Unit – 4 Laws Relating to Negotiable Instruments

I. Choose the correct option:

1. The purpose of accommodation bill is :
a) To finance actual purchase or sale of goods b) To facilitate trade transmission
c) When any one or both parties are in need of funds d) None of these
2. If the due date is a public holiday, what will be the due date of the PN or BE :
a) Following Business Day b) Preceding Business Day
c) The same day only d) One month later
3. A cheque issued by a branch of a bank against consideration received is known as
a) Drawing Cheque b) Banker’s cheque c) Clearing cheque
4. According to Negotiable Instrument Act, 1881, all of the following are types of the cheque,
EXCEPT:
a) Bearer Cheques b) Pay Order cheques c) Crossed Cheques d) Blank Cheques
5. Dishonour of a cheque due to ‘insufficient fund’ is punishable under which section of NI Act?
a) Sec 128 b) Sec 131 c) Sec 138 d) Not punishable
6. Endorsement in blank is
a) writing nothing on the cheque b) signing by the holder on the cheque
c) neither of them d) both of them
7. If a cheque is drawn ‘Payable to Ramesh Verma only’, it means
a) Ramesh Verma cannot further negotiate or transfer the cheque to another person by delivery
b) Ramesh Verma can further negotiate or transfer the cheque to another person by
endorsement & delivery
c) Cheque can be paid to Ramesh Verma only
d) None of these
8. In a PN / BE / cheque, the endorsers are
a) principals b) sureties c) neither of the above d) both
9. Mr. Gupta issued a cheque in Favor of a charitable trust for donation. Here, Trust is
a) Holder b) Holder in due course c) Both of the above d) None of the above
10. Which of the following is true when words ‘Not Negotiable ’are included in a generally or
specially crossed cheque?
a) Cheque becomes non-transferable.
b) Cheque can be further transferred but the transferee cannot get the better title than the
transferor.
c) An open or uncrossed cheque with the words ‘Not Negotiable’ has similar effect.
d) None of these.
11. Which of the followings is not the feature of Negotiable Instrument?
a) It is transferable by mere delivery if payable to bearer.
b) It is transferable by endorsement & delivery if payable to order.
c) Both of the above
d) None of the above
II. Fill in the blanks:
1. A PN payable by instalments, grace period of _3_ days is allowed.
2. In a cheque, there is no grace period as the cheque is demandinstrument.
3. Stamp duty is applicable on bills payables after 90 days.
4. Abill of exchange is an unconditional order to pay.
5. The bill has to be delivered to the payee to make it an effective BE/
cheque.
6. Maker of the BE / Cheque is called the drawee.
7. Where the drawee is incompetent to contract, or the acceptance is qualified, the BE may
be treated as dishonoured.
III. Answer in detail:
1. What is negotiable instrument?
A negotiable instrument is a written document that represents an unconditional promise or
order to pay a specific amount of money, either on demand or at a specified future date, to the
bearer or to a person named on the instrument. The key characteristic of a negotiable instrument
is that it is transferable from one person to another, and the holder of the instrument can claim
payment.
Under the Negotiable Instruments Act, 1881 (in India) and similar laws in many countries,
negotiable instruments provide a legal framework for the transfer of rights to money through
documents.

Key Characteristics of a Negotiable Instrument:

1. Transferability:
o A negotiable instrument can be transferred from one person (the holder) to another
(the transferee) through endorsement or delivery. Once transferred, the transferee
has the same rights as the original holder.
2. Unconditional Promise or Order:
o The instrument must contain an unconditional promise (in the case of a promissory
note) or order (in the case of a bill of exchange or cheque) to pay a certain amount
of money.
3. Payable to the Bearer or Order:
 o A negotiable instrument can be payable to the bearer (whoever holds it) or payable
to order (only to the person or entity named on the instrument or to someone they
specifically designate).
4. Specific Sum of Money:
o The instrument must specify a fixed sum of money to be paid.
5. No Conditions Attached:
o A negotiable instrument must not be subject to any conditions. The obligation to pay
must be clear and absolute.

