A negotiable instrument refers to a signed document that contains an order or a promise to pay a particular amount of money to the creditor on a specific date or on demand. There are three different types of negotiable instruments and they are bill of exchange, promissory note, and cheque. In this article, we will have a sight at the complete difference between bill of exchange and promissory note. This blog has been arranged in the following order.
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Definition Of Bill Of Exchange
In business and finance, a bill of exchange refers to the type of negotiable instrument that contains an unconditional order signed by the drawer(maker) which directs a person to pay a certain amount of money to a particular person or the holder of the instrument within the specific time frame. A creditor generally issues the bill of exchange to the debtors for the payment of goods and services(a debtor avail) within a specific time. The conditions that need to be fulfilled for the bill of exchange are as follows.
- The bill of exchange must be properly dated.
- It must contain an order of payment by the drawer to the drawee.
- It should be signed by the drawer/maker.
- The acceptance of the bill by the drawee is mandatory.
- The order of payment and its amount should be clearly defined.
- It must be issued/delivered to the payee.
The bill of exchange contains the following three parties.
- Drawer- The person who issues and makes the bill.
- Drawee- Drawee is an individual who has to pay a bill or a pre-determined amount of money.
- Payee- The one who receives the payment, and in most cases, acts as same as a drawer.
Definition Of Promissory Note
On the other hand, a promissory note is another negotiable tool that contains a written promise to pay a certain sum of money to its holder by a person or an organization either on a pre-defined date or on demand by the holder. It is used by the debtor to borrow money from the creditor. Once it is drawn by the debtor, it may need not to be accepted by the creditor. The promissory note has the following features.
- The note should carry a written promise to pay the amount of money to the creditor.
- The note must be signed by the promisor.
- It must be properly dated.
- The Drawer and Darawee need to be certain.
- The sum of money should be specified.
- The usage of state legal currency to discharge the debt is mandatory.
It involves two parties:
- Drawer/Maker- A debtor who promises to pay a specific amount of money to the lender/creditor is called a drawer.
- Payee- The creditor who has been promised by the debtor about the non-paid sum of money.
Difference Between Bill Of Exchange And Promissory Note(Table)
| Basis For Difference | Bill Of Exchange | Promissory Note |
| Definition | The negotiable instrument in writing issued to order the debtor to pay a certain amount of money to the creditor on a pre-determined date or on demand is called the bill of exchange. | The negotiable instrument issued by the debtor with a written promise to pay a certain sum of money to the creditor on a particular date or on demand is called a promissory note. |
| Section | The Bill of exchange is mentioned in section 5 of the negotiable instruments act,1881. | A promissory note is mentioned in section 4 of the negotiable instruments act,1881. |
| Issued By | Creditors | Debtors |
| Concerned Parties | It involves three parties i.e drawer, drawee, and payee. | It involves two parties i.e, drawee and payee. |
| Acceptance | Drawee must accept the bill of exchange before payment. | It need not to be accepted by the drawee. |
| Copies | It can have copies. | It cannot be drawn in copies. |
| Liability | In the case of a bill of exchange, the liability of the drawer is secondary and conditional. | In the case of the promissory note, the liability of the drawer is primary and absolute. |
Key Differences Between Bill OF Exchange And Promissory Note
The major difference between bill of exchange and promissory note is that
- A bill of exchange refers to a type of negotiable instrument that contains an unconditional order signed by the drawer(maker) which directs a person to pay a certain amount of money to a particular person or the holder of the instrument within the specific time frame. On the other hand, a promissory note is another negotiable tool that contains a written promise to pay a certain sum of money to its holder by a person or an organization either on a pre-defined date or on demand by the holder.
- While the bill of exchange is mentioned in Section 5 of the negotiable instrument act of 1881, a promissory note is mentioned under section 4 of the negotiable instrument act, 1881.
- In the case of a bill of exchange, there are three parties involved while in the case of the promissory note, there are two parties engaged.
- The bill of exchange is created by creditors, while on the other hand the promissory note is created by debtors.
- In the case of a bill of exchange, no assets are held as collateral. While in the case of the promissory note, the assets may be held as a security for a debt.
Key Takeaway(s)
Conclusion
So, with the above concepts, we can simply conclude that both bill of exchange and promissory note are crucial as a cheque. The bill of exchange is created by creditors and then is sent to the debtor, instructing him for the payment of items being borrowed. While on the other hand, the promissory note is created by debtors.
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