Introduction
Notebook: ipe
Created: 01-02-2023 21:33 Updated: 01-02-2023 21:35,
Author: Vinit kumar
Introduction
Paper money, in the modern sense, originated in the late 18th
century and the note was issued by private banks as well as semi-
government banks. Other payment instruments in the Indian money
market were introduced by the private banks and the Presidency
Banks. Cheques were introduced for the first time in India by the
Bank of Hindoostan, in 1770. In 1827, the British introduced “post
bills” that were Inland “promissory notes” issued by the bank at a
distant place. The holder of the post bill would be paid on acceptance
after a specified number of days and was similar to muddati hundis,
already existing in India. To formalise the use and standardise the
characteristics of instruments like the cheque, the bill of exchange
and promissory note, the Neqotiable Instruments Act (INI Act) was
enacted in 1881.
Nenotiahle
instruments
Negotiable instrument is a piece of paper that entitles a person to a
certain sum of money, transferable from one person to another by
mere delivery or by endorsement and delivery. The person on
transfer of the negotiable instrument also becomes entitled to the
money and the right to further transfer it. Negotiable instruments
are documents that are exchangeable and have a monetary value
which is two of their main characteristics. The negotiable
instruments and all their aspects are governed by the Negotiable
Instruments Act, 1881 in India. This Act defines these instruments
and has provisions for each type of them individually. Negotiable
instruments must contain important information such as the date,
the signature of the payer, the principal amount and also the interest
rate,
Promissory note
A promissory note is basically an informal loan or the document of
an informal loan. It is an instrument given in writing with an
unrestricted guarantee to pay a certain amount of money to a
certain individual or to the bearer of the instrument and signed bythe maker of it, It thereby creates a debt on the maker of the
promissory note.
According to Section 4 of the Negotiable Instruments Act, 1881 a
note is an instrument in writing but not being a bank or a currency
note that contains an unconditional undertaking, signed by the
maker to pay a certain amount of cash, or to the order of, to a
particular person or the bearer of the instrument. The limitation
period for a promissory note to file a suit is three years from the
date of execution or from the date of acknowledgement.
Example: Sometimes we take or give loans to our friends, relatives
and known people. But in the case of failed payment, there are
chances of getting a dispute in the relations, so in such a situation a
promissory note that is a proper legal financial instrument can be
used to recover the amount from the defaulter. Ajay wants to
purchase some goods from Ashok and has an immediate
requirement for them, but he has no money to pay Ashok for the
goods instantly. So, in such a situation, he can issue a promissory
note to Ashok that makes a written promise that he will pay the
specific money on a particular date or on the demand to Ashok.
Parties to a promissory note
There are mainly three parties in the promissory note, that are a
drawee, a payee, and a drawer:
1. Drawer: An individual who makes the written promise to pay the
amount on a certain date or on the demand by the drawee is
called the drawer. The drawer is also known as, the maker, or
promisor,
2, Drawee: The person to whom the promise has been made, or the
person in whose favour the promissory note is drawn is called
drawee or promise.
3, Payee: A payee is a third party to whom the payment is made.
The payee and drawee are the same people to whom the amount
is paid.
Features of a promissory note
1. Written or printed agreement: A promissory note should
always be written and cannot be an oral promise to pay money.
2. Pay defined amount: It’s a promise to pay the money on a
particular date or when demanded by the drawee. However, the
amount mentioned can neither be subtracted nor added.
3, Detailed Information: A promissory note must have all the
specified information such as the name of the drawer, drawee and
payee, date of maturity, terms of repayment, issue date, name,
and signature of the drawer, the principal amount, and the rate of
interest,4, Unconditional promise: The promise to pay the drawee the
amount of money mentioned in the promissory note must be
unconditional because a conditional instrument will not be
negotiable even after the fulfilment of the condition.
5. Duly signed and delivered by the maker: A promissory note is
incomplete without the signature of the drawer and it is required
to authenticate and give effect to the contract contained in the
document. The promissory note can be signed in any part of the
document. In case the maker cannot write their name, it may
have their thumb impression also,
6. Stamp duty for promissory note: A promissory note must be
stamped with revenue stamps available from the post office. In
case of a promissory note made for a large sum of money, a non-
judicial stamp paper should be used. It is important for all
promissory notes to be stamped with the proper revenue stamp
or non-judicial stamp paper as per Section 13 of the Indian Stamp,
Act, 1899, a promissory note that is not properly stamped or
insufficiently stamped is considered an invalid document and not
admissible in Court.