Types of Negotiable Instruments:

1. Promissory Note:
o A written promise by one person (the maker) to pay a certain sum of money to
another person (the payee) either on demand or at a specified future date.
o Parties involved: Maker (promisor), Payee.
o Example: "I promise to pay ₹5,000 to John or order on 30th March."
2. Bill of Exchange:
o A written order by one person (the drawer) directing another person (the drawee) to
pay a certain sum of money to a third person (the payee) either on demand or at a
specified future date.
o Parties involved: Drawer, Drawee, Payee.
o Example: "Pay ₹5,000 to John or order on 30th March."
3. Cheque:
o A bill of exchange drawn on a bank, payable on demand. It is a special form of bill
of exchange where the drawer (the person who issues the cheque) orders the
drawee (the bank) to pay a certain amount to the payee.
o Parties involved: Drawer, Drawee (bank), Payee.
o Example: A cheque issued by a person to a merchant to pay for goods or services.

Advantages of Negotiable Instruments:

1. Ease of Transfer:
o Negotiable instruments can be easily transferred from one person to another through
endorsement and delivery (in the case of a bearer instrument), making them very
convenient for business and trade.
2. Security:
o The holder of a negotiable instrument has legal rights to the amount specified in the
instrument. This provides a reliable method of payment and credit in commercial
transactions.
3. Legally Enforceable:
 o Negotiable instruments are legally enforceable documents. The holder can take legal
action to recover the amount due if payment is not made as promised.

Example of a Negotiable Instrument:

• Promissory Note:
o John borrows ₹10,000 from Ravi and signs a promissory note stating: "I, John,
promise to pay ₹10,000 to Ravi or order on 1st December."
• Bill of Exchange:
o A seller in New York orders a buyer in London to pay ₹10,000 for goods received.
The seller draws a bill of exchange on the buyer instructing them to pay the amount
on a specified date.
• Cheque:
o A customer writes a cheque to a supplier for ₹5,000 for goods purchased. The
supplier can deposit the cheque in their bank to receive payment.

2. What does “Endorsement in Blank” means?

Endorsement in blank refers to a type of endorsement on a negotiable instrument (such as a
cheque, bill of exchange, or promissory note) where the endorser (the person transferring the
instrument) simply signs their name on the back of the instrument without specifying the name of
the person to whom the instrument is being transferred.
This form of endorsement is also known as a blank endorsement because it does not name a
specific person or party who is entitled to receive the payment.

Key Features of Endorsement in Blank:

1. Simple Signature:
o The endorser only signs their name on the back of the negotiable instrument without
adding any additional instructions, such as the name of the payee.
2. Transfer of Ownership:
o By signing in blank, the endorser effectively transfers ownership of the instrument to
the person who holds it (the holder). The holder can then transfer the instrument to
someone else or cash it themselves.
3. Negativity:
o Once endorsed in blank, the negotiable instrument becomes payable to the bearer,
meaning it can be transferred to anyone who possesses the instrument, regardless
of who they are. The bearer of the instrument can present it for payment or further
endorsement.
4. Simpler Transfer:
o This type of endorsement allows for easy and fast transfer, as it does not require the
endorsement to specify a particular person or party.
Example of Endorsement in Blank:
1. Before Endorsement:
o Imagine that a cheque is issued by Mr. A to Mr. B. The cheque is payable to Mr. B.
2. Endorsement in Blank:
o Mr. B (the payee) signs the back of the cheque without writing any additional details
(such as the name of the transferee).
3. After Endorsement:
o The cheque is now considered payable to the bearer, meaning anyone who holds
the cheque can present it to the bank and claim the payment.

