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Meaning of Promissory Notes, Bills, and Cheques Order under Negotiable Instrument Act

9 min read

By Paromita Maitra

Published on: 09 December 2022 at 22:56 IST

Negotiable Instruments are written contracts in which the benefit of the original holder can be passed on to a new holder. To look at it another way, negotiable instruments are documents that ensure payment to the assignee (the person to whom it is assigned/given) or to a specific person.

These are transferable signed contracts that promise to pay the bearer/holder a fixed amount of money when demanded or at any later date.

These instruments are transferable, as previously stated. The money is given to the final possessor, who can spend them as he thinks fit. That is to state, once an instrument is transferred, the holder acquires full legal title to the instrument.

According to Section 13 of Negotiable Instruments Act, 1881– A ‘Negotiable Instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Types of Negotiable Instruments

Promissory notes (Section-4)

Section 4 of the Promissory Note: Definition- ‘A promissory note is an instrument in writing (not a bank notes or a currency note) usually contains an unconditional undertaking, signed by the maker, to pay a specific amount of money to, or to the order of, a specific person or to the bearer of the instrument,’ according to section 13 of the Negotiable Instruments Act, 1881.

A promissory note is a written commitment by a person to pay a particular person or to his order a quantity of money.

Parties to Promissory Notes

The Maker is the person who creates the promissory note and pledges to pay it. The Payee is the individual to whom the money is transferred.

The following basic components of a promissory note are evident from the definition-

  1. Written – A promissory note must be written down. Print and typewriting are both forms of writing.
  2. Promise to pay – It can include a promise to pay or an obligation to pay. As a result, simply acknowledging indebtedness is insufficient. It’s worth noting that the phrase “promise” isn’t required to define a document as a promissory note.
  3. Unconditional – The payment commitment must be unconditional. As a result, instruments due on the performance or non-performance of a specific act or the occurrence or non-occurrence of a certain event are not promissory notes.
  4. Number, location, date, and so on – These are typically found in a promissory note, but they are not required by law. A promissory note is presumed to have been made when it is given if it does not have a date.
  5. Payment in installments – It could be paid in installments.
  6. It can be paid on demand or after a set length of time. Payable ‘on demand’ meaning that it can be paid right away or at any moment until it becomes time-barred. A demand promissory note becomes time barred three years after the date it bears has passed.
  7. It cannot be rendered payable to bearer on demand or even after a set period of time.
  8. It must be duly stamped under the Indian Stamp Act – It means that the stamps of the requisite amount must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity.

Types of Promissory Notes

  1. Real estate promissory notes: A bank may issue a real estate promissory note at the beginning of a mortgage for a real estate home loan. This is especially useful if the lending party is a private individual rather than a bank. These types of promissory notes indicate that the home is collateral for the loan, and the creditor or issuer can theoretically place a lien on the property if the borrower cannot pay by a specific date or defaults on the loan.
  2. Student loan promissory notes: When a student takes out a loan for student financial aid for their undergraduate or graduate schooling, they typically sign a promissory note to formalize the loan. The promissory note agreement often stipulates that interest does not begin to accrue until after the student graduates. Students can often sign a master promissory note for the entirety of their schooling, which they don’t need to re-sign each year they take out a loan for school.
  3. Informal promissory notes: An informal promissory note, also called a personal promissory note, typically comes into play for a loan between two individuals such as friends or family members. It is a written promise between the payer and payee that a sum of money will be repaid in a certain period of time, and might not include as many repayment terms as other more formal promissory notes.

Bill Of Exchange [Section 5]:

A ‘Bill of Exchange’ is a written instrument containing an unconditional order, agreed to sign by the maker, trying to direct a certain person to pay a certain amount of money just to or to the order of a certain person, or to the bearer of the instrument, according to Section 5 of the Negotiable Instruments Act, 1881. It’s also known as a Draft.

A bill of exchange must have the following characteristics:

  • It must be written.
  • It must include a payment order rather than a promise or request.
  • The order must be irrevocable.
  • There must be three people involved, namely the drawer, the drawee, and the payee.
  • The parties must be certain of themselves.
  • The drawer must sign the document.
  • The amount owed must be certain or capable of being determined.
  • The order must be for the payment of money alone.
  • It must be properly stamped in accordance with the Indian Stamp Act.
  • The number, date, and location are not required.

Parties to Bill of Exchange

Drawer: The maker of a bill of exchange is called the Drawer.

Drawee: The person directed to pay the money by the Drawer is called the Drawee.

Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid by the instruments are called the Payee.

Types of Bills of Exchange

Type of bill of exchange depends on its object or purpose. From the accounting point of view, Bills of exchange are of two types:

  • Trade bill: Where the bill of exchange is drawn and accepted to settle a trade transaction, it is called Trade bill. This bill of exchange is drawn by the seller of the goods and is accepted by the buyer.
  • Accommodation bill: Where a bill of exchange is drawn and accepted for mutual help, it is called Accommodation bill. This bill is for mutual benefit without a trade transaction. It does not involve a sale or purchase of any goods or services. This bill carries an agreement between two parties for the purpose of giving financial support to others.

