Negotiable instruments: meaning, characteristics, promissory note, bill of exchange and cheque

1. Meaning and kinds

The Negotiable Instruments Act, 1881 does not define the idea; it lists the instruments. Section 13(1): a “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer. An instrument is payable to order if it is expressed to be so payable, or payable to a particular person without words prohibiting transfer; it is payable to bearer if expressed to be so payable or if the only or last indorsement is in blank (Explanations (i) and (ii)).

Besides the three statutory instruments, others are negotiable by custom or usage: hundis (whose local usages s.1 saves), bank drafts (s.85A deals with them), treasury bills, dividend and interest warrants, and bearer debentures. Documents such as fixed deposit receipts, postal orders, share certificates and bills of lading are not negotiable instruments, though some are transferable.

2. Characteristics of a negotiable instrument

• Easy transfer. Property passes by delivery if payable to bearer, or by indorsement and delivery if payable to order (ss.46–48). No written assignment and no notice to the debtor is needed, unlike assignment of a debt under s.130 of the Transfer of Property Act.
• Better title to a holder in due course. A person who takes it for value, in good faith and before maturity, gets a title free from defects in the title of his transferor (ss.9, 53, 58). This is the feature that distinguishes negotiation from assignment.
• Right to sue in his own name. The holder can sue all prior parties without joining the transferor.
• Presumptions in favour of the holder: consideration, date, time of acceptance and transfer, order of indorsements, stamp, and that he is a holder in due course (s.118).
• Written, signed, unconditional, for money only, and certain as to amount and parties.
• Special procedure. Summary suits under Order XXXVII of the Code of Civil Procedure, and the criminal remedy for dishonoured cheques (s.138).

3. Promissory note

Section 4: a promissory note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

The essentials, each with the illustration that tests it:

• In writing. An oral promise is not a note.
• A promise to pay. A mere acknowledgement of debt is not enough: “Mr. B, I O U Rs. 1,000” is not a promissory note (illustration (c)). But “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received” is one, because it contains an undertaking to pay (illustration (b)).
• Unconditional. “I promise to pay B Rs. 500 seven days after my marriage with C” is conditional and not a note (illustration (f)); so is a promise to pay “on D's death, provided D leaves me enough to pay that sum” (illustration (g)). But a promise to pay a stated time after an event certain to happen, such as a person's death, is not conditional merely because the time is uncertain (second paragraph of s.5).
• Signed by the maker. The signature may be anywhere on the instrument, and a thumb impression suffices.
• A certain sum of money. “I promise to pay B Rs. 500 and all other sums which shall be due to him” is uncertain (illustration (d)); so is “Rs. 500, first deducting thereout any money which he may owe me” (illustration (e)). A sum that includes future interest, or is payable at an indicated rate of exchange, is still certain (s.5).
• Money only. “I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next” is not a note (illustration (h)).
• To a certain person, or to his order, or to bearer. The payee may be named or described; a misnamed payee is still a certain person (s.7).

Section 31(2) of the RBI Act, 1934 adds a public law condition: no person other than the RBI or the Central Government may make or issue a promissory note payable to bearer. A note payable to bearer made by a private person is therefore invalid, and making it is an offence. Bank notes and currency notes are excluded from s.4 for the same reason.

A promissory note must also be stamped under the applicable Stamp Act (in Karnataka, the Karnataka Stamp Act, 1957); an unstamped note is inadmissible in evidence, but the underlying debt may still be proved independently. A note payable on demand, or with no time for payment stated, is payable on demand (s.19).

4. Bill of exchange

Section 5: 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.

• Three parties: drawer (who makes it), drawee (who is directed to pay; he becomes the acceptor when he accepts by signing), and payee (s.7). The drawer and payee may be the same person.
• The drawee is not liable until he accepts (s.32); before acceptance the drawer is the principal debtor (s.37).
• Kinds: inland and foreign (ss.11, 12); demand and time (usance) bills; documentary bills, accompanied by documents of title to goods; accommodation bills, drawn to raise money for a party without consideration (s.43 and s.59 last paragraph).
• A bill payable otherwise than on demand gets three days of grace (s.22).

5. Cheque

Section 6: a cheque is a bill of exchange drawn on a specified banker 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 (inserted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002). A truncated cheque is one whose physical movement is stopped in the clearing cycle and replaced by an electronic image, which is how cheques are cleared today under the Cheque Truncation System.

So every cheque is a bill of exchange, with two special features: the drawee is always a banker, and it is always payable on demand.

6. The differences

Promissory note and bill of exchange.

• a note contains a promise, a bill an order;
• a note has two parties (maker, payee), a bill three (drawer, drawee, payee);
• the maker of a note is primarily liable; the drawer of a bill is liable only if the drawee fails to accept or pay, after notice of dishonour;
• a note needs no acceptance; a time bill must be accepted;
• a note cannot be made payable to bearer (RBI Act s.31); a bill payable to bearer on demand is likewise barred, but a bill payable to bearer after a time is not;
• noting and protest are relevant mainly to bills; a foreign bill must be protested where the law of the place where it is drawn requires it (s.104).

Cheque and bill of exchange.

• a cheque is drawn only on a banker; a bill on any person;
• a cheque is always payable on demand; a bill may be payable after a period;
• a cheque needs no acceptance and gets no days of grace;
• a cheque may be crossed (ss.123–131); a bill cannot;
• the drawer of a cheque is discharged by delay in presentment only to the extent he suffers damage (s.84); the drawer of a bill is discharged if it is not duly presented (s.64);
• a cheque can be countermanded by the drawer; a bill once accepted cannot;
• dishonour of a cheque for want of funds is an offence under s.138; dishonour of a bill is not.

7. Problem

‘A’ signs an instrument as follows: “I promise to pay ‘Y’ on order Rs. 1,00,000/-.” Is it a valid promissory note? (January 2026; the June 2025 paper set the same problem as “I promise to pay B or order Rs. 2,000.”)

Issue. Whether the instrument satisfies s.4 and is not barred by s.31 of the RBI Act.

Law. Section 4 requires a written, unconditional undertaking, signed by the maker, to pay a certain sum of money only, to or to the order of a certain person or to bearer. Illustration (a), “I promise to pay B or order Rs. 500”, is a promissory note. Section 19 makes an instrument with no time of payment payable on demand. Section 31 of the RBI Act forbids a note payable to bearer.

Application. The instrument is in writing and signed by A. It contains a promise (“I promise to pay”), not a mere acknowledgement. The promise is subject to no condition. The sum, ₹1,00,000, is certain and is money only. The payee, Y, is a certain person. The words “on order” are best read as “or order”, making the note payable to Y or as Y directs, which is exactly illustration (a). Even if read literally as “on order” (pay when Y asks), the note simply becomes payable on demand under s.19, which does not affect its validity. It is not payable to bearer, so s.31 of the RBI Act is not attracted.

Conclusion. It is a valid promissory note, enforceable once duly stamped. The same reasoning gives the same answer for “I promise to pay B or order Rs. 2,000.” If the words had been “I promise to pay bearer Rs. 1,00,000”, the instrument would satisfy s.4 but be void under s.31(2) of the RBI Act.

How this is examined

“Define promissory note. Explain essentials of promissory note” and “Define negotiable instrument. Explain characteristics of negotiable instruments” (January 2026); “Define cheque. How is it different from bill of exchange and promissory note?” (August 2024). The promissory note problem is set in nearly every paper. Use the illustrations to s.4 by letter; they are the authority the examiner expects.