Difference Between Bill of Exchange and Promissory Note

Introduction

Negotiable instruments are signed documents that promise to pay a set sum of money to the holder or assignee at a specific date or upon demand. These instruments are transferable, allowing the individual or entity to put them to the best possible use.

Bills of Exchange, Cheques, and Promissory Notes are the three types of Negotiable Instruments.

A negotiable instrument is a written commercial document that contains an order for money to be paid on demand or after a set period. Bills of exchange, promissory notes, and cheques are the three sorts. There are times when a bill of exchange is used in conjunction with a promissory note. The primary distinction between a Bill of Exchange and a Promissory Note is that the former contains a payment order, whilst the latter provides a promise to pay money.

Acceptance is a key feature that distinguishes the two business instruments, as a bill of exchange must be accepted before it can be used. A promissory note, on the other hand, does not require any type of acceptance. When working with these two, one should be aware of their meanings and characteristics.

Goods are sold or purchased, with cash or credit. When things are sold for cash, the buyer receives payment right away. If the items are sold on credit, however, the payment is postponed to a later date. An instrument of credit is drafted in such instances to avoid the potential of late payment or default. This instrument assures that the debtor pays the creditor on the due day, following the agreed-upon terms.

The Negotiable Instruments Act of 1881 governs negotiable instruments in India. It is governed by Section 31 of the Reserve Bank of India Act, 1934, which states that no person other than the Reserve Bank of India or the Central Government, as expressly authorized by this Act, shall accept, draw, issue, or make any bill of exchange, promissory note, hundi, or engagement for the payment of money payable to bearer on demand. This section further states that no one other than the Reserve Bank of India or the Central Government can make or issue a promissory note that is stated to be payable, requested, or payable after a specific period.

The instrument can be freely transferred by delivery or endorsement, as well as by trade customs.

The person who obtains it in good faith must get it free of any flaws and must be able to collect money in his name for the instrument.

Share warrants, debenture warrants, and dividend warrants are a few examples of negotiable instruments. Deposit receipts, bills of lading, postal orders, dock warrants, and other similar instruments are not negotiable instruments because, while they can be transferred by delivery and endorsements, they do not offer the transferee a stronger title for value than the transferor.

Bill of Exchange vs. Promissory Note

Bills of exchange and promissory notes are written agreements between two parties confirming the completion of a financial transaction. In international trade, bills of exchange are more common, whereas promissory notes are more common in domestic trade.

Financial documents such as bills of exchange and promissory notes are used to confirm the completion of a transaction. Both financial instruments are written agreements between buyers and sellers, as well as any other parties involved in a financial transaction. Bills of exchange are legal documents that demonstrate that a buyer has committed to pay a seller a specified sum at a specific time. Due to the dangers associated with foreign transactions, the parties normally enlist the help of a bank to issue the bill of exchange; as a result, the bill is also known as a bank draught.

Bills of exchange and promissory notes are two types of credit instruments that are comparable in many aspects. They do, however, contain certain key differences, as listed below:

There are three people involved in a bill of exchange: the drawer, the drawee, and the payee. In the case of a promissory note, there are two parties: the drawer and the drawee.

The drawer and payee of a bill of exchange may be the same individual. The drawer of a promissory note, on the other hand, can never be the payee.

A bill of exchange is an unconditional order for the drawee to pay the payee following the order's direction, whereas a promissory note is an unconditional promise by the drawer to pay the payee.

The drawer's liability is primary and absolute in the event of a promissory note, but secondary and conditional in the case of a bill of exchange.

A promissory note's drawer is in direct contact with the payee, but an approved bill of exchange's drawer is in contact with the acceptor.

