Types of Negotiable Instruments 🆚
The NI Act, 1881 recognizes only 3 types of negotiable instruments.
1. Promissory Note (Section 4) 📜
Definition: An instrument in writing containing an unconditional undertaking (promise), 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.
Parties (2):
- Maker: Person who promises to pay (Debtor).
- Payee: Person to whom payment is promised (Creditor).
Key Word: "I Promise to Pay".
Example: "I promise to pay B or order ₹10,000." - Signed A.
Note: Currency Note is technically a Promissory Note signed by RBI Governor, but it is excluded from NI Act.
2. Bill of Exchange (Section 5) 📄
Definition: 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.
Parties (3):
- Drawer: Person who makes the bill (Creditor/Seller).
- Drawee: Person directed to pay (Debtor/Buyer).
- Payee: Person receiving money (Usually Drawer himself or third party).
Key Word: "Pay to..." (It is an Order, not a Promise).
Process: Drawer writes bill → Drawee Accepts it (Signs "Accepted") → Becomes valid.
3. Cheque (Section 6) 🏦
Definition: A Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
Parties (3):
- Drawer: Account holder who issues cheque.
- Drawee: Always a Bank (where account is held).
- Payee: Person named in cheque.
Special Features:
- Always drawn on a Bank.
- Always payable on Demand (Valid for 3 months).
- Does NOT require acceptance by bank (Bank pays if funds available).
Comparison Table 📊
| Feature | Promissory Note | Bill of Exchange | Cheque |
|---|---|---|---|
| Nature | Promise to pay | Order to pay | Order to pay |
| Parties | 2 (Maker, Payee) | 3 (Drawer, Drawee, Payee) | 3 (Drawer, Banker, Payee) |
| Drawee | N/A (Maker pays) | Any person | Always a Bank |
| Acceptance | Not needed | Required (by Drawee) | Not needed |
| Payable | On demand or Time | On demand or Time | Always on Demand |
| Grace Days | 3 days (if Time note) | 3 days (if Time bill) | None |
| Stamping | Required | Required | Not Required |
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 5
1. How many parties are there in a Promissory Note?
💡 Final Wisdom: "A Cheque is just a Bill of Exchange with a VIP pass - it's always on a bank and always payable now!" 🎫
Next up: Paying Banker - The bank that pays your cheque! 💸