Promissory Notes, Bills of Exchange & Cheques
1. Promissory Note (Section 4)
Section 4 defines a Promissory Note:
“A ‘promissory note’ is 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.”
- Parties: 2 parties — Maker (the debtor who promises to pay) and Payee (the creditor to whom payment is promised).
- Prohibition on Bearer On-Demand Notes: Under Section 31 of the RBI Act 1934, no person other than the Reserve Bank of India or Central Government can draw or issue a promissory note payable to bearer on demand (to prevent unauthorized paper currency issuance).
2. Bill of Exchange (Section 5)
Section 5 defines a Bill of Exchange:
“A ‘bill of exchange’ is 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.”
- Parties: 3 parties — Drawer (maker of the bill), Drawee (person directed to pay; becomes Acceptor upon signing acceptance), and Payee (person entitled to receive money).
3. Cheque (Section 6)
Section 6 defines a Cheque:
“A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”
- Nature: Unconditional promise to pay.
- Parties: 2 parties (Maker and Payee).
- Acceptance: No acceptance needed (maker is already bound).
- Drawee: Cannot be drawn on a banker as a customer check.
- Liability: Maker's liability is primary and absolute.
- Nature: Unconditional order to pay.
- Parties: 3 parties (Drawer, Drawee, Payee).
- Acceptance: Must be presented for acceptance to bind drawee.
- Payability: Payable on demand or after a specified term.
- Liability: Drawer's liability is secondary (until accepted).
- Nature: Specialized bill of exchange.
- Drawee: Must always be a specified banker.
- Payability: Always payable on demand; no days of grace.
- Crossing: Can be crossed for safe transit and banking collection.
- Notice of Dishonour: Formal notice not required to drawer if insufficient funds.
4. Crossing of Cheques
Crossing is an instruction to the paying banker not to pay the cheque in physical cash at the bank counter, but only to credit it through a bank account.