UNIT-2
Lecture-5
Types of Negotiable Instrument:
•There are three types of negotiable instruments & these are:
a) Promissory Note
b) Bill of Exchange
c)Cheque
a) 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. (Sec.4)
•The person who makes the promissory note & promises to pay is called the maker & the
person to whom the payment is to be made is called the payee.
Essential elements of a promissory note
•Writing: - The instrument must be in writing. Writing includes print & typewriting and may
also be in pen or ink.
•Promise to pay: - The instrument must contain an express promise to pay. The following
instrument signed by A is not a promissory note:
Ex. I am bound to pay the sum of Rs. 500 which I received from you.
•Definite and Unconditional: - The promise to pay must be definite and unconditional. If it is
conditional or uncertain, the instrument is invalid.
Ex. I promise to pay B Rs. 500 when he delivers the goods.
•Signed by the maker: - The instrument must be signed by the maker otherwise it is
incomplete & of no effect.
•Certain parties: - The instrument must point out with certainty as to who the maker is & who
the payee is. Where the maker & the payee can’t be identified with certainty with the
instrument itself, the instrument even if contain an unconditional promise to pay is not a
promissory note.
•Certain sum of money: - The sum payable must be certain and must not be capable of
contingent addition or subtraction.
Ex. I promise to pay B Rs. 1000 and all other sums due to him.
•Promise to pay money only: - The payment to be made under the instrument must be in the
legal tender money of India. If the instrument contains a promise to pay something in
addition to money, it cannot be a promissory note.
Ex. I promise to pay B 20 shares & 10 bonds of XY limited.
•It may be payable on demand or after a definite period of time.
b) Bill of exchange
•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 (Sec.5)
Parties to a bill
a) Drawer: - The person who gives the order to pay or who makes the bill is called the
drawer.
b) Drawee: - The person who is directed to pay is called the drawee. When the drawee
accepts the bill, he is called the acceptor.
c)Payee: - The person to whom the payment is to be made is called the payee.
The drawer or the payee who is in the possession of the bill is called the holder. The holder
must present the bill to the drawee for its acceptance.
When the holder endorses the bill, note or cheque, he is called the endorser. The person to
whom the bill, note or cheque is endorsed is called the endorsee.
Essential elements of bill of exchange
a) It must be in writing.
b) It must contain an order to pay.
c)The order must be unconditional.
d)It requires three parties i.e., the drawer, the drawee & payee.
e) The parties must be certain.
f) It must be signed by the drawer.
g) The sum payable must be certain.
H )It must contain an order to pay money only.
i) The formalities like number, date, place, consideration etc are usually found in
an instrument although they are not essential in law but a bill must be affixed with the
necessary stamp.
Difference between Promissory note & Bill of exchange
Promissory Note Bill of Exchange
There are two parties. There are three parties.
It contains an unconditional promise to It contains an unconditional order to
pay. pay.
The drawer of the bill is the creditor
The maker of the note is the debtor & he
who directs the drawee (his debtor) to
himself undertakes to pay.
pay.
The liability of the maker of a note is The liability of a drawer of a bill is
primary & absolute. secondary & conditional.
A note cannot be made payable to the In a bill, the drawer & the payee may be
maker himself. one & the same person.
c)Cheque
•A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it
includes the electronic image of a cheque or a cheque in the electronic form.
•A cheque in the electronic form means, “Cheque which contains the exact mirror image of a
proper cheque and is generated, written & signed in a secure system ensuring the minimum
safety standard with the use of digital signature”.
A cheque is the species of a bill of exchange but it has the following two additional
qualifications:
a) It is always drawn on specified banker.
b) It is always payable on demand.
All cheques are bill of exchange but all bill of exchange is not cheque. A cheque must have
all the essential elements of a bill of exchange but it doesn’t require acceptance as it is
intended for immediate payment.
Difference between a bill of exchange and a cheque
Bill of exchange Cheque
It may be drawn on any person
It is always drawn on a banker.
including a banker.
It must be accepted before the drawee
A cheque requires no acceptance.
to make payment upon it.
It may be payable on demand or after
the expiry of a certain period after date It is always payable on demand.
or sight.
A bill is never be crossed. A cheque may be crossed.
A bill except in certain cases must be
stamped. A cheque doesn’t require any stamp.
Essential element of cheques
[Link] must be in writing: A cheque must be in writing. An oral order to pay does not constitute
a cheque.
2. It should be drawn on banker: It is always drawn on a specified banker. A cheque can be
drawn on a bank where the drawer has an account, saving bank, or current.
3. It contains an unconditional order to pay: A cheque cannot be drawn so as to be payable
conditionally. The drawer’s order to the drawee bank must be unconditional and should not
make the cheque payable dependent on a contingency. A conditional cheque shall be invalid
4. The check must have an order to pay a certain sum: The cheque should contain an order
to pay a certain sum of money only. If a cheque is drawn to do something in addition to, or
other than to pay money, it cannot be a cheque. For example, if a cheque contains ‘Pay USD
500 and a TV worth USD 500 to A‘ it is not a cheque.
5. It should be signed by the drawer and should be dated: A cheque does not carry any
validity unless signed by the original drawer. It should be dated as well.
6. It is payable on demand: A cheque is always payable on demand.
7. Validity: A cheque is normally valid for six months from the date it bears. Thereafter it is
termed as stale cheque. A post-dated or antedated cheque will not be invalid. In both cases, the
validity of the cheque is presumed to commence from the date mentioned on it.
8. It may be payable to the drawer himself: Cheques may be payable to the drawer
himself/herself. It may be drawn payable to bearer on demand unlike a bill or a pro-note.
9. Banker is liable only to the drawer: The banker on whom the cheque is drawn shall be
liable only to the drawer. A holder or bearer has no remedy against the banker if a cheque is
dishonored.
10. It does not require acceptance and stamp: Unlike a bill of exchange, a cheque does not
require acceptance on part of the drawee. There is, however, a custom among banks to mark
cheques as ‘good’ for the purpose of clearance. But this marking is not an acceptance.
Similarly, no revenue stamp is required to be affixed on cheques.