Distinction between Promissory Note, Bill of Exchange and Cheque

Sections 4, 5 and 6 of the Negotiable Instruments Act, 1881 define the only three instruments that the Act recognises by name — the promissory note, the bill of exchange, and the cheque. The definitions are deceptively similar: each requires writing, an unconditional engagement to pay money, certainty of parties and amount, and a signature. The differences lie not in the surface ingredients but in the legal architecture each instrument creates — who promises, who is ordered, who pays, and what statutory consequences attach when the instrument is dishonoured.

This chapter sets out, point by point, the distinctions among the three instruments. The aim is exam-ready precision. The same fact-pattern can produce a valid promissory note, an invalid bill of exchange, and an instrument that is neither — and the only way to tell which is which is to apply the section-wise tests of Sections 4, 5 and 6 in sequence.

The three definitions in one place

Section 4 defines a promissory note as “an instrument in writing (not being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument”. The maker promises to pay the payee.

Section 5 defines a bill of exchange as “an instrument in writing containing an unconditional order, signed by the maker, 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 instrument”. The drawer orders the drawee to pay the payee.

Section 6 defines a cheque as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”, and post-2002 includes the truncated cheque and the cheque in electronic form. The drawer orders his banker to pay the payee, on demand.

The full essentials of each instrument are treated in dedicated chapters: Promissory Notes — Essentials and Form (Section 4), Bills of Exchange — Essentials and Form (Section 5), and Cheques — Essentials and Crossing (Section 6). The present chapter focuses only on the comparison.

Number of parties

A promissory note has only two parties: the maker (the debtor, who promises) and the payee (the creditor, to whom the promise is made). The relationship is direct — debtor and creditor.

A bill of exchange has three parties: the drawer (who issues the order), the drawee (the person to whom the order is addressed), and the payee (the person entitled to the money). One person can fill any two of these roles — the drawer can be his own payee (“Pay to me or order”), or the drawee can be his own payee where the bill is drawn by an agent on his principal in his own favour.

A cheque has the same three parties as a bill of exchange, with one constraint added by Section 6: the drawee must always be a banker. A cheque drawn on a non-banker is not a cheque — it may, depending on form, be a bill of exchange.

Promise versus order

The promissory note contains a promise by the maker to pay. The bill of exchange and the cheque contain an order by the drawer to the drawee to pay. The distinction is more than verbal: a promise is binding on the promisor at once, while an order is binding on the drawee only when accepted. Hence the law of acceptance applies to bills of exchange but not to promissory notes.

An order, to qualify as such, must be imperative. Excessive politeness defeats it. In Little v. Slackford (1828) M&M 171, the document “Mr. Little, please to let the bearer have seven pounds and place into my account, and you will oblige” was held not to be a bill of exchange because it read as a request rather than a demand. Conversely, a courteous expression like “please pay” affixed to a real order does not invalidate it: Ruff v. Webb (1794) 1 Esp 129.

Acceptance

A promissory note requires no acceptance. The maker is the principal debtor from the moment the note is issued; his liability is primary, absolute and unconditional unless there is a contract to the contrary (Section 32).

A bill of exchange (other than a demand bill) requires acceptance by the drawee before he becomes bound on it. Until acceptance, the drawee is not a party to the bill. After acceptance, the acceptor’s liability is primary; the drawer’s liability is secondary and conditional — the drawer is a kind of guarantor who must compensate the holder if the acceptor defaults (Section 30).

A cheque, being always payable on demand, requires no acceptance. Certification by the drawee bank as “good for payment” at the request of the holder does not amount to acceptance within the meaning of the Act — it is merely an acknowledgement of the cheque’s genuineness and the drawer’s signature.

Liability of the maker, drawer and acceptor

The maker of a promissory note is the primary debtor. So is the acceptor of a bill of exchange after acceptance. The drawer of a bill of exchange, before acceptance, is the principal debtor; after acceptance, his liability shifts to that of a surety for the acceptor (Section 37).

The drawer of a cheque is in a different position. Because the cheque is always payable on demand, and because the holder has no direct remedy against the bank for refusing to pay, the drawer’s liability is effectively primary. The holder must look to the drawer; the bank is liable only to its customer (the drawer) for wrongful dishonour, and only under Section 31 of the Act.

