---Rs. 10,000 New Delhi 110 016
Oct. 13, 1987
Six months after date I promise to pay X or order the sum of Rupees Ten Thousand only for value received.
To X Address
Stamp Sd:
---
---On the basis of the above discussion, we may summarize the basic features of a promissory note as given below:
---Essentials or Characteristics of a Promissory Note
1. It must be stamped.
2. It must contain a promise or undertaking to pay 3. The promise must not be conditional
4. The undertaking must be to pay certain sum of money 5. It may be payable on demand or after a particular date 6. It cannot be payable to bearer (Sec 31 or RBI Act)
7. It cannot be payable to bearer on demand (Sec 31 of RBI Act) 8. It cannot be crossed like a cheque
9. Number, place, date, etc., are not essential for a promissory not. If it does not bear a date, it is deemed to have been made when it was delivered
10. It may be payable by installments.
---Bills of Exchange
A ‘bill of exchange’ is defined by Sec. 5 of the Negotiable Instrument Act., 1881 as “an instrument in writing, containing an unconditional order, signed by the makers, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instruments”. In England, a bill of exchange is defined under Section 3 (1) of the Bill of Exchange Act as ‘an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specific person, or to the bearer”. Both these definitions points out that a bill exchange should be 1) in writing, 2) unconditional, 3) in the form of an order not a promise or request, 4) for a sum of money, not for a sum of money, not for a commodity or anything and 5) payable to a certain person or to his order or to the bearer of the instrument.
SPECIMEN OF PROMISSORY NOTE
---Rs. 10,000 New Delhi 110 016
Oct. 13, 1987
Six months after date pay to order the sum of Rupees Ten Thousand only for value received.
To Z Address
Stamp Sd:
---
---The specimen given above is of a usance bill, payable after a specified period of time. A bill of exchange may be drawn payable ‘at sight’ i.e. on demand or payable ‘after certain time after sight’
Basic features of a bill exchange may be summed up as hereunder.
---Essentials or Characteristics of a Bills of Exchange 1. It must be stamped
2. It contains an order to pay 3. Order must be unconditional 4. Sum payable must be certain 5. May be drawn payable to bearer
6. Cannot be made payable to bearer on demand 7. Cannot be crossed like a cheque
8. Requires acceptance by the drawee unless payable on demand 9. It is dishonoured by non-acceptance or non-payment
10. It may be payable by instalments
---Cheque:
A cheque is defined as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. (Section 6 of the Negotiable Instruments Act, 1881). Thus a cheque is a bill of exchange but always drawn on a specified banker and is always payable on demand, not otherwise.
Distinction between Promissory Note and Bill of Exchange
Promissory note differs from a bill of exchange in the following respects.
Promissory Note Bill of Exchange
1. There are only two parties, the maker
(debtor) and the payee (creditor) There are three parties – the drawer, the drawee and the payee, although any two of these capacities may be filled by one and the same person
2. A note contains an unconditional promise by the maker to pay the payee
It contains an unconditional order to the drawee to pay according to the drawer’s directions.
3. No prior acceptance is needed A bill payable ‘after sight’ must be accepted by the drawee or his agent before it is presented for payment.
4. The liability of the maker on drawer is primary and absolute.
The liability of the drawer is secondary and conditional upon non-payment by the drawee 5. No notice of dishonour need be given Notice of dishonour must be given by the
holder to the drawer and the intermediate indorsers to hold them liable thereon.
6. The maker of the note stands in relation with
the payee The maker or drawer does immediate not stand
in intermediate relation with the payee but with the acceptor or drawee.
Difference between Bill of Exchange and Cheque
Though a cheque is defined as a bill of exchange, it differs from the latter in the following respects.
Cheque Bill of Exchange
1. It must be drawn only on a banker It can be drawn on any person including a banker
2. The amount is always payable on demand. The amount may be payable on demand or after a specified time.
3. The holder of a cheque is of grace A holder of a bill is entitled not entitled to day to three days of grace
4. Acceptance is not needed A bill payable after sight must be accepted 5. A cheque can be crossed Crossing of a bill of exchange is not possible 6. Notice of dishonour is not necessary. The
parties thereon remain liable, even if no notice of dishonour is given
Notice of dishonour is necessary to hold the parties liable thereon. A party which does not receive a notice of dishonour can generally escape is liability thereon
7. A cheque is not to be noted or protested in
case of dishonour A bill is noted or protested to establish dishonour
8. The protection given to the paying banker in respect of crossed cheques is peculiar to this investment.
No such protection is available in the case of bills
Distinguishing Features of Cheques, Bill of Exchange and Promissory Note:
Based on the above statutory definitions, the following are the distinguishing features of the three negotiable instruments indicating the similarities and contracts between them:
1. Instruments in writing : The low requires that a cheque, bill or promissory note must be an instrument in writing. It does not specify any particular material with which it is to be written. Though a negotiable instruments written with a pencil is not prohibited by law, in practice the bankers do not accept such instruments because of risk involved Alternations therein may be easily made which cannot be detected.