Cheque [Section 6]

A Cheque is considered as “A bill of exchange drawn on a particular banker and not expressed to be due otherwise than on demand,” as per section 6 of the Negotiable Instruments Act of 1881.

Thus, a cheque is a bill of exchange having two new features:

  • It is always drawn on a particular banker;
  • It is always payable on demand.

Cheque Essentials:

  • Written Check: The check must be written. It can’t be done orally.
  • Unconditional: A cheque should be written in such a way that it conveys an unconditional order.
  • Creator’s Signature: It must be signed by the maker.
  • Amount in the Check Must Be Certain: The amount in the check must be certain.
  • Payees Must Be Specified: It must be payable to a specific individual.
  • Cash Only: Only cash should be accepted as payment.
  • Payable on Demand: It must be able to be paid immediately.
  • Upon a Bank: This is a depositor’s order to a bank.

Parties To a Cheque

Drawer: Drawer is the person who draws the Cheque.

Drawee: Drawee is the drawer’s banker on whom the Cheque has been drawn.

Payee: Payee is the person who is entitled to receive the payment of a Cheque.

Types of Cheques

  • Bearer cheque – It is one in which the bearer has the authority to have the cheque cashed. This means that the individual who delivers the check to the bank has the authority to request encashment from the bank. This form of check can be used to withdraw money. This type of check can be endorsed. The holder of the check does not need to show any identity.
  • Order a check – This sort of check cannot be endorsed, which means that only the payee whose name appears on the check is eligible to receive cash for the amount. To ensure that the cheque can only be en-cashed to the payee, the drawer must strike the “OR BEARER” mark as indicated on the cheque.
  • Crossed Cheque – In this type of cheque, no cash withdrawal can be done. The amount can only be transferred from the drawer’s account to the payee’s account. Any third party can visit the bank to submit the cheque. In case of a crossed cheque, the drawer must draw two lines at the left top corner of the cheque.
  • Account Payee Cheque – This is the same as the account payee cheque but no third-party involvement is required. The amount shall be transferred directly to the payee’s account number. To ensure that it is an account payee cheque, two lines are made on the left top corner of the cheque, labelling it for “A/C PAYEE”.
  • Stale Cheque – In India, any cheque is valid only until 3 months from the date of issue. So if a payee moves to the bank to get withdrawal for a cheque which was signed 3 months ago, the cheque shall be declared a stale cheque.
  • Post Dated Cheque – If a drawer wants the payee to apply for withdrawal or transfer of money after the present date, then he/she can fill a post-dated cheque.
  • Ante Dated Cheque – If the drawer mentions a date prior to the current date on the cheque, it is called ante dated cheque.
  • Self Cheque – If the drawer wishes cash for himself, he can issue a cheque where in place of the Payee’s name he can write “SELF” and get encashment from the branch where he owns an account.
  • Traveller’s Cheque – As the name suggests, the Traveler’s cheque can be used when a person is travelling abroad where the Indian currency is not used. If a person is travelling abroad, he can carry the traveller’s cheque and get encashment for the same in abroad countries.
  • Mutilated Cheque – If a cheque reaches the bank in a torn condition, it is called a mutilated cheque. If the cheque is torn into two or more pieces and the relevant information is torn, the bank shall reject the cheque and declare it invalid, until the drawer confirms its validation. If the cheque is torn from the corners and all the important data on the cheque is intact, then the bank may process the cheque further.
  • Blank Cheque – When a cheque only has a drawer’s signature and all the other fields are left empty, then such a type of a cheque is called a blank cheque. The above-mentioned types of cheques are the most commonly known and used in the Indian banking industry. Let us now know the parties associated with a cheque.

The Negotiable Instruments (Amendment) Bill of 2017 is a bill that amends the Negotiable Instruments Act.

On January 2nd, 2018, the Negotiable Instruments (Amendment) Bill, 2017 was introduced in the Lok Sabha. The bill proposes to change the existing Act.

Promissory notes, bills of exchange, and checks are all defined in the bill. The bill also establishes penalties for check dishonor and other crimes involving negotiable instruments.


Negotiable Instruments, as defined in the preceding discussion, are documents that are relevant to business transactions. In the world of trade, negotiating mechanisms are quite important. For international trading, we can employ negotiable instruments.

Negotiable or non-negotiable instruments are available. They must, however, fall into one of the two groups. By statute or mercantile usage, an instrument can become negotiable.

Because these documents are written, the person to whom the payment is to be made can sue the person to whom the payment is to be made if the payment is not made. Three major negotiable instruments with distinct characteristics are the bill of exchange, the check, and the promissory note.

These are the most widely used tools in international trade. These instruments can be freely passed from one person to another. Cheques are a convenient way to pay, but they can only be used on demand, and they are only good for three months.

Stamping isn’t necessary. An order to pay is a specific type of cheque. A bill of exchange (BOE) is a written document that demonstrates a debtor’s obligation to a creditor. It has to be stamped, and it can’t be paid on demand.

A promissory note is a written agreement to pay at a later period. Even after the digital revolution, these negotiable instruments are still in use. The electronic revolution is currently underway. The electronics revolution is considered as the next major step which replaces the negotiable instruments.


Negotiable Instruments Introduction Act

Negotiable Instruments – Meaning, Types & Uses