The word “negotiable” means “Transferable by delivery” and the word “instrument” means “a written document by which a right is created in favour of some person. Thus, the term “negotiable instruments” means “a written document transferable by delivery.” According to Section 13 (1) of the Negotiable Instruments Act, 1881(NI Act), A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.

In simple words negotiable instrument (e.g., cheque) is a signed document that promises a sum of payment to a specified person or the assignee. The payee, who is the person receiving the payment, must be named or otherwise indicated on the instrument.  A negotiable instrument is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. It’s a mode of transferring a debt from one person to another. Negotiable Instruments are always in written form.

Examples of Negotiable Instruments include a cheque, a promissory note and a bill of exchange.



  • Freely transferrable: The property in a negotiable instrument gets transferred by a simple process of mere delivery if it is payable to bearer, endorsement and delivery or payable to order. A Fixed Deposit Receipt, which is marked as ‘non-transferable’ is not a negotiable instrument. On the other hand all instruments which are transferable are not negotiable instrument e.g. Share Certificate. Further negotiable instruments may transferred any number of times till is discharged.
  • Recovery: One can sue upon the instrument in his own name.
  • Presumption as to considerations: These instruments are presumed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration.
  • Payable to order or bearer: It must be payable either to order or bearer.
  • Holder’s title free from all defects: The holder (one who acquires the instrument in good faith and for consideration) in due course gets title free from all defects.
  • Presumption as to holder: Every holder of negotiable instrument is presumed to be holder in due course.


There are two types of Negotiable Instruments:

Instruments Negotiable by Statute:

  • Promissory Notes
  • Bills of Exchange
  • Cheques

Instruments Negotiable by Custom or Usage:

There are certain other instruments which have occupied the character of negotiability as a result of usage or custom of trade. For example:

  • Exchequer bills
  • Bank notes
  • Share warrants
  • Circular notes
  • Bearer debentures
  • Dividend warrants
  • Share certificates with blank transfer deeds, etc.


Promissory Notes


A promissory note is a legal instrument in which a party promises to pay a certain amount of money to another party either at a fixed time or on demand of the payee. The promissory note is unconditional which is signed by the maker. The maker is the person who makes the promissory note and promises to pay the amount. The payee is the person to whom the payment is made.

The essential features of promissory note include

  • It must be in writing,
  • It is unconditional
  • It is payable to a definite person.
  • A maker or payer need to sign the promissory note.
  • The amount can be paid on demand or at a fixed or determined date.
  • The document must bear a stamp that is prescribed by the law of the country.


Bill of Exchange
Bill of exchange is a written promissory document for a person to pay a certain amount of money to the required payee. It also contains unconditional order which is signed by the maker for directing a person to pay.

The essential features of the bill of exchange include

  • Amount which is payable are to be certain,
  • The payment is done by money
  • The bill must be paid at required time or on demand
  • It is always paid by the creditor and it should be accepted by the drawee.



A cheque can be defined as an order to the bank to pay the stated amount in the document to the account of the drawer. It is payable on demand and it can be considered as a bill of exchange. The cheque can be crossed to end its negotiability. The acceptance of cheque is not always needed.

The cheque is always accepted into the account of the payee. A cheque bounce is a cheque which cannot be able to process due to the insufficiency of funds in the account holder. Banks will always return such cheques.

There are different types of cheques. Some of them are, order cheque, bearer cheque, marked cheque, open cheque, crossed cheque, bad cheque, Ante-dated Cheque, Post-dated Cheque, Stale Cheque, Mutilated Cheque, Digital Cheque- Cheques in Electronic form and Truncated Cheques, Banker Cheque, Golden Cheque and Travellers Cheque.

Other Negotiable Instruments include Bill in sets, Accommodation Bill, Ambiguous Instruments, Inchoate Stamped Instrument and Forged Instruments.


Basis of Comparison

Promissory note

Bill of Exchange


A promissory note is a written unconditional promise made by the debtor to pay a certain sum of money to the creditor at a future specified date. A Bill of Exchange is an instrument in writing, in the nature of an unconditional order, showing the indebtedness of a buyer towards the seller of goods. A document used to make payments on demand and can be transferred through hand delivery is known as cheque.
Define in
Section 4 of the NI Act Section 5 of the NI Act Section 6 of the NI Act
Number of Parties

Two parties, i.e. drawer and payee.


Three parties, i.e. drawer, drawee and payee.


Two parties, i.e. drawer, drawee and payee.

Drawn by
Debtor Creditor Debtor
Validity Period
Not Applicable Not Applicable 3 months
Payable to bearer on demand
Cannot be made payable to bearer on demand as per RBI Act, 1934 Yes Always
Can drawer/maker and payee be the same person?
No Yes Yes
Yes Yes No
Notice of dishonour
No notice needs to be given in case of its dishonour In case of its dishonour, due notice has to be given by the holder to the drawer In case of its dishonour, due notice has to be given by the holder to the drawer


Advantages & Disadvantages





Promissory Notes

·       Simple and easily understandable.

·       Beneficial when a loan has simple payment terms.

·        Not very lengthy.


·  Isn’t as beneficial for complex situations, where there are more terms and conditions and greater protection against borrower default is sought.

·  Cannot be made payable to bearer


Bill of Exchange

·       Easily transferable

·       Beneficial when a loan has simple payment terms.

·       Not very lengthy.

·       Certainty of terms and conditions

·        Convenient means of credit


·  Not binding unless accepted by the drawee

·  Isn’t as beneficial for complex situations




·       More convenient than carrying cash

·       Payment can be stopped , if necessary

·        Can be post dated


·  Not suitable for small amount

·  Valueless if the drawer has no funds in his account

·  Depositing a cheque is time consuming

·  Payee without a bank account will be inconvenienced because of a crossed cheque


The Negotiable Instrument Act was passed to make the road of trade go smooth. Since the laws of different countries differ from each other the cases of payment problems were observed. There was indeed a need for a negotiable instrument which is accepted by every law internationally. Negotiable instrument include promissory notes, Bills of exchange and Cheque had conditional and unconditional undertakings signed by the maker. These instruments are internationally accepted.



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