Farmat of a
promissory note
Promissory NoteAmount: Date of
making. Place: I (name of drawer), hereby acknowledge and
make a commitment to pay (name of drawee), the sum of (mention the amount in
rupees). Repayment is to be made in the form of (mention the payment schedule) at the
interest rate of (mention interest rate of the amount payable), making the total amount
due as (mention the final amount which is to be repaid after the interest is applied) on
(mention date of each month when payment is to made or one-time payment date)
Until the total amount of debt is paid. Notwithstanding any contrary statements
contained in this promissory note, if the drawer defaults on payment of this promissory
note or any other obligations set forth herein, and the default continues after the
drawee notifies the drawer of the default and the period within which it must be
corrected, as may be required by law, then this drawee may declare the unpaid principal
balance, and any accrued interest, immediately due and payable IN WITNESS WHEREOF,
| set my hand under seal this {the date and day) of (month and year) and |
acknowledge receipt of a completed copy of the instrument. Signature
of the drawer
Stamp Name and Address of the drawer
Bill of Exchange
‘bill of exchange’ is one of the most common types of negotiable
instruments and a type of written order/notice used for international
trade that binds one party to pay another party a definite amount of
money on demand or at a pre-decided date. It is mostly used in
international trade to help importers and exporters fulfil their
transactions. A bill of exchange however is different from a contract
but can be used by the parties involved to specify the terms and
conditions of a transaction. Although bills of exchange are similar tothe promissory note, many differences exist between them. The
definition of a bill of exchange is given in Section 5 of the Negotiable
Instruments Act, 1881 as a negotiable instrument that is in writing
and holds an unconditional order by the bill's maker to pay a certain
amount of money either to a specific person or its bearer. Bill of
exchange is also defined in Section 2(2) of the Indian Stamps Act,
1899 and the bill of exchange payable on demand has been
explained in Section 2(3) of the Indian Stamps Act, 1899.
Example: Ajay sold goods to Ashok on credit for Rs. 50,000 for six
months. To ensure the return of his payment on the due date Ajay
draws a bill of exchange upon Ashok for Rs. 50,000 payable after six
months. Before it is accepted by Ashok the document will be called a
draft. It will become a bill of exchange only after Ashok writes the
word “accepted” and appends the draft with his signature to
communicate his acceptance.
Parties to a bill of exchange
1, Drawer: This person is the maker of a bill of exchange, who is a
seller/creditor and who is authorised to receive money from the
debtor,
2. Drawee: In contrast to the drawer, the drawee is the person, who
is a purchaser or debtor who has been directed to pay the sum of
money mentioned in bill
3, Payee: Either the drawee or a person who will be receiving the
money is called the payee. The drawer of the bill becomes the
payee if he/she keeps the bill with him/her till the date of its
payment,
4, Acceptor: This is the person who signs the bill of exchange as a
mark of his acceptance and generally, the acceptor is the drawee
but a stranger may accept it too.
5, Holder: Payee of the bill of exchange is generally the holder. It
may also be another person to whom the payer endorses the bill.
In the case of the bearer of the bill, the bearer himself is the
holder.
6. Endorser: A bill holder becomes an endorser when he endorses
the bill to another person.
7, Endorse: This is the person to whom a bill of exchange has
been endorsed by the endorser.
Features of a bill of exchange
1, Written or printed agreement: To be a valid bill of exchange it
must be in writing. An oral direction to make the payment cannot
be considered a bill. The language of the bill has no bar but the
document so reduced to writing must adhere to all the conditions
laid down in Section 5 of the Negotiable Instruments Act, 1881
2, Unconditional order to pay: The order to pay must be without
any condition whatsoever except under certain circumstances.However, the direction of the drawer to the drawee must be
unconditional. The acceptor or the endorser may make his own
liability conditional in a bill. When a negotiable instrument
becomes bad as a bill it may still be used by the drawee as an
authority to make payment to the payee. If properly stamped,
even a bad bill can be used as evidence of an agreement between
the parties. So, a bill of exchange needs to have an order to pay
and the order should be express and unconditional.
