What is a Promissory Note?
A promissory note is a type of negotiable tool which contains a written promise of full payment. These are duly signed and stamped by its drawers, declaring to pay a certain sum of money to the holder at a specific date or on-demand. Used by debtors to borrow from creditors, promissory notes may not be accepted by a creditor after being drawn by a debtor. They have the following features.
Written notes promising to repay a creditor.
Must be signed by drawer or promisor.
The date of payment is predetermined.
Agreed upon by both promisor and promisee for payment of an agreed sum of money.
The legal currency of the relevant country is used for settlement.
It Involves the Following Two Parties:
Drawer/Maker: This is the debtor who promises to pay a specific sum to its creditor.
Drawee: This is the creditor who is promised a certain sum of money on a specific date.
What is a Bill of Exchange?
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. Requiring to be accepted by a debtor to be valid, these are usually the payment for goods and services. It has these features mentioned below.
It must be appropriately dated.
Contains an order of payment.
The signature of the drawer/maker is mandatory.
Bill must be accepted by a drawee.
Order of payment and its amount should be defined.
It must be delivered to the relevant payee.
It involves the following three parties:
Drawer: An issuer of this instrument who receives the payment.
Drawee: An individual who has to pay the relevant amount.
Payee: This is an individual who receives payment, and in most circumstances, is the same as the drawer.
How are Promissory Notes Different from Bills of Exchange?
While promissory notes, bill of exchange, and cheque have some similarities among themselves, these are distinctly different from each other. Despite being financial instruments with a written promise for payment, these have different features and purposes, which every commerce student must understand.
Every distinguishing feature about a bill of exchange vs promissory note is listed below in detail.
While this table above describes fundamental differences between promissory notes and bills of exchange, students should also learn their differences to that of a cheque – another financial instrument.
Similar to the difference between promissory notes and bill of exchange, there are numerous crucial topics in the standard 10 + 2 curricula for commerce students. Subsequently, Vedantu offers detailed study materials on all these topics written by expert teachers to help students in their studies. Additionally, students can also attend live classes offered by Vedantu to clear any doubt they might have.
Key Differences between Promissory Note and Bill of Exchange
As you know now, there are several differences between bills of exchange and promissory notes. Here are some of the most notable differences between them:
A bill of exchange is a negotiable instrument that is issued when the debtor is ordered to pay the due amount to the creditor within a certain length of time. A promissory note, on the other hand, is a written agreement between the drawer and the drawee in which the drawer agrees to pay a specific sum within a given time frame.
Drawer, drawee, and payee are the parties engaged in a Bill of Exchange. Drawer and payee/drawee are the persons involved in a promissory note.
In the event of a bill of exchange, the debtor must accept it in order for it to be considered valid. There is no requirement for the drawee's acceptance in the event of a promissory note.
A notice is sent to all parties concerned if the Bill of Exchange is not respected. In the event of a promissory note, no notice of dishonor is sent to the promissory note's "maker."
There is no asset held as security in the case of a bill of exchange. In some situations, such as with promissory notes, an asset can be held as collateral for a loan.
In business, bills of exchange and promissory notes are just as significant as cheques. However, these concepts, which are essential for commercial transactions and financing reasons, are rarely discussed. When a debtor acquires items on credit, bills of exchange are one of the most important negotiable documents. The creditor sends a bill of exchange to the debtor, instructing him to pay the amount within the specified time frame.
The promissory note is similar, but it is issued by the debtor and states that he will pay the requisite amount within a certain time frame. These principles will help you understand business from a practical standpoint, and you will be able to use them in your own business or employment.
FAQs on Promissory Note vs. Bill of Exchange: Definitions and Differences
1. What is a Promissory Note in simple terms?
A Promissory Note is a formal, written financial instrument containing an unconditional promise made by one party (the maker or debtor) to pay a definite sum of money to another party (the payee or creditor). The payment can be scheduled on a specific future date or on demand. It is essentially a legally recognized 'I owe you'.
2. What is a Bill of Exchange as per the Negotiable Instruments Act, 1881?
A Bill of Exchange is a written instrument containing an unconditional order, signed by the creator (the drawer), directing a specific person (the drawee) to pay a certain sum of money only to, or to the order of, a certain person (the payee) or to the bearer of the instrument. It functions as a creditor's instruction to a debtor to pay.
3. What are the key differences between a Promissory Note and a Bill of Exchange?
The main differences between a Promissory Note and a Bill of Exchange are:
- Nature: A Promissory Note is a promise to pay from a debtor, while a Bill of Exchange is an order to pay from a creditor.
- Parties Involved: A note involves two parties (Maker and Payee). A bill involves three parties (Drawer, Drawee, and Payee).
- Acceptance: A Promissory Note does not require acceptance as it is made by the person who is liable to pay. A Bill of Exchange must be accepted by the drawee to be legally valid.
- Liability: In a note, the maker's liability is primary and absolute. In a bill, the drawee's liability becomes primary only after they accept the bill.
4. Who are the different parties involved in a Promissory Note compared to a Bill of Exchange?
In a Promissory Note, there are two parties: the Maker, who is the debtor promising to pay, and the Payee, who is the creditor set to receive the payment. In a Bill of Exchange, there are three parties: the Drawer (the creditor who creates the bill), the Drawee (the debtor who is ordered to pay), and the Payee (the person who receives the money, who can be the drawer themselves or another party).
5. Why is acceptance by the drawee crucial for a Bill of Exchange but not for a Promissory Note?
Acceptance is crucial for a Bill of Exchange because it is an order from a creditor to a debtor. The drawee's signature of acceptance confirms their agreement to this order and makes them legally liable to pay the amount. Without this acceptance, it is merely a request. A Promissory Note, however, is a promise initiated by the debtor themselves. Since the debtor is already the one making the promise, no further acceptance from their end is required for it to be valid.
6. In what kind of business transaction is a Bill of Exchange typically used?
A Bill of Exchange is most commonly used in trade credit transactions, especially for the sale of goods. For instance, when a seller provides goods to a buyer on credit, the seller (drawer) can draw a bill on the buyer (drawee) for the invoice amount, payable after a certain period (e.g., 90 days). This creates a formal, negotiable instrument that serves as proof of the debt and the payment term.
7. How does a Bill of Exchange differ from a Cheque?
While a cheque is a type of Bill of Exchange, the key difference is who the drawee is. In a regular Bill of Exchange, the drawee can be any person or business entity. In the case of a Cheque, the drawee must always be a specific bank where the drawer holds an account. Furthermore, a cheque is always payable on demand, whereas a bill can be payable on demand or after a specified period.
8. What are the legal consequences if a Bill of Exchange is dishonoured?
If a Bill of Exchange is dishonoured (i.e., the drawee refuses to accept or pay it), the holder must provide a formal notice of dishonour to the drawer and any prior endorsers. This action is legally necessary to hold them liable for the payment. Failure to provide this notice can discharge the other parties from their liability. This is different from a Promissory Note, where no notice of dishonour needs to be given to the maker.
9. What are the main similarities between a Bill of Exchange and a Promissory Note?
Despite their differences, both a Bill of Exchange and a Promissory Note are negotiable instruments under the Negotiable Instruments Act, 1881. Key similarities include:
- Both must be in writing.
- Both must be signed by the person creating them (maker or drawer).
- The amount to be paid must be certain and clearly stated.
- The promise or order to pay must be unconditional.
- Both serve as legally enforceable evidence of a debt.
