Direct Answer: Bills of Exchange vs Promissory Notes vs Cheques at a Glance

Bills of Exchange vs Promissory Notes vs Cheques: Key Differences

Quick Answer: Under the Negotiable Instruments Act, 1881, a promissory note (Section 4) is a two-party unconditional promise to pay, a bill of exchange (Section 5) is a three-party unconditional order to pay, and a cheque (Section 6) is a bill of exchange drawn on a specified banker and payable on demand. The maker of a note and the acceptor of a bill are primarily liable; a cheque needs no acceptance and gets no days of grace.

What Is a Negotiable Instrument? (Sections 13–14, NI Act, 1881)

Section 13 of the Negotiable Instruments Act, 1881 defines a negotiable instrument as a promissory note, bill of exchange or cheque payable either to order or to bearer. Section 14 explains negotiation as the transfer of an instrument to another person so as to constitute that person the holder of it.

Key characteristics of negotiability include:

• Free transferability — the instrument passes by simple delivery (if payable to bearer) or by endorsement plus delivery (if payable to order).
• Title of a holder in due course — a bona fide transferee for value gets a better title than the transferor (Section 118 read with Section 53).
• Presumptions — Section 118 and Section 139 create presumptions of consideration, of the date mentioned, and (for cheques) that the cheque was issued for discharge of a debt.
• Presumption of validity — every party accepting or endorsing an instrument is presumed to have done so before maturity.

The full statute is available on the India Code portal and summaries are published on rbi.org.in.

Promissory Note: Definition, Parties and Features (Section 4)

Section 4 defines a promissory note as an instrument in writing (not being a bank note or 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.

Parties: There are only two — the maker (who promises to pay) and the payee (to whom payment is promised). Maker and payee must be different persons.

Essentials of a valid promissory note:

• It must be in writing and signed by the maker.
• The promise to pay must be unconditional.
• The sum must be certain and payable in legal currency money only.
• The payee must be certain.
• It must be properly stamped under the Indian Stamp Act, 1899.

The maker is primarily liable — the payee need not ask anyone else first.

Bill of Exchange: Definition, Parties and Features (Section 5)

Section 5 defines a bill of exchange as an instrument in writing containing an unconditional order, signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

Parties: Three — the drawer (who makes the order), the drawee (who is ordered to pay; on acceptance he becomes the acceptor) and the payee. The drawer and payee can be the same person.

A bill is a promise turned into an order: the drawer does not promise to pay himself; he directs the drawee to pay. Until the drawee accepts, the bill carries no obligation on him. After acceptance, the acceptor is primarily liable and the drawer becomes secondarily liable.

Cheque: Definition, Parties and Features (Section 6)

Section 6 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. After the Negotiable Instruments (Amendment) Act, 2002, the definition also includes:

• A truncated cheque — a cheque truncated during clearing (the electronic image replaces the physical movement).
• An electronic cheque — a cheque containing the exact mirror image of a paper cheque, generated, written and signed in a secure system.

Parties: Three — drawer (account holder), drawee (the specified banker) and payee. Essential differences from an ordinary bill: the drawee must always be a banker, the cheque is always payable on demand, it requires no acceptance, no stamp and no days of grace.

Parties Compared: Who Signs, Who Pays, Who Receives

Liability Differences: Primary vs Secondary Liability

Primary liability means being the first person to be sued for payment; secondary liability arises only on default of the primarily liable party.

• Promissory note: the maker is primarily and unconditionally liable.
• Bill of exchange: the acceptor is primarily liable; the drawer and every endorser are secondarily liable (Section 32).
• Cheque: the drawer is liable (and under Section 138 for dishonour); the banker is only a paying agent — it pays or dishonours based on funds and mandate, and enjoys statutory protection under Sections 85 and 128 for properly drawn and crossed cheques.