3. Detailed information: All the entities, payee, drawer and
drawee must be definite individuals. Although the drawer and the
drawee cannot be the same person the drawer and payee,
generally are the same person as the drawer usually draws the bill
in his or her favour. Names of the drawer, the drawee and the
payee must be definitely mentioned in the bill. The fixed date for
the amount to be paid and the date of payment are some other
essentials of the bill.
4. The drawer must be certain and sign the instrument: The
bill is considered complete only after it is signed by the maker.
Without his/her signature, it remains incomplete, The amount of
money must be certain.
Format of a bill of
exchange
Bill of Exchange Stamp Name and address of
drawer Date on which the bills
drawn: Amount One month after the date pay to (name and address of payee) or order,
the sum of (mention the amount) for value
received. Accepted (Signed by the drawer)
Signed by the drawee Name
and address of drawer Name and address of drawee
Cheque
A cheque is a negotiable instrument under Section 6 of the
Negotiable Instruments Act, 1881. By a cheque one individual/party
orders the bank to transfer the money to the bank account of
another individual/party in whose name the cheque has been issued
A cheque ensures safe, secure, and stress-free payment because it
is a convenient option as there is no involvement of hard cash during
the transfer process, In other words, a cheque is a bill of exchange
drawn on a bank payable always on demand and the bank is always
the drawee in the case of a cheque. It is generally written in a
specially printed form. According to Section 6 of the Negotiable
Instruments Act, 1881, a cheque is a bill of exchange drawn on a
specified banker payable only on demand. In the case of cheques,
the drawer and payee may be the same person.
Parties to a cheque1, Drawer: It is the person who draws/writes the cheque, signs it
and orders the bank to pay the amount to someone.
2. Drawee: It is the banker of the drawer or the bank on which the
cheque is drawn or who is directed to pay/transfer the specified
sum written on the cheque to somebody.
3, Payee: Payee is the beneficiary/person to whom the amount
written in the cheque is issued or to whom the amount is to be
paid. The payee could draw himself or any other person.
4. Endorser: When the payee transfers his/her right to take the
payment to another person, he/she is called the endorser.
Endorsee: The person in whose favour, the right is transferred is
called the endorsee.
Features of a cheque
1. Written order: A cheque, just like a bill of exchange and the
promissory note has to be written and an oral order to pay does
not institute a cheque
2, Drawn ona banker: A cheque has to be drawn on a bank
where the drawer has an account, be it a savings bank account or
a current account,
3. Unconditional: A cheque is not a request but an order to pay
and it must be unconditional. The order should be to pay a
definite amount of money and if the cheque is drawn to do
something other than pay money then it cannot be a cheque.
4. Signature and date: A cheque without the date and signature of
the issuer is invalid.
5, Payable to the drawer: Cheques may be payable to the drawer
and maybe drawn also payable to the bearer on demand unlike a
bill or a promissory note.
6. Specific banker only: A cheque is drawn always by a specific
banker and these days the name, address of the banker and the
bank's IFS (Indian Financial System) code are printed on the
cheque leaf itself.
7. Stamp: Unlike a bill of exchange and promissory note, no
revenue stamp is required to be affixed on cheques.
Nifferance hetween
cheniie and bill of
exchange
Aspect Cheque Bill of exchange
Meaning By a cheque one A negotiable instrument is,
individuaV/party orders the in writing and holds an
bank to transfer the money unconditional order by theProvision
Drawn on
When can it be drawn
Notice of Dishonour
Copies
Approval
Grace period
Liability
Discharge
to the bank account of
another individual/party in
whose name the cheque has
been issued
A cheque is a negotiable
instrument under Section 6
of the Negotiable
Instruments Act, 1881
A cheque is always drawn
on a particular banker.
A cheque can only be drawn
payable on demand,
For a cheque, a notice of
dishonour is not
compulsory.
The cheque allows no
copies.
A cheque does not need any
approval from the parties
before being presented for
payment.
A cheque does not have a
grace period once itis,
presented for its payment.
Parties remain liable to pay
and in case notice of
dishonour is not given.
‘The drawer of a cheque is
discharged only if he suffers
bills maker to pay a certain
amount of money either to
a specific person or its
bearer.
‘The definition of a bill of
exchange is given in
Section 5 of the
Negotiable Instruments
‘Act, 1881. Bill of exchange
is also defined in Section
2(2) of the Indian Stamps
‘Act, 1899 and the bill of
exchange payable on
demand has been
explained in Section 2(3) of
the Indian Stamps Act,
7899,
Abill of exchange can be
drawn on anyone,
including a banker. Itis
generally drawn by the
creditor upon his debtor.
