Quick Summary
Negotiable instruments make business payments easier by allowing money claims to be transferred. The three central instruments are promissory note, bill of exchange, and cheque.
Meaning and Features
- Written document
- Unconditional promise or order
- Payable in money
- Certain parties
- Certain amount
- Transferable by delivery or endorsement
- Holder may obtain title and payment rights
Main Instruments
Promissory Note
A written promise made by one person to pay a certain sum to another person.
Parties:
- Maker
- Payee
Bill of Exchange
A written order given by one person directing another to pay a certain amount to a third person.
Parties:
- Drawer
- Drawee
- Payee
Cheque
A bill of exchange drawn on a banker and payable on demand.
Parties:
- Drawer
- Drawee bank
- Payee
Comparison
| Promissory Note | Bill of Exchange | Cheque |
|---|---|---|
| Promise to pay | Order to pay | Order to bank to pay |
| Two parties | Three parties | Three parties |
| Maker is primarily liable | Drawee accepts liability after acceptance | Bank pays on demand |
| Not necessarily linked to bank | May or may not involve bank | Always drawn on a bank |
Important Terms
- Endorsement
- Holder
- Holder in due course
- Dishonour
- Crossing of cheque
Important Questions
One Mark
1. Define negotiable instrument. 2. Name the parties to a promissory note. 3. Which instrument is always drawn on a banker?
Short Answer
1. State any three features of negotiable instruments. 2. Distinguish between promissory note and bill of exchange. 3. Name the parties to a cheque.
Long Answer
1. Explain the features of negotiable instruments. 2. Distinguish among promissory note, bill of exchange, and cheque. 3. Explain the parties connected with negotiable instruments.
Common Mistakes
- Calling a promissory note an order instead of a promise.
- Forgetting that a cheque is always drawn on a bank.
- Mixing drawer and drawee.
- Writing only instrument names without parties.
Revision Checklist
- [ ] Meaning and features
- [ ] Three instruments
- [ ] Parties to each
- [ ] Comparison table
- [ ] Holder and endorsement terms