Business Laws and Ethics · Negotiable Instruments Act, 1881

Promissory Note, Bill of Exchange and Cheque Explained

Updated 10 October 2026 · Fact-checked

A promissory note is a written, unconditional promise by the maker to pay a certain sum to a certain person or bearer. A bill of exchange is a written, unconditional order to a third person to pay. A cheque is a bill drawn on a specified banker, payable on demand. Check each element in the definition to solve any question.

Understand Promissory Note, Bill of Exchange and Cheque

The Negotiable Instruments Act, 1881 deals with three instruments: the promissory note (Section 4), the bill of exchange (Section 5) and the cheque (Section 6). Each is a written document that carries a money claim and can be passed on to others.

The key difference is who does what. In a promissory note, the maker promises to pay. There are two parties at the start: maker and payee. In a bill of exchange, the drawer orders another person, the drawee, to pay. There are three parties: drawer, drawee and payee. The same person can play two roles, for example the drawer can also be the payee.

Both need an unconditional promise or order, a certain sum of money only, a certain person as payee, and the signature of the maker. The Act says a promise or order is still unconditional if payment is due after an event that is certain to happen, even if its timing is uncertain. A sum is still certain if it includes future interest, is payable at an indicated rate of exchange, or if default in one instalment makes the balance due. A payee is still certain if mis-named or described only by description.

A cheque is a special bill of exchange. It is drawn on a specified banker and not expressed to be payable otherwise than on demand. Under Section 6 it includes the electronic image of a truncated cheque and a cheque in electronic form. A bank-note or currency-note cannot be a promissory note.

These instruments become negotiable when payable to order or to bearer (Section 13). A bearer instrument is negotiable by delivery. An order instrument needs indorsement and delivery (Section 46). If indorsed in blank, it becomes payable to the bearer (Section 54). Crossing of a cheque is dealt with in Sections 123 and 124. Section 123 says what addition makes a cheque crossed generally, and Section 124 says what addition makes it crossed specially. A crossed cheque is then governed by the banker-related rules on crossed cheques, which you will meet in later sections.

Key rules to remember

Promissory note (Section 4): Writing + unconditional undertaking + signed by maker + certain sum only + certain person or bearer; Not a bank-note or currency-note. Maker promises to pay.
Bill of exchange (Section 5): Writing + unconditional order + signed by maker (drawer) + directs a certain person to pay + certain sum only + certain payee or bearer; Three parties: drawer, drawee, payee.
Cheque (Section 6): Bill of exchange + drawn on a specified banker + payable on demand only; Includes electronic image of a truncated cheque and a cheque in electronic form.
General crossing (Section 123): Two parallel transverse lines, or 'and company' (or abbreviation) between two parallel lines, with or without 'not negotiable'; Addition across the face of the cheque.
Special crossing (Section 124): Name of a banker across the face, with or without 'not negotiable'; Cheque is crossed to that banker.
Negotiation (Sections 46 and 54): Bearer: delivery. Order: indorsement + delivery. Indorsed in blank: payable to bearer; Subject to the rules on crossed cheques.

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

Use this method for any question on the three instruments, whether it is a definition, a distinction or a problem on a given wording.

1Identify the instrument: is it a promise (note), an order to a third person (bill) or an order on a banker payable on demand (cheque)?
2Write the statutory definition in your own words with the section number.
3Test each essential one by one: writing, unconditional, signed, certain sum, certain person, payable to order or bearer.
4Check the exclusions: conditions on uncertain events, extra promises or deductions, bank-notes and currency-notes.
5For a problem, state your conclusion on each wording and give the reason in one line.
6For a crossing question, say whether it is general (lines) or special (banker's name) and whether 'not negotiable' is added.
7For a distinction question, write at least five points in a two-column style using lines such as 'Parties: two / three'.
8Close with a one-line conclusion.

Quickest way: Four-question test

When to use it: Use for MCQs and short problems that give a wording and ask whether it is a promissory note or bill.

Who pays? The signer himself means a note. Someone else means a bill.
Is anything conditional on an uncertain event, or is anything extra promised, such as goods or other sums? If yes, it is not valid.
Is the payee certain and the sum certain? Interest or instalment terms do not destroy certainty.
Is the drawee a banker and payable on demand? If yes, it is a cheque.