3. What is payment in due course?

Payment in due course refers to a payment made in accordance with the terms of a negotiable
instrument (such as a bill of exchange, promissory note, or cheque) by the drawee or payer to
the holder or payee. It must be made within the time frame specified in the instrument and under
conditions that protect the payer from any legal repercussions for making the payment.
Under the Negotiable Instruments Act, 1881, payment in due course is an essential concept,
particularly for ensuring that payments made to a holder of a negotiable instrument are legitimate
and valid.

4. Compare the characteristics of Bills of Exchange and Promissory note?

Here is a comparison of the characteristics of a Bill of Exchange and a Promissory Note, which
are both negotiable instruments governed by the Negotiable Instruments Act, 1881:

Aspect Bill of Exchange Promissory Note

A written order by one party (drawer) directing A written promise by one party
Definition another party (drawee) to pay a specified sum (maker) to pay a specified sum to
to a third party (payee) or the drawer. another party (payee).

Parties
Three parties: Drawer, Drawee, and Payee. Two parties: Maker and Payee.
Involved

Nature of
It is an order to pay. It is a promise to pay.
Obligation

Requires acceptance by the drawee to No acceptance is required as the

Acceptance
confirm liability. maker is directly liable.

The maker promises to pay the

Drawer's Role Drawer orders the drawee to pay the payee.
payee directly.
Aspect Bill of Exchange Promissory Note

Drawee's Drawee is the party on whom the bill is drawn No drawee exists in a promissory
Role and is expected to pay. note.

Payee receives the payment as specified in Payee is the person to whom the
Payee's Role
the bill. payment is promised.

Liability arises upon drawee's acceptance of Maker is directly liable from the
Legal Liability
the bill. outset.

Must be accepted by the drawee to be No acceptance needed; the note

Formality
binding. itself creates the obligation.

Types Demand Bill and Usance Bill (time bill). Demand Note and Usance Note.

Commonly used in trade and commerce for Often used in loan or credit
Use in Trade
credit transactions. arrangements.

"I promise to pay ₹10,000 to John

Example "Pay ₹10,000 to John or order after 30 days."
or order after 30 days."

Key Differences
1. Number of Parties: A bill of exchange involves three parties (drawer, drawee, payee), while
a promissory note involves two parties (maker, payee).
2. Nature: A bill is an order to pay, while a promissory note is a promise to pay.
3. Acceptance: A bill requires acceptance by the drawee, whereas a promissory note does
not.
4. Liability: In a bill, the drawee becomes liable only after acceptance; in a promissory note,
the maker is liable from the start.

5. Explain the difference between Demand and Usance Promissory Note?

The difference between a Demand Promissory Note and a Usance Promissory Note lies in the
time when payment is due. Both are types of promissory notes under the Negotiable Instruments
Act, 1881, but their terms of payment set them apart.

1. Demand Promissory Note

A Demand Promissory Note is a note where the payment is due immediately on demand by the
payee or holder.
Key Features:
1. Payment Time:
o Payable on demand, meaning the holder can request payment at any time.
o No specific due date is mentioned in the note.
2. Maturity Period:
 o No maturity period; payment is immediate upon demand.
3. Example:
o "I promise to pay ₹10,000 to Mr. A or order on demand."
4. Use Case:
o Commonly used in short-term loans or financial transactions requiring immediate
payment.

2. Usance Promissory Note

A Usance Promissory Note is a note where the payment is due after a specified period, giving
the maker time to arrange funds.
Key Features:
1. Payment Time:
o Payable after a fixed term or on a future date as mentioned in the note.
2. Maturity Period:
o The note specifies a duration (e.g., 30 days, 60 days) or a due date for payment.
3. Example:
o "I promise to pay ₹10,000 to Mr. A or order 60 days from today."
4. Use Case:
o Commonly used in trade finance or deferred payment agreements where time is
needed for fulfillment of financial obligations.

Key Differences:

Aspect Demand Promissory Note Usance Promissory Note

Payment Due On demand, anytime. After a specified time or date.

