Difference between promissory note and bill of exchange iPleaders

Mrs Q wants to start a garment business but does not have sufficient capital. Mr P is a well-established businessman and agrees to finance Mrs Q’s business idea. Mr P provides a loan of ₹ to Mrs Q at 10% interest to be paid in 50 equal monthly instalments of ₹3300 each. In this case, Mr P is both the drawer as well as the payee, whereas Mrs Q is the drawee. 9) In the Bill of Exchange, you can send money to anyone but in the Promissory Note, you cannot send money to an unknown beneficiary. 8) In the case of a bank, you can use a bill of exchange to raise funds as collateral whereas in the case of an individual, you cannot do that.

In case two or more persons promise to pay, they may bind themselves jointly or jointly and severally, but their liability cannot be in the alternative. In the case of a promissory note, the liability of the drawer is primary and absolute, but for a bill of exchange, the liability is secondary and conditional. In the case of a bill of exchange, there are three parties – the drawer, the drawee, and the payee.

Difference between Promissory Note and Bill of Exchange

In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for payment. The bill of exchange was an acknowledgment created by Car Supply XYZ, which was also the creditor in this case, to show the indebtedness of Company ABC, the debtor. In case, there is a mistake in the name of the payee or his designation; the note is valid if the payee can be ascertained by evidence. Even where the name of a dead person is entered as the payee in ignorance of his death, his legal representative can enforce payment. In case of Promissory Note, the payer, payee and beneficiary cannot be traced as it is an anonymous check as per banking terms; however, in case of Bill of Exchange, sender and beneficiary can be found easily.

Section 13 of the Negotiable instruments Act recognises promissory notes, bills of exchange, and cheques as negotiable instruments. However, it does not exclude the possibility of other negotiable instruments. Hundis, share warrants, dividend warrants, circular notes, bearer debentures, etc., are examples of a few such instruments recognised by usage or custom.

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Other payment instruments in the Indian money market were introduced by the private banks and the Presidency Banks. Cheques were introduced for the first time in India by the Bank of Hindoostan, in 1770. In 1827, the British introduced “post bills” that were Inland “promissory notes” issued by the bank at a distant place.

It Should Be Signed by Maker

1. When a bill is dishonored, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.
2. It is also used to pay back any loan or money borrowed in case of default.
3. 9) In the Bill of Exchange, you can send money to anyone but in the Promissory Note, you cannot send money to an unknown beneficiary.
4. These are issued by debtors and contain their stamp and signature along with a predetermined date for payment and a fixed amount.
5. At the same time, Mr P had purchased raw material worth ₹ from Mr R on credit for three months.

They are generally used in loan transactions wherein one of the parties requires borrowing funds or credit. They thus become legally binding and are considered proof of the debt between the two parties. A bill of exchange is also a negotiable tool, which is a written note legally bound, and duly stamped and signed by its drawer. It instructs payment of a certain sum of money to the holder of this instrument on demand, or within a specific time frame.

Use of Promissory Notes

In the case of bills of exchange, the liability of its drawer is only secondary and conditional. These are issued by creditors and contain their stamp and signature along with a predetermined date for payment and a fixed amount. These are issued by debtors and contain their stamp and signature along with a predetermined date for payment and a fixed amount. A bill of exchange involves the drawer (who issues the bill), the drawee (who is directed to pay), and the payee (who will receive the payment). Bills of exchange help difference between bills of exchange and promissory note facilitate the process of international trade by stipulating payment from one party to another at a specified date. They function similarly to a check and though not a contract, can be used to fulfill the terms of a contract.

The transferee of the negotiable instrument has the right to sue in his own name if the instruments get dishonoured. A negotiable instrument can be transferred multiple times till the date of its maturity. The holder of the instrument does not need to give any notice of its transfer to the party liable on the instrument to pay. However, the payment gets postponed to a future date, if the goods are sold on credit. In such cases, to avoid the possibility of delayed payment or default, an instrument of credit is drawn. This instrument ensures the payment by the debtor to the creditor according to the agreed conditions on the due date.

It is also used to pay back any loan or money borrowed in case of default. Promissory note is used by the beneficiary to state that he/she will pay back a particular amount at a specified date. In case of default by the beneficiary, a bank or individual holding a promissory note can file for legal action against debtors and through court process can claim money from him/her. Promissory note is also issued during real estate purchase where it is seen as a proof that loan amount will be paid to the seller within an agreed time frame.