A negotiable instrument is a commercial document in writing, that contain an order for payment of money either on demand or after a certain time. These are of three types, namely, bills of exchange, promissory note and cheques. There are instances when the bill of exchange is juxtaposed with a promissory note. The fundamental difference between Bill of Exchange and Promissory Note is that the former carries an order to pay money while the latter contains a promise to pay money.
Acceptance is one of the major element, which distinguishes the two commercial instruments, i.e. bill of exchange need to be accepted, so as to become effective. On the other hand, a promissory note does not require any kind of acceptance. So, when one is working with these two, he/she should be known about the meaning and features.
Content: Bill of Exchange Vs Promissory Note
|Basis for Comparison||Bill of Exchange||Promissory Note|
|Meaning||Bill of Exchange is an instrument in writing showing the indebtedness of a buyer towards the seller of goods.||A promissory note is a written promise made by the debtor to pay a certain sum of money to the creditor at a future specified date.|
|Defined in||Section 5 of Negotiable Instrument Act, 1881.||Section 4 of Negotiable Instrument Act, 1881.|
|Parties||Three parties, i.e. drawer, drawee and payee.||Two parties, i.e. drawer and payee.|
|Liability of Maker||Secondary and conditional||Primary and absolute|
|Can maker and payee be the same person?||Yes||No|
|Copies||Bill can be drawn in copies.||Promissory Note cannot be drawn in copies.|
|Dishonor||Notice is necessary to be given to all the parties involved.||Notice is not necessary to be given to the maker.|
Definition of Bill of Exchange
A Bill of Exchange is a written document which is duly stamped and signed by the drawer carrying an unconditional order which directs (not commands) a person to pay a specific amount to a particular person or to the order of the particular person or the holder of the instrument. The following conditions need to be fulfilled:
- The bill should be properly dated.
- It must contain an order, i.e. the drawer of the instrument directs the drawee to pay a certain sum to the payee.
- Must be signed by the maker of the bill.
- The drawee must accept Bill.
- Order to pay money only as well as the amount should be definite.
- Delivering the bill to the payee is a must.
The creditor makes Bill of Exchange. It is used in business to settle the debt between the parties.
Definition of Promissory Note
A promissory note is a negotiable instrument, containing a written unconditional promise, duly stamped and signed by the drawer, to pay a specified sum of money to a particular person or the order of the particular person. It is made by the debtor to borrow money from the creditor. The features of a promissory note are as under:
- The note must be in writing carrying written promise to pay money to the creditor.
- Signature of the promisor i.e. drawer of the note must be there.
- The date on which the note is payable should be fixed.
- Both the promisor and promisee needs to be certain.
- The sum of money must be definite.
- The country’s legal currency should be used to discharge the debt.
Promissory Note does not include a currency note or a bank note.
Key Differences Between Bill of Exchange and Promissory Note
The following are the major differences between bill of exchange and promissory note:
- Bill of Exchange is a financial instrument showing the money owed by the buyer towards the seller. Promissory Note is a written document in which the debtor promises the creditor that the amount due will be paid at a future specified date.
- Bill of Exchange is defined in Section 5 of the Negotiable Instrument Act, 1881 whereas Promissory Note is defined in Section 4.
- In a bill of exchange, there are three parties while in the case of a promissory note the number of parties is 2.
- Creditor creates Bill of Exchange. On the other hand, Promissory Note is prepared by the debtor.
- The liability of the maker of the bill of exchange is secondary and conditional. Conversely, the liability of the maker of the promissory note is primary and absolute.
- Bill of Exchange can be made in copies, but Promissory Note cannot be made in sets.
- In the case of the bill of exchange, the drawer and payee can be the same person which is not possible in case of the Promissory Note.
- The notice of dishonor of a bill of exchange must be given to all the parties concerned, however, in the case of promissory note such notice need not be given to the maker.
Along with the differences between the bill of exchange and promissory note, there are a few similarities like both the two instruments are not payable to the bearer on demand as per RBI Act, 1934. Moreover, treatment of Bill of Exchange or Promissory Note is as under-Bills Receivable: The payee of the bill and note. and Bills Payable: The drawer of the note and drawee of the bill.