Fundamentals of Business Laws and Business Communication · Negotiable Instruments Act, 1881

Promissory Note, Bill of Exchange and Cheque: Essentials and Differences

Updated 10 October 2026

A promissory note is an unconditional written promise by the maker to pay a fixed sum. A bill of exchange is an unconditional written order by the drawer to the drawee to pay a fixed sum. A cheque is a bill drawn on a banker, payable on demand. Match each question to the essentials and the parties.

Understand Promissory Note, Bill of Exchange and Cheque

The Negotiable Instruments Act, 1881 deals with instruments that can be transferred from one person to another by delivery or by endorsement and delivery, so that the new holder can claim the money in his own name. The three main instruments are the promissory note, the bill of exchange and the cheque.

A promissory note is a promise. One person (the maker) promises in writing to pay a fixed sum to another person (the payee) or to his order. It cannot be made payable to bearer. There are only two parties. It is defined in Section 4 of the Act.

A bill of exchange is an order. One person (the drawer) orders another (the drawee) in writing to pay a fixed sum to a certain person (the payee) or to his order, or to the bearer of the instrument. There are three parties, though one person can play two roles, for example when the drawer is also the payee. It is defined in Section 5. The drawee becomes the acceptor only after signing acceptance on the bill.

A cheque is a special bill of exchange. It is drawn on a specified banker, and it is payable on demand only. It is defined in Section 6. The drawer is the account holder, the drawee is the bank, and the payee is the person who receives the money.

To answer exam questions, ask two things: is it a promise or an order, and who are the parties? A promise with two parties is a note. An order with three parties is a bill. An order on a bank payable on demand is a cheque.

Key formulas to remember

Promissory note (Section 4): Written + unconditional promise + signed by maker + certain sum of money + payable to a certain person or to his order; A promissory note cannot be made payable to bearer. Under Section 31 of the RBI Act, only the Reserve Bank of India can issue bearer notes payable on demand. A note can be payable to a named person or to his order. It must also be properly stamped, as required by stamp law.
Bill of exchange (Section 5): Written + unconditional order + signed by drawer + certain sum of money + addressed to a certain drawee + payable to a certain person or to his order, or to the bearer of the instrument; The drawee must be certain. Acceptance by the drawee is needed to make him liable.
Cheque (Section 6): Bill of exchange + drawn on a specified banker + payable on demand only; An instrument need not bear the word 'cheque' to be a cheque if it meets the Section 6 conditions. Section 6 expressly includes the electronic image of a truncated cheque and a cheque in electronic form.
Parties: Note: maker, payee | Bill: drawer, drawee (acceptor), payee | Cheque: drawer, drawee bank, payee; Endorser, endorsee and holder come in later when the instrument is transferred.
Types of crossing: General crossing: two parallel transverse lines, simply or with the words 'and company' (or its abbreviation) or 'not negotiable' between them | Special crossing: name of a banker written across the cheque, with or without 'not negotiable'; parallel lines are not needed; There are two types of crossing, general and special. 'Not negotiable' is not a third type. It is a set of words that can be added to a general or special crossing, and then the transferee cannot get a better title than the transferor had. It does not stop transfer. An uncrossed cheque is an open cheque and is payable over the counter. A crossed cheque is paid only through a bank account.

How to solve Promissory Note, Bill of Exchange and Cheque questions

Use this method for any question that asks you to identify, define or distinguish these instruments.

1Read the instrument or the statement carefully and note whether the language is a promise ('I promise to pay') or an order ('Pay to').
2Count the parties and name them: maker, payee, drawer, drawee.
3Check the essentials one by one: in writing, unconditional, signed, certain sum, certain payee.
4Check when it is payable: on demand only points to a cheque if it is drawn on a bank, otherwise a time-based bill or note is also possible.
5Look for fatal defects such as a condition, an uncertain amount, a missing signature, or a promise by two parties.
6Choose the label (note, bill or cheque) and give the reason using the section's key words.
7For a 'difference' question, compare on promise or order, parties, acceptance, and who is primarily liable.

Quickest way: Promise or order, then count the parties

When to use it: Use this for MCQs that ask you to name an instrument or find which statement is correct.

