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Difference between promissory note, bill of exchange and cheque

This article is written by Ashutosh Singh, a student at Amity law school, Kolkata.

Table of Contents

Introduction 
Negotiable instruments
Promissory note 
Parties to a promissory note
Features of a promissory note
Format of a promissory note
Bill of Exchange
Parties to a bill of exchange
Features of a bill of exchange 
Format of a bill of exchange
Cheque
Parties to a cheque
Features of a cheque
Difference between a cheque and bill of exchange
Difference between a bill of exchange and a promissory note
Difference between a cheque, bill of exchange and promissory note
Conclusion

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
MeaningBy 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
MeaningA 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
MeaningBy 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.