Days of grace

Every promissory note or bill of exchange not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable (Section 22). This is the rule of three days of grace.

A cheque enjoys no days of grace. It is payable on demand. Section 22 expressly excludes a cheque from the days-of-grace regime. So is a bill or note payable on demand, at sight or on presentment.

Bearer payable rule

A promissory note cannot be made payable to bearer. Although Section 13 read with Section 4 permits an instrument payable either to order or to bearer, Section 31 of the Reserve Bank of India Act, 1934 separately prohibits the issue of a promissory note payable to bearer on demand. The reason: such a note would compete with currency notes, the issue of which is a monopoly of the Reserve Bank.

A bill of exchange may be made payable to bearer, but not on demand. The same Section 31 of the RBI Act prohibits a bill payable to bearer on demand — for the same reason.

A cheque may be made payable to bearer on demand. The cheque is a statutory exception to Section 31 of the RBI Act, because Section 31 itself excludes cheques from its prohibition. This is the only one of the three instruments that may be drawn payable to bearer on demand.

Notice of dishonour

Where a bill of exchange has been dishonoured by non-acceptance or non-payment, the holder must give notice of dishonour to the drawer and every endorser sought to be charged. Failure to give notice discharges the drawer and endorsers, except in the cases listed in Section 98.

Where a promissory note has been dishonoured, the holder must give notice of dishonour to every prior party (the maker is the only party liable, and notice to the maker is generally not required because his liability is primary).

For a cheque dishonoured for want of funds, notice of dishonour to the drawer is dispensed with under Section 98 — the absence of funds is itself notice. The holder may nevertheless give notice; in cases of dishonour falling outside Section 138 (for instance, dishonour for irregular endorsement or technical reasons), notice is desirable to preserve the right to claim damages from the drawer.

Crossing

Crossing is a feature unique to the cheque. Sections 123 to 131A of the Act permit a cheque to be crossed generally or specially, with or without the additional words “not negotiable” or the customary direction “account payee only”. Once crossed, the cheque cannot be paid over the counter; it must be collected through a banker.

Promissory notes and bills of exchange cannot be crossed. The crossing chapters — crossing of cheques (general, special, account payee, not-negotiable) — are limited to the cheque alone.

Stop payment and revocability

A cheque is a revocable mandate from the drawer to his banker. The drawer may countermand payment at any time before the cheque is paid — this is the well-known ‘stop payment’ instruction. The bank, on receiving valid stop-payment instructions, must refuse to pay; if it pays in disregard of the instruction, it cannot debit the customer’s account.

A bill of exchange, once accepted, is irrevocable as between the holder and the acceptor. The drawer cannot unilaterally instruct the acceptor not to pay. A promissory note, once delivered, cannot be revoked by the maker.

Statutory protection of the drawee

The Act gives the drawee bank of a cheque several layers of statutory protection unavailable to any other drawee. Section 85(1) protects the bank where a cheque payable to order purports to be endorsed by the payee, even if the endorsement is forged. Section 85(2) carries the ‘once a bearer, always a bearer’ rule for cheques. Section 89 protects the bank where the crossing has been obliterated and the obliteration was not apparent. Section 128 protects the paying bank where it pays a crossed cheque in due course. Section 131 protects the collecting bank that has received payment for a customer in good faith and without negligence.

No equivalent protection exists for the drawee or acceptor of a bill of exchange — the acceptor pays at his peril, and a forged endorsement intervening before him is no defence except in the narrow circumstances of Section 41 (bill already endorsed).

Presentment for acceptance and presentment for payment

Bills of exchange may require presentment for acceptance — for instance, a bill payable after sight cannot mature until it has been presented for acceptance. Sections 61, 62 and 64 govern presentment for acceptance. Promissory notes have no parallel concept — the maker’s promise is the engagement; there is no third party to accept.

All three instruments require presentment for payment in the manner appropriate to each — Sections 64 to 77, treated in detail in the chapter on presentment for acceptance and payment — but with different consequences. A holder who fails to present a cheque within a reasonable time of issue may discharge the drawer to the extent the drawer is injured by the delay (Section 84). A holder of a bill or note who fails to present at maturity may discharge the indorsers but not, ordinarily, the principal debtor (the acceptor or maker).