Promise means promissory note. Order means bill of exchange or cheque.
If an order is addressed to a bank and payable on demand, choose cheque.
If the option says a note has three parties or a cheque is payable after a period, eliminate it.
If an option adds a condition such as 'if I get the job', eliminate it because the instrument fails the unconditional test.
In crossing questions, two parallel transverse lines mean general crossing. The name of a banker written across the cheque, with or without lines, means special crossing.

Common mistakes in Promissory Note, Bill of Exchange and Cheque

Saying a promissory note has three parties.
Students mix it up with a bill of exchange.
Fix: A note has the maker and the payee only. The maker is the promisor and is primarily liable.
Treating an IOU such as 'I owe you ₹5,000' as a promissory note.
It looks like a written acknowledgement of debt.
Fix: A note needs a promise to pay. A bare acknowledgement of debt has no promise, so it is not a note.
Thinking a bill of exchange needs no acceptance.
Students focus on the drawer's order.
Fix: The drawee is not liable until he accepts. The drawer is only secondarily liable until then.
Calling any cheque a bill payable after a fixed period.
Students forget the special features of a cheque.
Fix: A cheque is always payable on demand. A post-dated cheque is still a cheque; it is payable on demand once the date arrives.
Confusing a conditional order with a valid bill.
Students ignore the word 'unconditional'.
Fix: Any real condition, such as 'pay if the goods arrive', makes the instrument invalid. A mere statement of the reason for payment is fine.
Mixing up general and special crossing.
Both are often pictured with parallel lines.
Fix: Special crossing carries the name of a banker, with or without lines. General crossing has two parallel transverse lines, with or without 'and company' or 'not negotiable', and no banker's name.

Worked examples

Example 1

Ravi writes: 'I promise to pay Sunita or order ₹20,000 three months after date.' He signs it and hands it over. What is this instrument and who are the parties?

Show the solution

The wording is 'I promise to pay', so it is a promise, not an order.
It is in writing, unconditional, signed, and states a certain sum, ₹20,000.
The payee is certain: Sunita. It is payable after three months, which is allowed.
With a promise, the parties are the maker and the payee only.

Answer: It is a promissory note under Section 4. Ravi is the maker and Sunita is the payee.

Example 2

Which one of the following is a cheque? (A) An order to a bank to pay ₹10,000 to Meena on demand (B) An order to a trader to pay ₹10,000 to Meena after 30 days (C) A promise to pay ₹10,000 to Meena on demand (D) A promise to pay ₹10,000 to Meena after 30 days

Show the solution

A cheque is an order, not a promise, so eliminate C and D.
A cheque is drawn on a banker. In B the order is to a trader, so eliminate B.
A cheque is payable on demand. Option A matches both conditions.

Answer: Option A. It is an order on a banker payable on demand.

Exam tips

Learn the three definitions in key words: promise or order, unconditional, certain sum, certain person, signed.
Make a small table in your notes of the parties for each instrument and revise it before the exam.
In MCQs, look for a condition, a missing signature or the wrong number of parties to eliminate options fast.
Link crossing questions to the topic on crossing of cheques: general, special and not negotiable.
Questions on the difference between a note and a bill usually test the promise-order split and the number of parties.

Practice questions from Negotiable Instruments Act, 1881

Promissory Note, Bill of Exchange and Cheque: frequently asked questions

What is the main difference between a promissory note and a bill of exchange?

A promissory note contains a promise by the maker to pay and has two parties. A bill of exchange contains an order by the drawer to the drawee and has three parties. The maker of a note is primarily liable, while the drawee of a bill is liable only after acceptance.

What are the essentials of a cheque?

A cheque is a written, unconditional order, signed by the drawer, to a specified banker to pay a certain sum to a certain person or bearer. It must be payable on demand. It is a special type of bill of exchange.

What is the difference between an open and a crossed cheque?

An open cheque is not crossed, so the holder can get cash over the bank counter. A crossed cheque is paid only through a bank account. This gives safety if the cheque is lost.

Can a promissory note be payable to bearer?

No. A promissory note cannot be made payable to bearer. Under Section 31 of the RBI Act, only the Reserve Bank of India can issue bearer notes payable on demand. A promissory note can be payable to a named person or to his order.