Abill of exchange may be
drawn payable on demand,
or the expity of a certain
period after date or sight:
For a bill of exchange, a
notice of dishonour is
mandatory and it should
be served to all the
concerned parties involved
in the transaction on
dishonouring the bill of
exchange.
Bill of exchange can have
copies.
Abill of exchange needs
approval from the drawee
for the payment.
Abill of exchange,
however, has a three days
grace period,
AAs regards a bill of
exchange, the parties who
don't get notice of
dishonour are free from
the liability of paying and
the liability of the drawer is
secondary and conditional.
The drawer of a bill of
exchange is discharged, ifAcceptance
Revocability
Crossing
Stamp
any damage by delay in
presentation for payment.
A cheque does not require
acceptance and its object is
for immediate payment
A cheque being a revocable
mandate, the authority can
be revoked by
countermanding payment
and is determined by notice
of the customer's death or
insolvency.
A cheque may be crossed
and itis safer if itis crossed.
A cheque does not require
any stamp except in certain
itis not presented for
payment.
Abill of exchange must be
accepted first before
payment can be
demanded on it
This is not so in the case of
abill of exchange. A bill of
exchange is not a
revocable mandate.
Abill of exchange may not
be crossed,
Abill of exchange must be
stamped,
Niffereance hetweean
hill af axchanae and
a promissory note
Aspect
Meaning
Legal
Drawer of the instrument
Partied involved
Bill of exchange
Anegotiable instrument
that is in writing and holds
an unconditional order by
the bill's maker to pay a
certain amount of money
either to a specific person
or its bearer
The definition of a bill of
exchange is given in
Section 5 of the Negotiable
Instruments Act, 1881. Bill
of exchange is also defined
in Section 2(2) of the Indian
Stamps Act, 1899 and the
bill of exchange payable on
demand has been
explained in Section 2(3) of
‘the Indian Stamps Act,
1899,
Creditor
Basically, three parties are a
drawer, drawee and payee
are involved
Promissory note
Itis an instrument given in
writing with an unrestricted
guarantee to pay a certain
amount of money to a
certain individual or to the
bearer of the instrument
and signed by the maker of
it
The definition of the
promissory note is given in
Section 4 of the Negotiable
Instruments Act, 1881
Debtor
‘Two parties involved are
the drawer/maker and the
payee‘The same person can be a
drawer and payee is The drawer and payee
Payabilty payable on-demand oron cannot be the same
the expiry of a certain person.
period.
For a bill of exchange, 2
notice of dishonour is
mandatory and it should be No notice is served to the
served to ll the concerned drawer in case of
Notice of Dishonour
parties involved in the dishonouring the
transaction on promissory note.
dishonouring the bill of
exchange.
Copies Bill of exchange can have The promissory note allows
copies. no copies.
Aregards a bill of
exchange, the parties who
don't get notice of
Liability dishonour are free from the
liability of paying and the
liability of the drawer is
secondary and conditional.
No notice is served to the
drawer in case of
dishonouring the
promissory note
Apromissory note is valid
Abill of exchange has no only for 3 years starting
Validity
y validity for the payment from the date of its
execution
Abill of exchange must be
accepted first before No acceptance is required
‘Acceptance payment can be demanded from the drawee.
onit.
stamp Abill of exchange must be A promissory note has to
stamped besufficiently stamped
Nifference hetween a
cheanue_ hill of
aychanae and
promissory note
Aspect Cheque Bill of Exchange Promissory note
Meaning Byacheque one negotiable Itis an instrument
individual/party instrument is in given in writing
orders the bank to writing and holds an with an unrestricted
transfer the money unconditional order guarantee to pay a
tothe bank account by the bill's maker to certain amount of
of another pay acertain amount money to a certain
individual/party in of money either toa __ individual orto the
whose name the bearer of theLegal
Drawer of the
instrument
Partied involved
Payabilty
Notice of
Dishonour
Copies
Grace period
Liability
cheque has been
issued.
A cheque is a
negotiable
instrument under
Section 6 of the
Negotiable
Instruments Act,
1881
Creditor
Three parties are
involved as a drawn
payee.
Itis payable on-
demand only.
For a cheque, a
notice of dishonour
is not compulsory.