Sets — bills in sets only

Bills of exchange may be drawn in sets — typically three identical parts each numbered, each containing a clause that it is payable only so long as the others remain unpaid (Sections 132 and 133). The device is used for international trade where loss in transit is a risk. Promissory notes and cheques are never drawn in sets.

Inland and foreign instruments

All three instruments may be inland or foreign within the meaning of Sections 11 and 12. A foreign bill must be protested for dishonour if such protest is required by the law of the place where it is drawn (Section 104); protest is optional for an inland bill. A foreign promissory note may also be protested. A cheque, although technically capable of being drawn on a foreign bank, is in practice always domestic and is not subject to the protest regime.

Penal consequence of dishonour — Section 138

The single most important practical distinction in modern litigation is that only a cheque can attract the criminal liability under Section 138 of the Act. Section 138 is in terms confined to a cheque drawn on a banker for payment of any amount of money to discharge any debt or other liability, dishonoured for insufficiency of funds or for exceeding the arrangement.

Dishonour of a promissory note or a bill of exchange creates a civil cause of action for the holder against the maker, drawer, acceptor or endorsers (Sections 30 to 37, 91 to 94). It does not, by itself, attract criminal liability. The drafting choice in 1988, when Section 138 was introduced, was deliberate: only the cheque, as the most widely used commercial instrument, was thought to need the deterrent of criminal sanction.

Electronic and truncated forms

The 2002 Amendment Act added the cheque in electronic form and the truncated cheque to the definition in Section 6. The amendment was confined to cheques. A promissory note in electronic form is not contemplated by Section 4; a bill of exchange in electronic form is not contemplated by Section 5. Where electronic execution of these instruments is desired, parties rely on the broader regime of the Information Technology Act, 2000 read with the Indian Contract Act, 1872 — not on the NI Act.

Demand drafts and pay orders — how do they fit?

A bank’s demand draft is a bill of exchange drawn by one bank or branch upon another bank or branch with an instruction to pay a specified sum to a named payee on demand. It is not a cheque, because it is not drawn by a customer on his banker. It is, however, a negotiable instrument because it is a bill of exchange in form and operates by the same rules. Section 131A makes the crossing rules applicable to a demand draft as if it were a cheque.

A pay order or banker’s cheque is similar but limited in its territorial reach — it is payable only at the issuing branch. Whether a pay order is a negotiable instrument has been disputed, but the better view is that it is not, because it is restricted to a particular branch and its commercial purpose is local payment, not circulation.

Common errors and exam traps

1. Treating a post-dated cheque as a cheque on the date of issue. Until the date written on the face arrives, a post-dated cheque is a bill of exchange, not a cheque. The Section 138 cause of action cannot accrue before that date.
2. Treating an ‘I.O.U.’ as a promissory note. A bare acknowledgement is not a promissory note. The instrument must contain an express undertaking to pay. Illustration (c) to Section 4 is conclusive.
3. Confusing the maker of a note with the drawer of a bill. The maker of a note promises; the drawer of a bill orders. The maker is the principal debtor from the moment of issue; the drawer of a bill is the principal debtor only until acceptance, after which the acceptor takes that role.
4. Treating a cheque crossed ‘account payee’ as non-negotiable. An account-payee crossing does not affect negotiability. It binds the collecting banker but does not strip the cheque of its capacity to be transferred to a holder in due course (M/s. Tailors Priya v. M/s. Gulabchand Danraj AIR 1963 Cal 36). The ‘not negotiable’ crossing under Section 130 is the one that strips negotiability.
5. Forgetting Section 31 RBI Act. A promissory note payable to bearer on demand is invalid — not for any defect in the NI Act, but because of the RBI Act’s currency-monopoly. A bill of exchange payable to bearer on demand suffers the same fate. The cheque alone escapes.

Summary distinction-table for revision

For quick recall, the differences boil down to the following matrix:

• Parties. Note — 2; Bill — 3; Cheque — 3 (drawee always a banker).
• Engagement. Note — promise; Bill — order; Cheque — order.
• Acceptance. Note — not required; Bill — required (except demand bills); Cheque — not required.
• Liability of maker/drawer. Note maker — primary; Bill drawer — secondary after acceptance; Cheque drawer — primary.
• Days of grace. Note — yes (if not on demand); Bill — yes (if not on demand); Cheque — no.
• Bearer-payable on demand. Note — barred (Section 31 RBI Act); Bill — barred on demand; Cheque — permitted.
• Crossing. Note — not applicable; Bill — not applicable; Cheque — permitted.
• Sets. Note — not drawn in sets; Bill — may be drawn in sets; Cheque — not drawn in sets.
• Stop payment. Note — not applicable; Bill — not applicable; Cheque — permitted.
• Statutory protection of drawee. Note — not applicable; Bill — very limited; Cheque — Sections 85, 89, 128, 131.
• Section 138 dishonour offence. Note — no; Bill — no; Cheque — yes.
• Electronic form. Note — not contemplated; Bill — not contemplated; Cheque — recognised post-2002.

