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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 certainsum 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, Banker’s 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.

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  CHAPTER 2

2.1 PROMISSORY NOTE UNDER NEGOTIABLE INSTRUMENTSection 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.

1Essential 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 MadrasHigh 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

1Law of banking and negotiable instruments an introduction: Avtar Singh

2AIR 1995

3AIR 1914

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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.

 4

AIR 19555

AIR 1983

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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 ofexchange 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.

Essent i al s of a Bi l l 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.

 

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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 unconditionalpromise 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 acertain 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.Partiesin 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 topay 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.

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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.

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