Common mistakes in Promissory Note, Bill of Exchange and Cheque

Treating 'I.O.U. Rs. 1,000' as a promissory note.
It looks like an acknowledgement of debt, so students assume it is a note.
Fix: Remember the illustration to Section 4: 'Mr. B, I O U Rs. 1,000' is not a promissory note, as it has no promise to pay. 'I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand' is a note.
Treating a promise to pay on an uncertain event as an unconditional promise.
Students confuse it with a promise payable after an event that is certain to happen.
Fix: Under Section 5, a promise payable on the lapse of a period after an event that is certain to happen, such as death, is still unconditional, even if the time of its happening is uncertain. The Section 4 illustrations (f), payment seven days after 'my marriage with C', and (g), payment on D's death 'provided D leaves me enough to pay that sum', are held not to be promissory notes. The usual explanation is that payment depends on an uncertain event or a contingency. The Act does not state the reason, so present it as the generally accepted reasoning, not as a quoted rule.
Saying a cheque can be payable after a fixed period.
Students mix it with a time bill.
Fix: A cheque is payable on demand only and is drawn on a specified banker.
Mixing up general and special crossing.
Both involve words across the face.
Fix: General: two parallel lines or 'and company'. Special: the banker's name. 'Not negotiable' can go with either.
Writing that a note has three parties.
Students copy the bill's structure.
Fix: A note has maker and payee. A bill has drawer, drawee and payee.
Forgetting that a bill can carry future interest and still have a certain sum.
Students read 'certain' too literally.
Fix: Section 5 says the sum may include future interest or be payable at an indicated rate of exchange.

Worked examples

Example 1

A signs the following: (a) 'I promise to pay B or order Rs. 500.' (b) 'I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.' (c) 'I promise to pay B Rs. 500 seven days after my marriage with C.' State which are promissory notes.

Show the solution

Instrument (a): in writing, signed, an unconditional promise to pay a certain sum to B or order. All essentials of Section 4 are met.
Instrument (b): the promise includes delivery of a horse. The undertaking is not to pay a certain sum of money only, so it fails Section 4.
Instrument (c): this is Section 4 illustration (f), which the Act says is not a promissory note. The Act does not give the reason. The generally accepted reasoning is that payment depends on an uncertain event, marriage with C, so the promise is treated as conditional.

Answer: Only (a) is a promissory note. (b) and (c) are not.

Example 2

Distinguish between a bill of exchange and a cheque, and explain general and special crossing.

Show the solution

Definition: a bill is an unconditional written order to a certain person to pay a certain sum to a certain person or bearer. A cheque is a bill drawn on a specified banker and not payable otherwise than on demand.
Drawee: a bill can be drawn on any person. A cheque is drawn on a banker only.
Time of payment: a bill can be payable on demand or after a period. A cheque is payable on demand only.
Form: a cheque may also be a truncated cheque image or a cheque in electronic form.
General crossing (Section 123): two parallel transverse lines, or 'and company' (or an abbreviation) between two parallel lines, with or without 'not negotiable'.
Special crossing (Section 124): the name of a banker across the face, with or without 'not negotiable'; the cheque is crossed to that banker.

Answer: A cheque is a special bill. Drawee: a bill can be drawn on any person, but a cheque is drawn on a specified banker. Time: a bill can be payable on demand or after a period, but a cheque is payable on demand only. Form: a cheque may also be a truncated cheque image or an electronic cheque. General crossing (Section 123): two parallel transverse lines, or 'and company' between two parallel lines, with or without 'not negotiable'. Special crossing (Section 124): the name of a banker across the face, with or without 'not negotiable'; the cheque is crossed to that banker.

Exam tips

Learn the Section 4 illustrations. The examiner often gives a wording and asks whether it is a promissory note.
For a distinction question, give the section number and at least five points. Parties, promise or order, acceptance, drawee and payment time are the safest.
In MCQs, check the word 'unconditional' and the words 'certain sum' before choosing.
Write crossing answers with both types and the effect of 'not negotiable' only if you are sure; otherwise stick to the definitions.

Practice questions from Negotiable Instruments Act, 1881

Promissory Note, Bill of Exchange and Cheque in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

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

What are the essentials of a valid promissory note under Section 4?

It must be in writing, contain an unconditional undertaking signed by the maker, and promise to pay a certain sum of money only. The payee must be a certain person, or the bearer. It must not be a bank-note or currency-note.

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

A note contains a promise by the maker to pay, so it has two parties at the start. A bill contains an order by the drawer to the drawee, so it has three parties. The drawer of a bill may also be the payee.

What is a cheque under Section 6?

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in electronic form.

How is a cheque crossed?

Generally, by two parallel transverse lines or the words 'and company' between them, with or without 'not negotiable'. Specially, by adding the name of a banker across its face, with or without 'not negotiable'.

How is a bearer or order instrument negotiated?

A bearer instrument is negotiated by delivery. An order instrument needs indorsement and delivery. If indorsed in blank, it becomes payable to the bearer.