2. Unconditional order/promise: A cheque and a bill of exchange contain an order to the drawee whereas a promissory note contains a promise by the maker to his creditor. Thus the main difference between a cheque and a bill on the one hand and a promissory note on the other is that the cheque and the bill contain an order from the creditor to the debtor to pay a sum of money while he promissory note contains an undertaking or promise made by the debtor to his creditor to pay the sum specified therein.
However, there is one common feature of a promissory note, cheque and a bill. The promise in the former and the order in the latter must be an unconditional one i.e., the payment should not be made dependent upon the happening or occurrence of a particular event or on the fulfillment of any condition. But if the time for payment of the amount (or any of its installments) is expressed to be on the lapse of a certain period after he occurrence of specified event, the promise or order to pay is not deemed ‘conditional’ provided the event is certain to happen according to ordinary expectation of mankind, although the time of its happening may be uncertain (Section 5) Thus, a distinction may be made between an event which is bound to take place according to human expectation and the one which may or may not at all take place according to human expectation and the one which may or may not at all take place. For example, the death of a particular person is an event which shall definitely take place, its timing ma be uncertain. But the marriage of a person, or his departure to or return from a foreign country are events which are uncertain to take place. The banker may refuse to honour a cheque having conditional order of the drawer. The drawer of a cheque
may, however, cross the cheques and thereby instruct the banker the manner in which and the intermediary through which the payment is to be made. Such instructions do not make the order of the drawer a conditional one.
The words in the cheque or the bill must be in the nature of an order rather than a request, though it is not necessary that the word ‘order’ is specifically mentioned therein. Words of courtesy, if any such as ‘please’ do not make the instruments invalid on this ground. The words in the promissory note should also amount to an
unconditional promise to pay the specified amount, otherwise it will not be treated as a promissory note. For example, in the following cases, unconditional promise is not given by the writer of the note:
1. Mr. B.I.O.U (I owe you) Rs. 500 2. I am liable to pay you Rs.500
3. “I promise to pay B Rs. 5,00 and all other sums which shall be due to him”.
4. “I promise to pay B Rs. 5,00, first deducting thereout any money which he may owe me”
5. “I promise to pay B Rs. 500 seven days after my marriage with C”
6. “I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum”.
7. “I promise to pay B Rs. 500 and to deliver him my black horse on 1st January next”
In the following case, the writer of the promissory note makes an unconditional promise.
i) I promise to pay B or order Rs. 5,000.
ii) I acknowledge myself indebted to B in Rs. 1,000 to be paid on demand, for value received.
3. The drawee of a cheque or bill : The main difference between a cheque and a bill is that the former is always drawn on and is payable by a banker specified therein, while a bill of exchange may be drawn on any person, firm or company. Thus only a customer of a bank having a current or a savings bank account is entitled to draw a cheque on his banker i.e., the particular branch of a bank where he has opened his bank account. The name and address of the drawee bank are specifically printed on the cheque form. A bill of exchange is generally drawn by a seller on his customer, or by a creditor on his debtor. Sometimes accommodation bills are also drawn to help a familiar party.
4. The amount of the instrument must be certain: The order of the drawer of a cheque or a bill and the promise by the writer of a promissory note must be to pay a certain sum of money and not anything else, e.g., securities or goods, etc. The amount of money to be paid must be certain and specified in words and figures. According to Section 5, the sum payable may be ‘certain’ although.
i) it includes future interest, or
ii) it is payable at an indicated rate of exchange, or iii) it is according to the course of exchange, or
iv) the instrument provides that on default of payment of an instalment, the balance unpaid shall become due.
The amount may be mentioned in a foreign currency as well, provided the rate of conversion of the domestic currency into foreign currency is stated by the drawer or is left to be decided according to the market conditions.
