12 Difference Between Bill Of Exchange And Promissory Note (With Chart)

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Both bill of exchange and promissory note are known as negotiable instruments. A negotiable instrument is a document guaranteeing the payment of a specific amount of money to a specified person (the payee). It requires payment either upon demand or at a set time and is structured like a contract.

 A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains a full legal title to the instrument. Negotiable instruments contain key information such as principal amount, interest rate, date and most importantly, the signature of the payor. Examples of negotiable instruments defined under section 5 of Negotiable Instrument Act, 188 include: Promissory notes, bill of exchange and cheques.

Bill Of Exchange

A bill of exchange is essentially an unconditional order made by one person to another to pay a specified sum of money to a third person. The bill of exchange is either payable on demand or after a specified term.  While a bill of exchange is not a contract in itself, the involved parties can use it to fulfill the terms of a contract. It can specify that payment is due on demand or at a specified future date. It’s often extended with credit terms, such as 90 days. A bill of exchange must clearly detail the amount of money, the date and the parties involved. As well, a bill of exchange must be accepted by the drawee to be for it to be valid.

A bill of exchange is transferable, so the drawee may find himself or herself paying an entirely different party than he or she initially agreed to pay. The payee can transfer the bill to another party by endorsing at the back of the document.

A payee may sell a bill of exchange to another party for a discounted price in order to obtain funds prior to the payment date specified on the bill. The discount represents the interest cost associated with being paid early.

A bill of exchange is commonly used in international trade to help importers and exporters fulfill transactions. A bill of exchange is distinguishable from a promissory note since it does not contain a promise and the drawer does not expressly pledge to pay it. It is similar to a note payable since it is payable either on demand or at a specified time.  

Parties To Bill Of Exchange         

  • Drawer: The person who makes the bill or who gives the order to pay a certain sum of money.
  • Payee: The person receiving payment, he or she can be a designated person or the drawer himself.
  • Drawee: The person who accepts the bill of exchange or who is directed to pay a certain sum.

What You Need To Know About Bill Of Exchange

  • A bill of exchange is an unconditional written order made by the creditor to the debtor to pay a specified amount to a person mentioned therein.
  • There are usually three parties involved with a bill of exchange i.e drawer, a payee and drawee.
  • The bill of exchange is drafted by the creditor or lender who is liable to receive the amount.
  • Bills of exchange can be drawn in copies.
  • The debtor needs to accept the bill of exchange in order for it to be valid and legally binding.
  • The bill of exchange carries a legal obligation in case of dispute or dishonour.
  • The liability of the drawer is secondary and conditional upon non-payment by the drawee.
  • In case of dishonour, the notice of dishonour of a bill of exchange must be given to all the parties concerned.
  • With bill of exchange, the drawer and the payee may be the same person.
  • Bill of exchange is defined under section 5 of Negotiable Instrument Act, 1881.
  • A bill of exchange is always in a printed form.
  • A bill of exchange can be endorsed since the payee is the one who holds the bill on maturity.

Promissory Note (Note Payable)

 A promissory note, sometimes referred to as note payable is an instrument in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.  A promissory note is used for mortgages, student loans, car loans, business loans and personal loans between family and friends.

Promissory notes are debt instruments. They can be issued by financial institutions, small companies or individuals. They enable a person or a business to obtain financing without going through a bank. The issuer of the note simply must be willing to carry it until maturity and be willing and able to provide the sum of money specified in the agreed-upon terms in the note.

A promissory note typically contains all the terms relevant to the indebtedness such as the principal amount, interest rate, maturity date, and place of issuance and issuer’s signature. It is usually held by the party that is owed money and returned to the issuer when payment is made. It does not usually explain methods of recourse if the issuer does not pay on time.

What You Need To Know About Promissory Note

  • A Promissory note is a written and signed promise by the debtor to pay a certain amount to the creditor on a specific date or on-demand.
  • A promissory note only involves drawer and payee.
  • A promissory note is made by the borrower or the debtor who is liable to pay the sum.
  • Promissory notes cannot be drawn in copies.
  • With promissory note, there is no need for acceptance from drawee.
  • A promissory note does not hold a legal obligation in case of dishonour or dispute.
  • The liability of the maker or drawer is primary and absolute.
  • In case of dishonour of promissory note, notice of dishonour to the maker is not necessary.
  • In the case of promissory note, the drawer cannot be the payee .
  • A promissory note is defined under section 4 of Negotiable Instrument Act.
  • A promissory note can be handwritten.
  • A promissory note is strictly payable to the payee mentioned initially in the note.

Difference Between Bill Of Exchange And Promissory Note In Tabular Form

BASIS OF COMPARISON BILL OF EXCHANGE PROMISSORY NOTE
Description A bill of exchange is an unconditional written order made by the creditor to the debtor to pay a specified amount to a person mentioned therein.   A Promissory note is a written and signed promise by the debtor to pay a certain amount to the creditor on a specific date or on-demand.  
Parties Involve There are usually three parties involved with a bill of exchange i.e drawer, a payee and drawee.   A promissory note only involves drawer and payee.  
Drafter The bill of exchange is drafted by the creditor or lender who is liable to receive the amount.   A promissory note is made by the borrower or the debtor who is liable to pay the sum.  
Production In Copies Bills of exchange can be drawn in copies.   Promissory notes cannot be drawn in copies.  
Acceptance The debtor needs to accept the bill of exchange in order for it to be valid and legally binding.   With promissory note, there is no need for acceptance from drawee.  
Legal Obligation The bill of exchange carries a legal obligation in case of dispute or dishonour.   A promissory note does not hold a legal obligation in case of dishonour or dispute.  
Liability of The Drawer The liability of the drawer is secondary and conditional upon non-payment by the drawee.   The liability of the maker or drawer is primary and absolute.  
Notice Of Dishonor In case of dishonour, the notice of dishonour of a bill of exchange must be given to all the parties concerned.   In case of dishonour of promissory note, notice of dishonour to the maker is not necessary.  
Act Of Law Bill of exchange is defined under section 5 of Negotiable Instrument Act, 1881.   A promissory note is defined under section 4 of Negotiable Instrument Act.  
Nature A bill of exchange is always in a printed form.   A promissory note can be handwritten.  
Drawer & Payee With bill of exchange, the drawer and the payee may be the same person.   In the case of promissory note, the drawer cannot be the payee.  
Endorsement A bill of exchange can be endorsed since the payee is the one who holds the bill on maturity.   A promissory note is strictly payable to the payee mentioned initially in the note.