Difference Between Bill of Exchange and Promissory Note in Tabular Form

Specifications	Bill of Exchange	Promissory Note
Definition	A bill of exchange is a document that conveys an instruction from the creditor to the debtor to pay a certain amount to a specific individual.	A promissory note is a written instrument stating the maker's unconditional promise to pay a specific amount of money.
Section	Section 5 of the Negotiable Instruments Act defines a bill of exchange.	Section 4 of the Negotiable Instrument Act defines a promissory note.
Parties	The drawer, the acceptor, and the payee are three possible parties.	Only two parties are involved: the Maker and the Payee.
Drawn by	Creditor	Debtor
Liability	A bill of exchange drawer's obligation is secondary and conditional.	The maker of a promissory note bears main and absolute liability.
Acceptance	The drawee must accept the bill of exchange before it may be used.	The drawee does not have to accept the Promissory Note.
Copies	Except in the case of foreign bills, a single copy is made. Three copies are printed.	In every scenario, a single copy is made.
Case of dishonor	The Notice must be given to all persons obligated to pay if a bill of exchange is dishonored due to non-payment, non-payment, or non-acceptance.	It is not essential to notify the maker of a promissory note that has been dishonored.
Stamps	Except for "bills payable on demand," stamping is required for a bill of exchange.	There are no exclusions when it comes to stamping promissory notes.
Payable to bearer	A bill of exchange can be drawn in this manner as long as it is not payable on demand to the bearer.	A bearer cannot be named on a promissory note.
Payable to maker	The drawer and payee of a bill of exchange can be the same individual.	The maker of a promissory note cannot pay himself.

What is a Bill of Exchange?

The Bill of Exchange is the most widely used and also the most complicated of all the negotiable instruments. The Negotiable Document Act of 1881 defines "bills of exchange" as a written instrument signed by the creator, containing an unconditional command, and directing a specific person to pay a certain sum of money to a specific person or the bearer of the instrument. In simple terms, it is a document that directs the person to whom the bill is directed to pay a specific sum of money to someone else.

Features of Bill of Exchange:

According to the definition, a bill of exchange has the following characteristics:

• It must be in the form of a written document.
• It is a payment instruction.
• The payment must be made on a conditional basis.
• The maker of the bill of exchange must sign it.
• The amount of money to be paid should be certain.
• The deadline for making the required payment should also be specified.
• The bill of exchange must be addressed to a specific individual.
• The sum due is due on demand or at the end of the period specified in the draught.
• The document must be stamped following the law.

It is typically drawn by creditors (drawer) on their debtors (drawee) to ensure that they pay on time. The drawee must accept the bill of exchange, as it is nothing more than a draught without it.

A bill of exchange involves three parties:

The individual who creates the bill of exchange is known as the 'drawer.' In most cases, a seller/creditor who is entitled to money from the debtor issues a bill of exchange to the buyer/debtor. After writing the bill of exchange, the drawer must sign it as the maker.

The individual on whom the bill of exchange has been drawn and who is required to pay a sum of money is known as the 'drawee.' They are typically the buyer of commodities and the debtor of goods.

The individual to whom the drawee must pay the sum of money is referred to as the 'payee.' If the bill is with the drawer for the duration of the payment period, he is the payee.

The payee may, however, change in certain circumstances: if the drawer is getting the bill discounted, the person discounting the bill becomes the payee; and if the drawer has endorsed the bill in favor of its creditor, the creditor becomes the payee.

Because of the following benefits, bills of exchange are most commonly used in business transactions:

• Bills of exchange establish a framework for credit transactions between a seller and a buyer, or a debtor and a creditor, on a mutually agreed-upon basis.
• There is a certainty of time since the creditor knows when he will receive the money, and the debtor knows when he must pay the money. This is because the bill of exchange specifies the terms and conditions of the debtor-creditor relationship, such as the due amount, payment date, interest to be paid if any, and the location of the transaction.
• A bill of exchange allows a buyer to purchase things on credit and pay off the balance at the end of the credit period. Furthermore, the seller can receive payment right away, even after the credit has been extended, by having the bills reduced with a bank or by endorsing it to a third party.
• These bills serve as legal proof of credit transactions, indicating that a trade buyer has secured credit from a goods seller and is obligated to pay the seller. If the debtor refuses to pay, the creditor is required by law to get a certificate from a notary as conclusive evidence that it occurred.
• Debt can be resolved quickly with bills of exchange by transferring them through endorsement and delivery.

