Sep 9, 2023 08:14 UTC
Sep 9, 2023 at 08:14 UTC
Study Notes: Bill of Exchange, Promissory Note and Cheque
Bill of Exchange
Bill of exchange is defined under Section 5 of the Negotiable Instruments Act, 1881. Section 5 says 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.
A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be “certain”, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”, within the meaning of this section and section 4, although he is misnamed or designated by description only.
Parties to a Bill of Exchange
- The “Drawer”, i.e. the person who is the maker of the bill.
- The “Drawee”, i.e. the person who is directed to pay the bill.
- The “Payee”, i.e. the person to whom or to whose order the amount of the bill is payable, unless it is payable to bearer.
Essentials of Bill of Exchange
- The bill of exchange must be in writing although it may be written in any language.
- The bill of exchange must contain an order to pay: The order must be imperative and not a mere request although it may be politely worded.
In case of Ruff v. Webb (1974), Ruff was a servant of Webb; Webb Dismissed Ruff from service and for wages Webb gave Ruff an Instrument in the words, “Mr. Nelson will much oblige Mr. Webb by paying to J. Ruff or order, twenty guines on his account”. Here the instrument was not considered as bill of exchange as there was excessive politeness and the order to pay was absent.
There is a similar case, Little v. Slackford (1882), in this case too, the instrument was not considered as bill of exchange because of lack of order to pay. The words were “Please let the bearer have seven pounds and oblige.” This is not a bill of exchange because it is a request and not an order.
In case of Hamilton v. Spottiswood (1849), it was held that the instrument must contain an order to pay and not merely authorize the other to pay the money. The instrument said “We hereby authorise you to pay on our account to the order of X, £600.” This is not a bill of exchange because it is not an order to pay.
- The order to pay must be unconditional: An instrument contingent on the happening of an event which is not certain to happen, the instrument is not valid.
An instrument containing an order to pay “thirty days after the arrival of the ship Paragaon in Calcutta” is not a bill of exchange even if the ship arrives. (Palmer v. Prett, 1824)
An instrument containing a promise to pay on settlement of account when the litigation comes to an end is not a valid instrument as the settlement of account is an uncertain event even though the litigation may come to an end one day. (Sankaran v. Mathai, 1973)
An undertaking to repay the amount only when demanded is not a conditional promise to pay. (Balmukund v. Munna Lal Ramji Lal, 1970)
If there is a condition subject to jurisdiction, the instrument will be invalid. (R. Kannusamy v. VVK Swamy and Co., 1988)
If an instrument is made payable on the event of death of certain person it is a valid instrument. (Robert v. Peaks)
- The sum payable must be money only and it must be certain: It includes future interest or is payable at an indicated rate of exchange.
- The bill of exchange must be signed by the drawer: If bill of exchange is not signed by the drawer, no action can be maintained against the acceptor or any other party who has signed the instrument.
There can be more than one drawer of a bill of exchange with joint liability but not with alternate liability.
- The Drawee must be certain.
Like the drawer the drawee must also be definitely indicated avoiding all chances of uncertainty. If, however, the drawee is not named in the bill itself which only mentions the place of payment or designation and it is accepted by a person of the same address he is estopped from taking the plea that he is not the drawee or the acceptor (Gray v. Milner, 1819). One person cannot accept a bill addressed to another. There may be joint drawees of a bill but an order addressed to two or more persons in succession enjoining a series of acceptances is bad and is not a bill of exchange. Where the drawer and the drawee are the same person, the holder may treat it as a bill of exchange or a pronote at his option.
- The payee must be certain.
The payee of a bill must be definitely named or indicated in the instrument with reasonable certainty to enable the drawee to make the payment to a right person.
Where a bill is payable to bearer, the payee is indicated with certainity. Where a bill is not payable to bearer, the payee must be named or otherwise indicated with reasonable certainity.
The bill may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two or more payees.
In Cruchley v. Clarence (1913), it was held that “a bill of exchange drawn and issued in blank for the name of the payee, may be filled up by a bona-fide holder with his name and will bind the drawer.” The effect of not writing the name of the payee is that the drawer makes it payable to bearer.
Maturity of Bill
The term maturity refers the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days, known as days of grace, must be added to the date on which the period of credit expires instrument is payable. Thus, if a bill dated March 05 is payable 30 days after date it, falls due on April 07, i.e. 33 days after March 05 if it were payable one month after date, the due date would be April 08, i.e. one month and 3 days after March 05. However, where the date of maturity is a public holiday, the instrument will become due on the preceding business day. In this case if April 08, falls on a public holiday then the April 07 will be the maturity date. But when an emergent holiday is declared under the Negotiable Instruments Act 1881, by the Government of India which may happen to be the date of maturity of a bill of exchange, then the date of maturity will be the next working day immediately after the holiday. For example, the Government declared a holiday on April 08 which happened to be the day on which a bill of exchange drawn by A upon B for Rs.20,000 became due for payment, Since April 08, has been declared a holiday under the Negotiable Instruments Act, therefore, April 09, will be the date of maturity for this bill.