Maturity Period No maturity period. Has a defined maturity period.

Purpose For immediate or short-term needs. For planned, deferred payments.

Example "Pay on demand." "Pay after 30 days."

6. Explain how to distinguish between a holder and a holder in due course?

The terms holder and holder in due course (HIDC) are key concepts under the Negotiable
Instruments Act, 1881, and they define different legal statuses of individuals possessing
negotiable instruments. Here’s how they differ:

1. Definition
Holder:
A holder is a person who is legally entitled to possess a negotiable instrument and is authorized to
receive or recover the amount from the parties liable on it.
• Example: A person who receives a cheque in their name.
Holder in Due Course (HIDC):
A holder in due course is a person who acquires a negotiable instrument:
• For consideration (value received).
• Before its maturity.
• In good faith, without knowledge of any defects in the title of the transferor.
• Example: Someone who buys a bill of exchange in good faith and for value before it
matures.

2. Rights and Protections

Aspect Holder Holder in Due Course

Right to sue Can sue to recover the amount. Has an unquestionable right to sue.

May not be protected against prior Protected against prior defects in the
Protection
defects. instrument.

Liability of Does not necessarily bind all prior

Binds all prior parties to make payment.
Parties parties.

3. Legal Status
• A holder can become a holder without giving consideration (e.g., by receiving a gift).
• A HIDC must acquire the instrument for valuable consideration.

4. Example of a Key Difference

• Holder: Ravi receives a cheque as a gift from his friend. If the cheque is dishonored, Ravi
can recover the amount from the drawer but might not be protected if there was fraud in the
cheque’s transfer.
• HIDC: Meera buys a promissory note for ₹1,000 in good faith before its due date. If the note
was fraudulently transferred to her, Meera can still claim payment because she is a HIDC.

7. Explain what is protest?

Protest is a formal, written declaration issued by a notary public when a negotiable instrument,
such as a bill of exchange, promissory note, or cheque, is dishonored due to non-acceptance or
non-payment. It serves as conclusive legal evidence of the dishonor and is particularly important
for preserving the holder's right to recover payment from the liable parties.
8. Explain the parties to the Promissory note and cheque?
The parties to a promissory note and a cheque differ because they are distinct types of
negotiable instruments under the Negotiable Instruments Act, 1881. Here's an explanation of the
parties involved in each:

1. Parties to a Promissory Note

A promissory note is a written promise by one party to pay a specified sum of money to another
party or their order, either on demand or at a future date.
Key Parties:
1. Maker:
o The person or entity who creates the promissory note and promises to pay the
amount.
o The maker is the primary debtor and is liable to fulfill the obligation.
2. Payee:
o The person or entity to whom the payment is promised.
o The payee is the creditor and has the right to receive payment.
Example:
If John (maker) issues a promissory note to Peter (payee) stating, "I promise to pay ₹10,000 to
Peter on demand," John is the maker, and Peter is the payee.

2. Parties to a Cheque
A cheque is a written order by an account holder (drawer) directing their bank (drawee) to pay a
specified sum of money to a person or entity (payee) on demand.
Key Parties:
1. Drawer:
o The person who writes/signs the cheque, instructing the bank to pay.
o The drawer must have a bank account with sufficient funds.
2. Drawee:
o The bank on which the cheque is drawn.
o The drawee is responsible for paying the specified amount upon presentation of the
cheque.
3. Payee:
o The person or entity in whose favor the cheque is written and who is entitled to
receive the payment.
o In the case of a self-cheque, the drawer is also the payee.
Example:
If Mary (drawer) writes a cheque to Paul (payee) for ₹5,000, directing her bank (drawee) to make
the payment, Mary is the drawer, her bank is the drawee, and Paul is the payee.
9. What is the notice of dishonour?
The notice of dishonour is a formal communication sent by the holder of a dishonoured
negotiable instrument (such as a bill of exchange, promissory note, or cheque) to notify the parties
liable on the instrument (e.g., drawer, endorsers) about its dishonour. This notice is essential to
hold those parties liable for payment.
10. Explain what is the noting and protest?
Noting and protest are formal legal procedures related to negotiable instruments (such as bills of
exchange, promissory notes, or cheques) under the Negotiable Instruments Act, 1881, carried
out when an instrument is dishonored. They serve as evidence of dishonor and preserve the rights
of the holder to take legal action.