Other Key Differences: Acceptance, Payability, Stamping and Days of Grace

• Acceptance: Bills generally require acceptance by the drawee; promissory notes and cheques never do.
• Days of grace: Notes and bills payable “otherwise than on demand” get 3 days of grace (Section 22); cheques payable on demand get none.
• Stamping: Notes and bills must be stamped; cheques need no stamp.
• Drawee: In a cheque, only a banker can be the drawee; in a bill, any person can be.
• Noting and protest: Applicable to foreign bills on dishonour; not applicable to cheques.

Crossing of Cheques (Sections 123–131)

Crossing is a direction to the banker to pay only through a bank — it never affects negotiability of the cheque as between the parties.

• General crossing (S. 123): two parallel transverse lines, with or without the words “and Co.” — payable only through a bank account.
• Special crossing (S. 124): the name of a specific banker written across the face — payable only to or through that banker.
• “Not negotiable” crossing (S. 130): words “not negotiable” — the transferee gets no better title than the transferor.
• Account payee crossing: a direction to the collecting banker to credit only the named payee’s account (protected under S. 131 read with the explanation to S. 126).

Statutory Provisions to Remember: Sections 4, 5, 6, 118, 138

• Section 4: Promissory note.
• Section 5: Bill of exchange.
• Section 6: Cheque (including truncated and electronic cheques).
• Section 118: Presumptions as to negotiable instruments.
• Section 138: Dishonour of cheque for insufficiency of funds — punishment up to two years’ imprisonment or fine up to twice the cheque amount, or both. The holder must demand payment within 30 days of receiving information of dishonour; the drawer gets 15 days to pay before prosecution can begin.

Exam-Style Practice MCQs and Previous-Year Trends

SSC and banking exams repeatedly ask (i) the number of parties in each instrument, (ii) primary liability, and (iii) Section 138 punishments. Attempt these:

1. How many parties are there to a bill of exchange? (a) Two (b) Three (c) Four (d) One — Answer: (b) Three
2. Who is primarily liable on a promissory note? (a) Payee (b) Drawer (c) Maker (d) Endorser — Answer: (c) Maker
3. A cheque is defined under which section of the NI Act, 1881? (a) Section 4 (b) Section 5 (c) Section 6 (d) Section 13 — Answer: (c) Section 6
4. Days of grace allowed on a bill payable at 60 days after date: (a) 0 (b) 1 (c) 3 (d) 7 — Answer: (c) 3
5. Which crossing destroys negotiability in the sense of better title? (a) General (b) Special (c) “Not negotiable” (d) Account payee — Answer: (c) “Not negotiable” crossing under Section 130
6. Under Section 138, maximum imprisonment for cheque dishonour is: (a) 1 year (b) 2 years (c) 5 years (d) 6 months — Answer: (b) 2 years
7. Which instrument does not require stamping? (a) Promissory note (b) Bill of exchange (c) Cheque (d) Both (a) and (b) need stamps — Answer: (c) Cheque
8. On a bill of exchange, primary liability lies on: (a) Drawer (b) Drawee (c) Acceptor (d) Payee — Answer: (c) Acceptor

Quick Revision Chart and Memory Aids

Mnemonics: “Note = No acceptance, No third party” (2 parties); “Cheque = Cash on demand, Crossable, Covered by S. 138″; a bill is a note plus one more party and one more step (acceptance).

Frequently Asked Questions

Is a cheque a bill of exchange?

Yes. Under Section 6, a cheque is a bill of exchange drawn on a specified banker and payable on demand; the differences are that it needs no acceptance, no stamp and no days of grace.

Who is primarily liable on a promissory note?

The maker, who gives an unconditional promise to pay (Section 4). On a bill of exchange, the acceptor is primarily liable.

How many parties are there in a promissory note and a bill of exchange?

A promissory note has two parties (maker and payee); a bill of exchange has three (drawer, drawee and payee).

Do promissory notes and bills of exchange get days of grace?

Yes — instruments payable otherwise than on demand get 3 days of grace under Section 22. Cheques, being payable on demand, get none.

Is a promissory note payable to the maker valid?

No. Under Section 4, the maker and the payee must be different persons — one cannot owe money to oneself by negotiable instrument.

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