Introduction
The Negotiable Instruments Act, 1881 defines and governs three primary types of negotiable instruments: promissory notes, bills of exchange, and cheques. These instruments facilitate smooth commercial transactions, ensure payment obligations are enforceable, and provide legal remedies in cases of default. Each instrument has distinct features, parties, and legal implications, making them essential tools in banking and trade.
Promissory Note
Meaning
A promissory note is a written unconditional promise made by one person (the maker) to pay a specific sum to another (the payee) either on demand or at a fixed future date.
- Section 4 of the Negotiable Instruments Act defines it.
- It must be in writing, signed by the maker, and specify the amount to be paid.
Parties Involved
- Maker: Person who promises to pay.
- Payee: Person to whom payment is promised.
Key Features
- Unconditional promise to pay.
- Transferable by endorsement.
- Payment obligation may be on demand or at a specified date.
Case Law
- M/s. Bharat Petroleum Corp. Ltd v. Great Eastern Shipping Co. Ltd (2002) – Enforced promissory notes as valid instruments.
Bill of Exchange
Meaning
A bill of exchange is an order in writing from one person (drawer) directing another (drawee) to pay a certain sum to a third person (payee) on demand or at a future date.
- Section 5 defines it under the Act.
- Unlike promissory notes, it involves three parties.
Parties Involved
- Drawer: Person who gives the order to pay.
- Drawee: Person directed to pay.
- Payee: Person who receives the payment.
Key Features
- Transferable by endorsement or delivery.
- Can be protested for dishonour if not paid.
- Can be payable on demand or at a fixed future date.
Case Law
- Punjab National Bank v. S.K. Singh (1991) – Validity of a bill of exchange and rights of holder in due course.
Cheque
Meaning
A cheque is a bill of exchange drawn on a bank, payable on demand. It is the most commonly used negotiable instrument in daily banking and business transactions.
- Section 6 defines a cheque.
- Drawn against a bank account, directing the bank to pay a certain sum to the payee.
Parties Involved
- Drawer: Account holder who issues the cheque.
- Drawee: Bank on which the cheque is drawn.
- Payee: Person receiving the payment.
Key Features
- Payable on demand.
- Can be endorsed or transferred.
- Dishonour of cheque invokes penal provisions under Section 138.
Case Law
- K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) – Clarified liability under Section 138 for dishonoured cheques.
- Dr. Arvind Kumar v. Union of India (2015) – Affirmed criminal consequences of dishonoured cheques.
Also Read: Contract of Agency under the Indian Contract Act, 1872
Differences Between Promissory Notes, Bills of Exchange, and Cheques
| Feature | Promissory Note | Bill of Exchange | Cheque |
|---|---|---|---|
| Nature | Promise | Order | Order on a bank |
| Parties | 2 (maker & payee) | 3 (drawer, drawee, payee) | 3 (drawer, bank, payee) |
| Payable | On demand/fixed date | On demand/fixed date | On demand only |
| Transferability | Yes | Yes | Yes |
| Dishonour | Civil remedies | Civil remedies, protest possible | Civil + criminal remedies (Sec 138) |
Conclusion
Promissory notes, bills of exchange, and cheques are fundamental instruments under the Negotiable Instruments Act, 1881. They provide legal certainty, transferability, and enforceability in commercial transactions. Understanding their distinct features, parties, and legal remedies ensures proper utilization and safeguards the rights of holders, makers, and drawers.