1. Noting
Noting is the first step when a negotiable instrument is dishonored due to non-acceptance (by the
drawee) or non-payment. It is carried out by a notary public.
Process:
1. The holder of the dishonored instrument takes it to a notary public.
2. The notary notes the dishonor on the instrument or on a separate attached slip.
3. The following details are recorded:
o Date of dishonor.
o Reasons for dishonor (if any).
o Name of the parties involved.
o Charges for noting.
Purpose:
• Noting serves as evidence of dishonour.
• It provides a record of when and why the dishonour occurred, which can be used in legal
proceedings.

2. Protest
If the instrument is dishonoured, the notary public may prepare a formal certificate called a
protest, which is a more detailed declaration of dishonour.
Process:
1. The notary prepares the protest certificate, including:
o A copy of the instrument.
o The names of the parties involved.
o The reasons for dishonour.
 o A formal declaration of dishonour.
2. The protest is delivered to the drawer or endorser to inform them of the dishonour.
Purpose:
• A protest is primarily required for foreign bills of exchange to enable the holder to retain
their right to sue the parties (drawer, endorser, or acceptor).
• It acts as legal proof of dishonour.

11. What are the types of endorsements available as per NI act?

The Negotiable Instruments Act, 1881 (NI Act) outlines several types of endorsements that can
be made on negotiable instruments like cheques, bills of exchange, or promissory notes. Here are
the main types:
1. Blank or General Endorsement
• The endorser simply signs their name on the instrument without specifying the endorsee.
• Effect: The instrument becomes payable to the bearer and can be further negotiated by
mere delivery.
2. Special or Full Endorsement
• The endorser specifies the name of the endorsee, making it payable only to that person or
their order.
• Example: "Pay to Mr. X or order, [Signature]."
3. Restrictive Endorsement
• The endorser restricts further negotiation of the instrument by including conditions or
limitations.
• Example: "Pay to Mr. X only, [Signature]."
4. Conditional or Qualified Endorsement
• The endorser imposes conditions for payment.
• Example: "Pay to Mr. X upon his arrival in Mumbai, [Signature]."
• Note: Such conditions affect the parties involved but not the negotiability of the instrument.
5. Partial Endorsement
• A part of the amount on the instrument is endorsed.
• Example: "Pay Rs. 5,000 to Mr. X out of the total amount, [Signature]."
• Legality: Partial endorsements are generally invalid as per the NI Act unless explicitly
accepted.
6. Sans Recourse Endorsement
• The endorser excludes their liability in case of dishonor of the instrument.
• Example: "Pay to Mr. X or order, without recourse to me, [Signature]."
7. Facultative Endorsement
 • The endorser waives some rights, such as the right to receive a notice of dishonor.
• Example: "Pay to Mr. X or order, notice of dishonor waived, [Signature]."
Importance of Endorsements
Endorsements facilitate the transfer of negotiable instruments, enabling them to circulate as a
substitute for money while maintaining legal accountability among the parties.
4o

