other person to whom, the
payee has endorsed the bill. In case of a bearer bill, the bearer is the holder.
(f) The endorser: when the holder endorses the bill to anyone else he becomes
the endorser.
(g) The endorsee: is the person to whom the bill is endorsed.

Essentials of a Bill of Exchange:

It must be in writing. It must contain an unconditional order to pay money only and not
merely a request. It must be signed by the drawer. The parties must be certain. The sum
payable must also be certain. It must comply with other formalities e.g. stamps, date,etc.

CHAPTER 3

3.1 Judicial trend on section 4 and section 5 of negotiable instrument act

Muthu Sastrigal Vs. Visvanatha6 Madras High Court, it has been held that a document
containing the following words Amount of cash borrowed of you by me is Rs.350. I shall in
two weeks time returning this sum with interest, get back this letter has been held to be a
promissory note because there is an unconditional undertaking to repay the borrowed money.

Mange Lal Vs. Lal Chand7 Rajasthan High Court has held that a document which was in the
form of a letter acknowledging receipt of certain sums and affixed with 20 paise revenue
stamp was held to be a receipt and not a promissory note.

Hogarth Vs. Latham & Co. (1878) The plaintiff took two bills of exchange without any
drawers name and completed them himself. The court held that he could not recover upon
the bills. Anybody who takes such an instrument as this, knowing that when it was accepted
the bill had not the name of any drawer upon it, takes it at his peril. An instrument may also
be incomplete because it is not properly dated or stamped. But a bill of exchange does not
need acceptance to make it complete and regular. Some unusual marks on the instrument may
make it defective, such as the marks of dishonour, blanks, or restrictive or conditional
endorsements. An improper endorsement renders the whole of the instrument irregular

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3.2 FINDINGS AND OBSERVATION

There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee,
while in a promissory note there are only two parties - maker and payee.In a bill of exchange
there is an unconditional order to pay, while in a promissory note there is an unconditional
promise to pay. A bill of exchange requires an acceptance of the drawee before it is presented
for payment, while a promissory note does not require any acceptance since it is signed by the
person who is liable to pay. The liability of a maker of a bill of exchange is primary and while
the liability of a drawer of a bill of exchange is secondary and conditional. It arises only when
the drawee fails to pay that the drawer would be liable as a surety. A bill of exchange can be
drawn in sets; but promissory note cannot be drawn in sets. Promissory Note is defined in
Section 4 of the Negotiable Instruments Act, 1881. It is an instrument signed by the maker
containing an unconditional undertaking to pay a certain sum of money only to the order of a
certain person. A bill of exchange is defined under Section 5 of the Negotiable Instruments
Act, 1881. It is an instrument containing an unconditional order, signed by the maker,
directing a person to pay a certain sum of money only to the order of a certain person or the
bearer. The general differences between a promissory note and a bill of exchange are as
follows:

1.

Number of Parties

In a Promissory Note there are two parties. In a Bill of Exchange, there are three parties.Parties
in a promissory note are called maker and payee while in Bill of exchange there is drawer,
drawee and payee.
2.

Nature of the Instrument

In a promissory note there is a promise to make the payment by the maker to the payee at a
certain time. It is called an unconditional undertaking. In a Bill of exchange, it is an
unconditional order to make the payment.
3.

Nature of liability

The maker of the promissory note has primary liability. If the payee demands the maker has to
pay directly to him. In a Bill of exchange, the drawee has the primary liability. In case of a
cheque which is a bill of exchange, the bank has to honour the cheque.

CONCLUSION

To be valid a negotiable instrument must meet four requirements. First, it must be in writing
and signed by the maker or drawee. Second, it must contain an unconditional promise
(promissory note) or order (bill of exchange) to pay a certain sum of money Third, it must
be payable on demand or at a definite time. Finally, it must be payable either to order or to
bearer. Promissory Note is an instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money
only to, or to the order of, a certain person, or to the bearer of the instrument.The word
negotiable means transferable by delivery, and the word instrument means a written
document by which a right is created in favor of some person. Thus, the term negotiable
instrument literally means a written document transferable by delivery. A bill of exchange
requires an acceptance of the drawee before it is presented for payment, while a promissory
note does not require any acceptance since it is signed by the person who is liable to pay. The
liability of a maker of a bill of exchange is primary and while the liability of a drawer of a bill of
exchange is secondary and conditional. It arises only when the drawee fails to pay that the
drawer would be liable as a surety.