Distinction between Promissory note and Bill of exchange

26/12/2020 0 By indiafreenotes

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.

A bill of exchange is a written agreement between two parties the buyer and the seller used primarily in international trade. It is documentation that a purchasing party has agreed to pay a selling party a set sum at a predetermined time for delivered goods. The buyer or seller typically employs a bank to issue the bill of exchange due to the risks involved with international transactions. For this reason, bills of exchange are sometimes also referred to as bank drafts.

Bills of exchange can be transferred by endorsement, much like a check. They can also require the buyer to pay a third party a bank in the event that the buyer fails to make good on his agreement with the seller. With such a stipulation, the buyer’s bank will pay the seller’s bank, thereby completing the bill of exchange, then pursue its customer for repayment.

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.

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.

Promissory notes are similar to bills of exchange in that they, too, are a financial instrument that is a written promise by one party to pay another party. They are debt notes that provide financing for either a company or an individual from a source other than a traditional lender, most commonly one of the parties in a sales transaction.

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.

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.
Drawn by Creditor Debtor
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.