12. Explain briefly the noting and protesting process of a BE?

The noting and protesting process for a bill of exchange (BE) involves formal procedures
taken when a bill is dishonoured, ensuring legal evidence of non-payment or non-acceptance.
Here's a brief overview:
1. Noting
When a bill is dishonoured (either by non-acceptance or non-payment), the holder of the bill may
request a notary public to note the dishonour.
• The notary public records the following details on the bill or a separate attached paper:
o Date of dishonour.
o Reasons for dishonour (if provided by the drawee).
o Charges for the noting process.
• The noting serves as prima facie evidence of dishonour.
2. Protesting
If necessary, the notary public issues a formal certificate called a protest to confirm the dishonour.
• A protest includes:
o A copy of the bill.
o Details of the parties involved.
o Reasons for dishonour.
o Certification of non-acceptance or non-payment.
• Protesting is typically required for foreign bills to preserve the holder's right to claim
damages or legal action against the drawer, drawee, or endorsers.
Purpose
The process protects the interests of the bill holder by:
• Providing documented proof of dishonour.
• Supporting legal claims for recourse.

13. What is Surety ship?

Suretyship is a legal relationship or agreement where one party, called the surety, agrees to
assume responsibility for the debt, default, or failure of another party, called the principal, to meet
their obligations to a third party, called the obligee. The surety guarantees that the principal will
fulfill their obligations, and if the principal fails to do so, the surety is legally bound to perform or
pay on behalf of the principal.
Key Features of Suretyship
1. Three-Party Agreement:
o Principal: The party responsible for performing an obligation (e.g., repaying a loan
or completing a project).
o Surety: The party that guarantees the principal's performance.
o Obligee: The party to whom the obligation is owed.
2. Purpose: Suretyship provides assurance to the obligee that the principal's obligations will
be met, either by the principal or by the surety.
3. Types of Suretyship:
o Contract Suretyship: Common in construction, where the surety ensures the
contractor fulfills project obligations.
o Commercial Suretyship: Involves guarantees related to legal obligations, such as
customs bonds or court bonds.
o Fidelity Suretyship: Protects employers against losses from employee dishonesty
or misconduct.
4. Indemnity: After fulfilling the obligation, the surety typically has the right to seek
reimbursement from the principal.
5. Legal Basis: Suretyship is typically governed by contract law, and the terms are outlined in
a formal agreement, such as a surety bond.

IV. Activities:
1. Prepare a chart showing the different negotiable instrument?

Instrument Transferability Security Examples of Use

Promissory Transferable by Medium security, as it is an Personal loans, credit

Note endorsement or delivery unconditional promise agreements

Bill of Transferable by Moderate security, subject to Business

Exchange endorsement or delivery acceptance by drawee transactions, trade

Payable to order or bearer, High security, due to Personal and business

Cheque
transferable by endorsement bank guarantee payments

Banker's Transferable by Very high security, Large payments, secure

Draft endorsement or delivery guaranteed by the bank transactions

Traveler's Transferable by High security, as it is pre-issued International travel, pre-

Cheque endorsement and replaced if lost paid payments
Letter of Not directly transferable, but Very high security, bank International trade,
Credit can be assigned guarantees payment import/export

2. Explain the class the different ways a cheque can be crossed and it implications?
Comparison of Different Types of Cheque Crossing:

Type of
Description Implication Transferability
Crossing

Transferable to any bank, but

General Two parallel lines, no Can only be deposited in
must be deposited in an
Crossing bank specified. a bank account.
account.

Can only be deposited

Special Two parallel lines with
through the specified Limited to the specified bank.
Crossing a bank's name.
bank.

Can only be deposited in Non-transferable, must be

A/C Payee Two parallel lines with
the account of the deposited into the payee’s
Crossing "A/C Payee" written.
payee. account.

Not Negotiable Two parallel lines with Prevents the cheque Only the payee can deposit or
Crossing "Not Negotiable". from being transferred. encash.

Double Two crossings with Further restricts Restricted to a specific bank

Crossing special instructions. payment and transfer. and account.

3. Prepare a chart showing the characteristics, differences and usage of Bill Payable, cheque
and Promissory Note?
Here’s a comprehensive chart showing the characteristics, differences, and usage of Bill
Payable, Cheque, and Promissory Note:

Aspect Bill Payable Cheque Promissory Note

A written order drawn on a A written promise by the

A written order by the
bank by the drawer, maker to pay a certain
drawer directing the
instructing the bank sum of money to the
Definition drawee to pay a
(drawee) to pay the payee payee either on demand
specified amount to the
a specified sum on or at a specified future
payee.
demand. date.