Distinction between Bill of Exchange and Promissory Note
|Basis For Comparison||Bill of Exchange||Promissory Note|
|Number of Parties||In a Bill of Exchange there are three parties, namely, the Drawer, the Drawee and the Payee.||In a Promissory Note there are two parties, Maker (Debtor) and the Payee (Creditor)|
|Promise and Order||In a Bill of Exchange there is an unconditional order by the Drawer to the Drawee to pay the money to the Payee or his order.||A Promissory Note contains an unconditional promise by the Maker to pay the money to the Payee or his order.|
|Acceptance||Acceptance by Drawee is required to take the money although non acceptance does not lead invalidating the instrument and it only becomes dishonoured.||Acceptance is not required as it contains a promise to pay by the Maker himself.|
|Liability||The liability of the Drawer of a bill of exchange is secondary and conditional and it arises only when the Acceptor does not honour the bill.||The liability of the Maker of the Promissory Note is primary and absolute.|
|Payable to Bearer||It can be made payable to bearer.||It cannot be made payable to bearer.|
|Dishonour||Notice is necessary to be given to all the parties involved.||Notice is not necessary to be given to the Maker.|
Difference between Bill of Exchange and Cheque
|Basis For Comparison||Bill of Exchange||Cheque|
|Acceptance||Acceptance is necessary in case of bill of exchange. Marking and certifying is not considered as acceptance under Section 7 of Negotiable Instruments Act, 1881. (Bank of Baroda v. Punjab National Bank Ltd., 1944)||A cheques does not require any acceptance.|
|Banker||Banker not required in Bill of exchange.||Banker is required in cheque.|
|Immediate Payment||Immediate payment is not possible in Bill of exchange.||Cheque is for immediate payment.|
|Payable on Demand||A Bill of exchange cannot be made payable to Bearer on demand although it can be made Payable to bearer after a certain time or fixed time period||A Cheque can be drawn Payable to Bearer on demand.|
|Days of Grace||Three days of grace are allowed in case of Bill of exchange.||As Cheque is for payment at the time of presentment, it is not entitle to any days of grace.|
|Crossing||Bill of exchange cannot be crossed except a bank draft.||A Cheque may be crossed.|
|Stamp||A Bill of exchange requires stamp.||A Cheque does not require any stamp.|
|Stopping Payment||Not in case of Bill of exchange.||A Cheque is a revocable mandate and its authority can be revoked by countermanding payment.|
Post Dated Cheque and Bill of Exchange
Cheque is defined under Section 6 of the Negotiable Instruments Act, 1881 as-
“A Cheque is a bill of exchange drawn on a specified banker (Drawee) 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.”
A Cheque is not invalid if it is ante-dated or post-dated. A Post-dated cheque is payable on presentation on or after the date it bears. A Cheque may bear the date of holiday.
In Anil Kumar Sawhney v. Gulshan Rai (1993), it was held that a Post-dated cheque remains only a Bill of Exchange till the date written on it and only from that date it becomes a Cheque on being Payable on demand.
Although Post-dated cheque does not comes under the definition of Section 6 of the Negotiable Instruments Act, 1881.
Similarly, in Ashok Yeshwant Badave v. Surendra Madhavrao Nighojakar (2001), it was held that a Post-dated cheque is not payable till the date which is shown thereon arrives and will become Cheque on the said date and prior to that date the same remains Bill of Exchange. Therefore, the Post-dated cheque becomes a Cheque within the meaning of Section 138 of the Negotiable Instruments Act, 1881 on the date which is written thereon and Three months period (before it was Six months) has to be reckoned for the purposes of proviso (a) of Section 138 of the Act [which says the Cheque has been presented to the bank within a period of six months (now three months) from the date on which it is drawn or within the period of its validity, whichever is earlier] from the said date.
It can also be said that a Cheque must contain all the essentials of Bill of Exchange.
 Section 5 of Negotiable Instruments Act, 1881
 Ruff v. Webb, (1974) 5, RR 773
 Little v. Slackford (1882) 31, RR 726
 Hamilton v. Spottiswood (1849) 80, RR 519
 Palmer v. Prett, (1824) 27 RR 583
 Sankaran v. Mathai, AIR 1973 Ker 22
 Balmukund v. Munna Lal Ramji Lal, AIR 1970 Punj 516
 R. Kannusamy v. VVK Swamy and Co., AIR 1988 Mad 336
 Gray v. Milner, (1819) 2 RR 529
 Bill of exchange – definition, Essentials and comparison LawPage, https://lawpage.in/negotiable- instruments/bill-of-exchange#drawer_must_be_certain_and_sign_the_instrument (last visited Nov 28, 2021)
 Bill of exchange – definition, Essentials and comparison LawPage, https://lawpage.in/negotiable-instruments/bill-of-exchange#payee_certain (last visited Nov 28, 2021)
 Cruchley v. Clarence, (1913) 14 RR 596
 Bill of Exchange 8 – NCERT, https://www.ncert.nic.in/ncerts/l/keac108.pdf (last visited Nov 28, 2021)
 Bank of Baroda Ltd. v. Punjab National Bank Ltd. (1944) 2 ALL ER 83
 Section 6 of Negotiable Instruments Act, 1881
 Anil Kumar Sawhney v. Gulshan Rai, (1993) 4 SCC 424
 Ashok Yeshwant Badave v. Surendra Madhavrao Nighojakar (2001) 3 SCC 726 : AIR 2001 SC 1315