The cheque allows
no copies.
A cheque does not
have a grace period
once itis presented
for its payment.
The parties remain
liable to pay even
though no notice of
dishonour is given.
specific person or its
bearer.
The definition of a bill
of exchange is given
in Section 5 of the
Negotiable
Instruments Act,
1881. Bill of exchange
is also defined in
Section 22) of the
Indian Stamps Act,
1899 and the bill of
exchange payable on
demand has been
explained in Section
243) of the Indian
Stamps Act, 1899,
Creditor
‘The three parties are
a drawer, drawee and
payee.
‘The same person can
be the drawer and
payee is payable
on-demand or on the
expiry of a certain
period,
For a bill of exchange,
a notice of dishonour
is mandatory and it
should be served to
all the concemed
parties involved in the
transaction on
dishonouring the bill
of exchange.
Bill of exchange can
have copies.
Abill of exchange,
however, has a three
days grace period.
As regards a bill of
exchange, the parties
who don't get notice
of dishonour are free
from the liability of
paying and the
liability of the drawer
instrument and
signed by the
maker of it.
The definition of
the promissory note
's given in Section 4
of the Negotiable
Instruments Act,
1881
Debtor
Two parties
involved are the
drawer/maker and
the payee.
The drawer and
payee cannot be
the same person,
No notice is served
to the drawer in
case of
dishonouring the
promissory note,
The promissory
note allows no
copies,
Third day after the
day on which its
expressed to be
payable,
The liability of the
drawer is primary
and absolute.Validity
Acceptance
Stamp
Security and
dishonour
‘Types
A cheque is
generally valid for
six months; some
cheques issued by
the central
government may be
valid only for 3
months from the
date of issue,
A cheque does not
require acceptance
and its objectis for
immediate payment.
A cheque does not
require any stamp
except in certain
A cheque bounce
notice is to be given
to the defaulter. fit
is due to faults of
mismatched
signature,
overwriting ete. the
payee can ask for
the resubmission of
the check to the
drawer for
clearance, However,
ifitis due to
insufficient funds in
the account then a
cheque bounce
notice is issued
under Section
135 of the
Negotiable
Instruments Act
within 30 days of an
intimation sent by
the bank. 15 days
after the notice
given, the payee can
initiate legal action
under Section 138
of the Act and the
offence of cheque
bounce isa criminal
offence under it.
Bearer ChequeOrder
chequeCrossed
chequeOpen
chequePost-dated
is secondary and
conditional
‘There is no validity to
abil
Abill of exchange
must be accepted
first before payment
can be demanded on
Abill of exchange
must be stamped.
Notice of dishonour
must be given
immediately to the
drawer otherwise to
whom such notice for
default is not given is
discharged, Section
20 of the Negotiable
Instruments Act
provides that in case
of dishonour by the
drawee the drawer is
authorised
compensation if due
notice of dishonour
has been served to
the drawee, Section
92 of the Negotiable
Instruments Act says
that a bill is
dishonoured by non-
payment when the
acceptor of the bill
makes a default in
payment after being
duly required to pay
the amount.
Documentary bill
Demand billTrade
BillExport billlmport
bill
A promissory note
is valid only for 2
period of 3 years
from the date of its
execution after
which it becomes
invalid,
No acceptance is
required from the
drawee,
A promissory note
has to besufficiently
stamped,
Collateral notes are
secured by a piece
of property or
another tangible
asset that can be
repossessed if the
borrower defaults
con the terms of the
promissory note,
‘One should also
check the
vetification of the
limitation period
and file a civil case
within a certain
time limit as per
the Limitation Act
1993,
Real estate
noteCommercial
notePerson
promissorychequeTraveller's notelnvestment
chequeSelt- note
chequeBanker's
cheque
Conclusion
Negotiable instruments such as cheques, bills of exchange and
promissory notes are considered written contracts whose benefit can
be passed on from the original holder to a new holder because these
negotiable instruments are documents which promise payment to
the assignee or a specified person. The advantage that these have is
that the final holder collects the funds and can use them as per
his/her requirements and once the instrument is transferred, the
holder of such instrument gains full legal title to such instrument,
The last decade has seen an electronic revolution in the banking
sphere in India, but negotiable instruments are still used widely.
Their existence depends on people overcoming the problems faced
due to digital banking but someday in the future, they may become
obsolete.