Parties Drawer, Drawee (Bank),

Drawer, Drawee, Payee Maker (Promisor), Payee
Involved Payee

Payable on demand or at Payable on demand or at

Payment Type Payable on demand.
a future specified date. a specified future date.

Order to pay (drawer Order to pay (drawer Promise to pay (maker

Nature
orders drawee to pay) orders the bank to pay) promises to pay)
Aspect Bill Payable Cheque Promissory Note

Transferable by Transferable by
Transferable by
Transferability endorsement or delivery (if endorsement or delivery (if
endorsement or delivery.
order cheque). order note).

Less secure; depends on Security depends on the

High security if properly
Security the creditworthiness of financial standing of the
signed and crossed.
the drawee. maker.

Paid by the drawee as

Mode of Paid by the bank on Paid by the maker directly
per the order of the
Payment presentation by the payee. to the payee.
drawer.

Time of At the time specified in On demand (immediate Either on demand or at a

Payment the bill or on demand. payment). future specified date.

Crossing Yes (general or special

Yes (if it is a crossed bill). No crossing applicable.
Applicable? crossing).

May or may not include

Interest Usually no interest No interest (unless a post-
interest, depending on the
Charge unless specified. dated cheque).
terms.

Can be legally enforced Legally enforceable by the Legally enforceable if

Legal Status
through court action. payee if dishonored. dishonored.

May be payable at a Payable either on

Usance future date or on Payable on demand only. demand or at a future
demand. date.

Trade transactions,
Personal and business
business dealings, and Loans, credit transactions,
Usage payments, especially for
payment for personal or business debt.
immediate transactions.
goods/services.

A customer writes a "I promise to pay ₹20,000

"Pay ₹10,000 to John or
Example cheque to a supplier for to XYZ on or before 1st
order on 1st December."
₹5,000. January."

Key Differences:

Aspect Bill Payable Cheque Promissory Note

Drawer (orders Drawer (orders the bank

Issuer Maker (promises to pay)
payment) to pay)

Nature of
Order to pay Order to pay Promise to pay
Obligation

Paid by the drawee as Paid by the bank upon Paid by the maker to the
Payment Mode
per the drawer's order. presentation. payee directly.
Aspect Bill Payable Cheque Promissory Note

Parties to the Drawer, Drawee (bank),

Drawer, Drawee, Payee Maker, Payee
Instrument Payee

Transferable by Transferable by Transferable by

Transferability endorsement or endorsement or delivery endorsement or
delivery. (if order cheque). delivery.

Depends on the Depends on the

High security if properly
Security creditworthiness of the creditworthiness of the
signed and crossed.
drawee. maker.

Legal Can be enforced in court Can be enforced in court if Can be enforced in court
Enforceability if dishonored. dishonored. if dishonored.

Payable on demand or Payable on demand or

Usance Payable on demand only.
at a future date. at a future date.

4. Carry out a role play on the parties involved in Bills of Exchange, Promissory note and
cheque?
Here’s a role-play scenario involving the parties in a Bill of Exchange, Promissory Note, and
Cheque, illustrating how each party functions and interacts in these transactions.

Role-Play Scenario
Scenario 1: Bill of Exchange
• Parties Involved: Drawer, Drawee, Payee
Characters:
• John (Drawer): A businessman who needs to pay ₹50,000 for goods.
• Rahul (Drawee): A bank where the payment will be made.
• Alice (Payee): The supplier from whom John purchased goods worth ₹50,000.

[John (Drawer) writes the Bill of Exchange and gives it to Alice (Payee)]
John: "Alice, here is the Bill of Exchange for ₹50,000. This is an order to the bank, Rahul’s bank,
to pay you this amount. Please present it to the bank on or after the 10th of December."
Alice (Payee): "Thank you, John. I will take this Bill of Exchange to Rahul’s bank on the 10th of
December to collect the payment."