What is a Promissory Note?

The 'promissory note' is defined in Section 4 of the Negotiable Instrument Act of 1881. And, according to the provision, it is a written instrument that is not a banknote or a currency note that contains an unconditional undertaking and is signed by its maker to make payment of a certain sum of money to a specific person or the bearer of the instrument. In simple terms, it is a written promise by a person to pay a specific sum of money to a specific person or according to his instructions.

Features of Promissory Note:

According to the definition, the promissory note has the following characteristics:

• The agreement must be written down.
• The vow to pay has to be irrevocable.
• The amount owed must be certain.
• The maker of the promissory note must sign it.
• It must be made payable to a specific individual.
• It must be stamped correctly.
• Acceptance is not required because the promissory note's creator is committing to pay the money.

A promissory note has two parties: the borrower and the lender.

The 'drawer' is the individual who signs the promissory note promising to pay the stipulated amount of money. He's also known as the 'promisor.'

The individual in whose favor the promissory note has been written and to whom the drawer must pay the money is known as the 'drawee' or 'payee.' He's also known as the 'promisee.' Unless the promissory note specifies otherwise, the drawee is also the payee in most cases.

The following are the benefits of a promissory note, which are similar to the benefits of bills of exchange:

• The promissory note contains important information about the credit agreement, such as the amount due and the payment due date. It also includes the lender's and borrower's names for identifying purposes. In addition, if the lender requires interest on the outstanding balance, the interest rate is specified in the note.
• Another benefit of a promissory note is that it explicitly states all of the terms and circumstances, including the terms in the event of nonpayment, which helps to avoid unnecessary misunderstandings and arguments.
• A promissory note properly documents credit and can thus be used as evidence in court to obtain a judgment if a dispute occurs between the debtor and the creditor.

Differences Between Bill of Exchange and Promissory Note in Points

1. A bill of exchange is a financial instrument that shows the amount of money owed to the seller by the buyer. A Promissory Note is a written instrument in which the debtor guarantees to the creditor that the sum owed will be paid at a later period.
2. Section 5 of the Negotiable Instrument Act of 1881 defines a bill of exchange, whereas Section 4 defines a promissory note.
3. There are three parties in a bill of exchange, but there are only two parties in a promissory note.
4. A Bill of Exchange is created by the creditor. The debtor, on the other hand, prepares the Promissory Note.
5. The manufacturer of the bill of exchange has a secondary and conditional liability. The maker of the promissory note, on the other hand, bears main and absolute liability.
6. A Bill of Exchange can be duplicated, however, a Promissory Note cannot be duplicated.
7. The drawer and payee of a bill of exchange can be the same individual, although this is not feasible with a Promissory Note.
8. In the case of a bill of exchange, a notice of dishonor must be given to all parties involved; but, in the case of a promissory note, such notification does not need to be given to the creator.

Conclusion

Along with the differences, there are some commonalities, such as the fact that neither the bill of exchange nor the promissory note is due to the bearer on demand under the RBI Act of 1934. Furthermore, Bills Receivable: The payee of the bill and note is treated as under-Bills Receivable: The payee of the bill and note is treated as under-Bills Receivable: The payee of the bill and note is treated as under-Bills Receivable: The payee of the bill and Bills Payable: The note's drawer and the bill's drawee.

Bills of exchange and promissory notes are equally as important in business as cheques. However, these notions are rarely explored, even though they are critical for business transactions and finance. Bills of exchange are one of the most significant negotiable documents when a debtor purchases products on credit. The creditor sends the debtor a bill of exchange, asking him to pay the amount within the time limit indicated. Similar to a promissory note, a promissory note is issued by the debtor and specifies that he will pay the required amount within a certain time frame. These ideas will assist you in comprehending business from a practical aspect, and you will be able to apply them in your firm or workplace.