How the three instruments work together

A single commercial transaction often deploys all three. A buyer of goods may issue the seller a post-dated cheque (a bill of exchange while post-dated, a cheque on the date of the cheque) supported by a promissory note as collateral. The drafting choices — whether to use a note, a bill, or a cheque, or all three — depend on the timing of payment, whether the third party (a banker) is to be involved, whether circulation is intended, and whether the parties want the deterrent of Section 138 to apply.

For exam purposes, the test sequence is:

1. Is the engagement a promise (note) or an order (bill or cheque)?
2. If an order, is the drawee a banker, and is it payable on demand? If yes — cheque under Section 6. If not — bill of exchange under Section 5.
3. Are the certainty of parties, certainty of amount, signature, and unconditionality requirements satisfied? If not, the instrument is none of the three.

Reading list within the Act

For the broader context, see the Negotiable Instruments Act notes hub, and read the chapter on the definition of a negotiable instrument under Section 13 for the umbrella concept that ties the three together. The chapters on holder and holder in due course, parties to negotiable instruments, and payment in due course apply to all three instruments and supply the cross-cutting doctrines that the section-wise definitions do not, on their own, exhaust.

Frequently asked questions

Is a cheque a bill of exchange?

Yes — Section 6 itself defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. The classical formulation is that all cheques are bills of exchange, but not all bills of exchange are cheques. The two extra constraints in Section 6 — the drawee must be a banker, and the instrument must be payable on demand — distinguish a cheque from an ordinary bill, and trigger the additional rules on crossing, stop payment, statutory protection of the bank, and the Section 138 offence that apply only to cheques.

Can a promissory note be made payable to bearer on demand?

No. Although Section 13 read with Section 4 of the NI Act would, in form, permit a promissory note payable to bearer, Section 31 of the Reserve Bank of India Act, 1934 prohibits the issue of any promissory note payable to bearer on demand. The reason is that such a note would compete with currency notes, the issue of which is the exclusive monopoly of the Reserve Bank. A bill of exchange payable to bearer on demand is barred for the same reason. A cheque is a statutory exception — it may be drawn payable to bearer on demand.

Why is acceptance required for a bill of exchange but not for a promissory note or cheque?

Because of the structure of liability. A promissory note contains a direct promise by the maker, who is the principal debtor from the moment of issue — there is no third party to accept. A cheque is always payable on demand and is presented straight to the bank, which pays or returns it; there is no time for acceptance. A bill of exchange (other than a demand bill) is an order from the drawer to a third party, who is not bound until he has accepted. Until acceptance, the drawee is a stranger to the bill.

Does Section 138 apply to dishonour of a promissory note or a bill of exchange?

No. Section 138 is in its own terms confined to a cheque — it speaks of a cheque drawn by a person on his banker for the discharge of a debt, returned unpaid for insufficiency of funds or for exceeding the arrangement with the bank. A promissory note or a bill of exchange that is dishonoured creates only a civil cause of action under Sections 30 to 37 and 91 to 94 of the Act, with notice of dishonour required where applicable. The criminal offence and the statutory notice-and-complaint timeline of Section 138 read with Section 142 are limited to cheques.

What is the practical difference between the maker of a note and the drawer of a cheque?

The maker of a promissory note is the primary and unconditional debtor from the moment of issue — there is no intermediate party. The drawer of a cheque is also primarily liable to the holder, because the holder has no direct remedy against the bank if the bank refuses to pay. But the cheque drawer's liability arises only on dishonour and only after notice of dishonour where required; the bank's wrongful dishonour gives the drawer a separate right to compensation under Section 31 of the Act. By contrast, the drawer of a bill of exchange is the principal debtor only until acceptance, and a guarantor for the acceptor thereafter.