5. The instrument must be payable either ‘to order’ or ‘to bearer’: According to Section 13, a promissory note, bill of exchange or cheque must be payable either ‘to order’ or ‘to bearer’. The meanings of these words are explained as under.
i) Payable to order: A promissory note, bill of exchange or cheque is payable to order if it is expressed to be so payable or if it expressed to be payable to a particular person and does not contain words which prohibit its transfer or which indicate an intention that it shall not be transferable. For example, if a cheque is drawn as “Pay to Ram Lal” its payment may be made to Ram Lal or any person as per his order. The cheque can be endorsed, even if it does not contain the words “or order”. But if he cheque is drawn as “Pay to Ram Lal only”, it cannot be endorsed by Ram Lal because the word “only” shows the intention of the drawer to restrict its further transfer. Such a cheque shall be payable to Ram Lal only.
If a negotiable instrument, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option. For example, if a bill of exchange is expressed as ‘pay to the order of Radhey Shyam or order”, it is still payable to Radhey Shyam or if he so chooses to the person specified by him.
ii) Payable to bearer: A promissory note, bill of exchange and cheque are payable to bearer a) if it is expressed to be so payable, or b) if the only or the last endorsement is an endorsement in blank. This means a cheque payable ‘to order’ becomes a bearer cheque if it is endorsed in blank.
If the word bearer printed on a cheque form is scored off, it does not make the cheque non-transferable or non-negotiable, nor does not it render it payable only to the payee. Such a cheque remains payable to order and is negotiable as such, (M. George & Brothers V. Cherian, 1990 (1) Kerala Law Times 133).
6. The payee must be a certain person: The person to whom payment of he instrument is to be made must be certain. The payee is considered as ‘certain person’ for this purpose even if he is mis-named or is designated by description only (Section 5). The term ‘person’ includes, besides individuals, bodies corporate, local authorities societies and associations of persons, etc., and cheque may be drawn payable to the Registrar, Principal, Director, Secretary, etc., of these institutions.
7. The payee may be more than one person: A negotiable instrument may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two or one of some of several payees (Section 13(2)).
For example, a cheque may be payable to-Ram and Shyam or to-Ram or Shyam
In both these cases, it is payable to a certain person.
8. The time of payment: A cheque is always payable on demand, through words to this effect are not mentioned therein. A bill may be payable at sight or after a period of time specified therein. A promissory not or a bill of exchange in which no time for payment is specified is payable on demand (Section 19). If a bill is payable after a certain period it must be accepted by a drawee. But no such acceptance is necessary in case of a cheque. If cheque is a post-dated cheque is does not constitute an order to the banker till the date specified therein approaches Banks do not make payment of such cheques before the date given in the cheques.
9. Signature of the drawer /promissor: A negotiable instrument is valid only if it bears the signature of the drawer/promisor.In case of a cheque the signature of the drawer must tally with his specimen signature given to the banker at the time of opening his account.
10. Delivery of a instrument is essential: A promissory note, bill of exchange and the cheque is a negotiable instrument. The making, acceptance or endorsement of such an instrument is completed by delivery (Section 46).
This means that a negotiable instrument is deemed to have been drawn, when it is written by the person concerned and delivered to the other party to whom it is meant. Delivery may be either actual or constructive.
11. Stamping of promissory notes and bills of exchange is necessary: The Indian Stamp Act, 1899 requires that the promissory note and the bills of exchange must be stamped. This is not required in case of a cheque. The value of stamp depends upon the value of the note or the bill and whether it is payable on demand or at a future date. A note or bill without stamp cannot be admitted in evidence. It may be stamped either before or at the time of its execution.
Currency Notes and Negotiable Instruments: The currency notes posses all the qualities of a negotiable instrument. In fact a currency note is a promissory note (except in case of inconvertible currency) issued by he monetary authorities of a country payable to bearer on demand. The right to issue such currency notes is now being conferred on the central banks of all the countries. In order to prohibit any other person or institution from issuing such promissory notes payable to bearer on demand, Section 31 of the Reserve Bank of India Act., 1934, specifically lays down that.
“No person in India other than the Reserve Bank or, as expressly authorized by this Act, the Central Government, shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person:
Provided that cheques or drafts including hundis payable to bearer on demand or otherwise, may be drawn on a person’s account with a banker, shroff or agent”.
This Section prevents persons (except the Reserve Bank and the Central Government) from drawing, accepting, making or issuing a bill or note payable to bearer on demand. This restriction is imposed with the object that instruments similar to currency notes are not issued by a private party. However, bearer cheques or drafts payable on demand may be issued on the drawer’s personal account with a banker or an agent.
LESSON – 18