[Alice (Payee) goes to Rahul’s Bank (Drawee) on December 10th to present the Bill of
Exchange]
Alice (Payee): "Hello, I have this Bill of Exchange from John for ₹50,000. Can you please make
the payment as instructed?"
Rahul (Drawee): "Certainly, Alice. Let me check. This is a valid Bill of Exchange, and I will process
the payment as per John’s instructions."
Alice (Payee): "Thank you."

[Rahul (Drawee) processes the payment and credits Alice’s account]

Rahul (Drawee): "The payment is done. ₹50,000 has been credited to your account, Alice."
Alice (Payee): "Thank you! I appreciate it."

Scenario 2: Promissory Note

• Parties Involved: Maker, Payee
Characters:
• Emma (Maker): A person who borrows ₹10,000 from her friend.
• David (Payee): Emma’s friend who lends her money.

[Emma (Maker) writes a Promissory Note to David (Payee)]

Emma (Maker): "David, here is the Promissory Note for ₹10,000. I promise to pay you this amount
on the 1st of January next year."
David (Payee): "Thank you, Emma. I’ll keep this Promissory Note safe as proof of your promise to
pay me."

[On 1st January, Emma (Maker) goes to David (Payee) to repay the amount]
Emma (Maker): "David, here’s ₹10,000 as promised in the Promissory Note. It’s now the 1st of
January, so I’m fulfilling my commitment."
David (Payee): "Thank you, Emma. The Promissory Note is now cleared, and the debt is settled."

Scenario 3: Cheque
• Parties Involved: Drawer, Drawee (Bank), Payee
Characters:
• Sophia (Drawer): A person who owes ₹5,000 for a dinner bill.
• Michael (Payee): The restaurant owner to whom Sophia owes the money.
• XYZ Bank (Drawee): The bank where Sophia’s account is held.

[Sophia (Drawer) writes a cheque to Michael (Payee)]

Sophia (Drawer): "Michael, here’s a cheque for ₹5,000 to settle the bill. You can deposit it into
your account, and the payment will be processed."
Michael (Payee): "Thank you, Sophia. I’ll take this cheque to my bank and deposit it."

[Michael (Payee) goes to XYZ Bank (Drawee) to deposit the cheque]

Michael (Payee): "Hello, I have this cheque from Sophia for ₹5,000. Could you please deposit it
into my account?"
XYZ Bank (Drawee): "Sure, Michael. Let me process the cheque. It will be credited to your
account once it clears."

[XYZ Bank (Drawee) processes the cheque and credits Michael’s account]
XYZ Bank (Drawee): "The ₹5,000 has been successfully credited to your account, Michael."
Michael (Payee): "Thank you! Payment is complete, and the bill is settled."

Key Takeaways from the Role-Play:

In a Bill of Exchange:
• Drawer (John) orders the Drawee (Rahul's bank) to pay the Payee (Alice) a certain
amount.
• The Payee (Alice) presents the Bill of Exchange to the Drawee (Rahul's bank) for payment.
• The Drawee (Rahul's bank) processes the payment to the Payee (Alice).
In a Promissory Note:
• The Maker (Emma) promises to pay the Payee (David) a certain amount by a specific date.
• The Payee (David) waits for the repayment and receives the money on the due date,
settling the obligation.
In a Cheque:
• The Drawer (Sophia) writes a cheque instructing the Drawee (XYZ Bank) to pay the Payee
(Michael) a specified amount on demand.
• The Payee (Michael) deposits the cheque in the bank for payment.
• The Drawee (XYZ Bank) processes the cheque and credits the Payee’s (Michael’s)
account.

This role-play demonstrates how each party in these negotiable instruments plays their part in
ensuring that payments are made, and obligations are fulfilled.