Difference between Bill of Exchange and Promissory Note
Introduction:
In the world of finance and commerce, signed documents that promise to pay a certain amount of money on a specific date or upon demand are essential tools for managing financial transactions. Among these, Bills of Exchange and Promissory Notes are two of the most common negotiable instruments. Though they may appear similar, they serve different purposes and involve distinct legal obligations. Understanding the differences between these instruments is crucial for anyone involved in business and finance.
What is a Bill of Exchange?
A Bill of Exchange (BoE) is a legal, negotiable instrument that contains an order to pay a specified sum of money to a particular person or bearer within a defined period or on demand. The Bill of Exchange is typically issued by a creditor to a debtor, instructing the debtor to pay the amount owed. For the bill to be valid, the debtor must accept it.
Key Features of a Bill of Exchange:
- Parties Involved: Three parties are involved—Drawer (issuer), Drawee (debtor), and Payee (recipient).
- Usage: Commonly used to settle debts in business transactions.
- Legal Reference: Governed by Section 5 of the Negotiable Instruments Act, 1881.
What is a Promissory Note?
A Promissory Note is a negotiable instrument that contains a written promise from a debtor to pay a specific sum of money to a creditor or bearer, either on demand or on a specified future date. Unlike a Bill of Exchange, a Promissory Note is issued by the debtor and does not require acceptance by the creditor.
Key Features of a Promissory Note:
- Parties Involved: Two parties are involved—Drawer/Maker (debtor) and Payee (creditor).
- Usage: Often used in lending scenarios where the debtor promises to repay the borrowed amount.
- Legal Reference: Governed by Section 4 of the Negotiable Instruments Act, 1881.
Differences Between Bill of Exchange and Promissory Note
| Aspect | Bill of Exchange | Promissory Note |
|---|---|---|
| Definition | A negotiable document issued by a creditor ordering the debtor to pay a specified amount of money within a set date or upon demand. | A negotiable document issued by the debtor containing a written promise to pay a specified amount within a set date or upon demand. |
| Section | Mentioned in Section 5 of the Negotiable Instruments Act, 1881. | Mentioned in Section 4 of the Negotiable Instruments Act, 1881. |
| Issued By | Creditor | Debtor |
| Parties Involved | Involves three parties: Drawer, Drawee, and Payee. | Involves two parties: Drawer/Maker and Payee. |
| Acceptance | Requires acceptance by the Drawee before payment can be made. | Does not require acceptance; the promise is made by the Drawer. |
| Liability | Liability of the Drawer is conditional and secondary. | Liability of the Drawer is absolute and primary. |
| Dishonoring the Instrument | All parties involved are notified if the instrument is dishonored. | The Drawer is not typically notified if the instrument is dishonored. |
| Copies | Can be drawn in duplicate. | Cannot be issued in copies. |
| Drawer and Payee Relationship | The Drawer and Payee can be the same person. | The Drawer and Payee cannot be the same person. |
Conclusion:
This comparison provides a clear understanding of the differences between a Bill of Exchange and a Promissory Note, which are essential concepts for students and professionals in commerce. Knowing these distinctions helps in making informed decisions when dealing with negotiable instruments in business transactions.