A commitment to pay a certain sum of money to the bearer or assignee at a particular time or upon demand is contained in a written agreement known as a "negotiable instrument." Such devices can be transferred, enabling a group or individual to utilize them as best suits their needs.
There are three different categories of negotiating instruments - bills of exchange, cheques, and promissory notes. Here, we will focus on promissory notes and bills of exchange.
A promissory note is a written contract between a lender and a borrower that includes specifics of a loan, such as the loan amount, the interest rate, and the payment schedule.
You have probably signed a promissory note if you have ever taken out a student loan, mortgage, or personal loan. A borrower commits to repay a bank, a person, or another lender a predetermined sum of money, plus interest and fees, by signing a promissory note.
You may encounter the following in a promissory note:
Names of the Parties: The borrower and lender are identified in the note.
Principal Amount: This is the total amount borrowed. However, because many lenders deduct costs before issuing the loan, this may not be the precise amount you get as a lump sum payment.
Interest rate terms: The note should specify the charged interest rate.
Payment schedule: The agreement should specify when payments are expected to be made and the minimum amount of each payment (including interest).
Loan term: This specifies the tenure or how long it will take the borrower to repay the loan.
Penalties for late payments: These may be described in the notice, together with the circumstances under which they are regarded late and their associated costs.
Defining when a loan is deemed to be in default: For instance, if a predetermined number of payments are made beyond the payment due date by a predetermined number of days, the loan may default.
Acceleration clause: If the loan is in default, the lender can request payment of the entire amount due.
Fees of collection: This clause in a note specifies that the borrower will be responsible for all court costs if the lender brings the borrower to court.
A promissory note's language can change depending on the lender. Promissory notes typically cover the same fundamental information, such as the loan's dollar amount, interest rate, and repayment period.
A bill of exchange is a written agreement with an average absolute initiating an individual to pay a specific amount to a specific person. It is subsequently imprinted and signed by the drawer. It primarily aids buyers and sellers in completing their operations in global trade.
For instance, Kunal gave Anand merchandise for Rs. 1 million over six months. Kunal issued Anand a bill of exchange for Rs. 1 million that would mature in six months to guarantee the return of his money on the scheduled deadline.
The paper will be referred to as a draft before Anand's approval. Only once Anand signs the draft and adds the term "accepted" to indicate his approval will this become a bill of exchange.
The following prerequisites must be met:
The bill must be appropriately addressed.
It should contain an order, i.e. the drawer of the instrument initiates the drawee to charge a certain amount to the payee.
Should be acknowledged by the originator of the bill.
The drawee must approve the bill.
Only cash must be paid, and the amount must be specified.
The bill must be delivered to the payee.
A Bill of Exchange is created by the creditor to pay the debt owed by the parties and is used in business.
If a promissory note is formed jointly, there will be both joint and several liabilities. If a bill of exchange is accepted jointly, the obligation of the drawer will also be joint.
Promissory notes and bills of exchange differ primarily in the following ways:
| Promissory Note | Bill of Exchange |
|---|---|
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A promise to pay is made in a promissory note. |
An instruction or directive to pay is a bill of exchange. |
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Promissory notes involve two parties: the maker and the payee. |
A bill of exchange involves three parties: the drawer, drawee, and payee. |
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The party obligated to make the payment signs a promissory note. So, there is no need for acceptance. |
For the drawee to be held responsible for payment under a bill of exchange, acceptance is essential. |
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It is drawn by the debtor. |
It is drawn by the creditor. |
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Promissory contracts don't require any kind of notification. |
All parties who are responsible for paying a bill should receive notice when it is not paid. |
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With a promissory note, serving a notice is not necessary if it is dishonored. |
When a foreign bill of exchange is dishonored, a notice must be served. |
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A promissory note cannot be made payable to the maker since the maker and payee cannot be the same person. |
A bill may have a single payee who is both the drawee and the payee. |
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Stamping is crucial for a promissory note. |
Stamping is not necessary for a bill due upon demand. |
A promise to make the payment in the future is all that is required to buy and sell goods and services on credit. Cheques, bills of exchange, promissory notes, and other types of negotiable instruments are used to make these credit payments.
The ease of using credit to buy and sell items allows customers to spend more money than they have. These negotiable instruments make it possible for new businesses to be established while efficiently utilizing their resources.
The promissory note involves two parties -
It involves the following three parties:
The bill of exchange is mentioned in Section 5 of the Negotiable Instruments Act of 1881.
A bill of exchange is a legally enforceable agreement between two parties that one would pay the other a specific sum of money on demand or as of a specific date.
The main application of bills of exchange is in global trade. Their use has decreased as alternative payment methods have grown in popularity.
A bill of exchange is not a commitment to pay; it is an order to pay. Bills of exchange are therefore not considered loans.
A promissory note does not have to be printed on non-judicial stamp paper.
The date, site of execution, the amount due, information about the promisee and promisor, and the promisor's signature across the stamp should all be included in the promissory notes. Registration or attesting witnesses are not necessary.
A promissory note could be created in India under Section 4 of the Negotiable Instruments Act, of 1881, making it a legally enforceable document even though the source of the money is an uncontrolled practice.
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