Promissory Note vs Bill of Exchange: Negotiable Instruments
Both are negotiable instruments under the Negotiable Instruments Act, 1881, but they differ in the number of parties, the direction of promise, and their acceptance requirements.
head-to-Head Comparison
| Basis | Promissory Note | Bill of Exchange |
|---|---|---|
| Number of Parties | Two parties: Maker (Drawer) and Payee | Three parties: Drawer, Drawee (Acceptor), and Payee |
| Nature | An unconditional PROMISE to pay (by the maker) | An unconditional ORDER to pay (by the drawer to the drawee) |
| Acceptance | No acceptance required — the maker is already the primary debtor | Must be accepted by the Drawee to become legally binding on the drawee |
| Liability of Maker/Drawer | Maker is primarily liable to the Payee | Drawer's liability is secondary (contingent on dishonor by acceptor) |
| Example | 'I promise to pay B or order ₹5,000' — Maker = A, Payee = B | 'Pay B or order ₹5,000 — A'. Drawer = A, Drawee = C (bank), Payee = B |
The 'Cheque is a BOE' Trap
A Cheque is a special type of Bill of Exchange drawn on a specific banker and payable on demand. So Cheque ⊂ Bill of Exchange. Students often treat a cheque as a separate instrument — it is not. However, unlike a regular BOE, a cheque does NOT require acceptance.
Common Ground (Similarities)
- Both are negotiable instruments — they can be freely transferred by endorsement and delivery.
- Both contain an unconditional obligation to pay a certain sum of money.
- Both are governed by the Negotiable Instruments Act, 1881 and are admissible as evidence in court.
Test Your Understanding
Q1: How many parties are involved in a Promissory Note?
One
Two ✅
Three
Four
Explanation: A Promissory Note has two parties: the Maker (who makes the promise) and the Payee (to whom payment is promised).
Q2: A Bill of Exchange requires ________ to become binding on the Drawee.
Endorsement
Payment
Acceptance ✅
Noting
Explanation: Until the Drawee accepts the BOE by signing it, they have no liability. Acceptance creates the primary liability of the Acceptor.