Discuss the distingtion among Promissory Notes, Bill of Exchange, and Cheques.
Discuss the distingtion among Promissory Notes, Bill of Exchange, and Cheques.
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Promissory Notes, Bills of Exchange, and Cheques are all negotiable instruments commonly used in commercial transactions, but they differ in their nature, parties involved, and legal characteristics. Here's a distinction among them:
Promissory Note:
A promissory note is a written promise made by one party (the maker) to pay a certain sum of money to another party (the payee) either on demand or at a specified future date. The key features of a promissory note include:
Unilateral Promise: A promissory note involves a unilateral promise to pay, meaning it is signed by the maker and contains an unconditional promise to pay the specified amount to the payee.
Two Parties: A promissory note involves only two parties: the maker, who promises to pay, and the payee, who is entitled to receive payment.
Payment Obligation: The maker of the promissory note is legally obligated to make the payment to the payee according to the terms specified in the instrument.
No Acceptance Required: Unlike bills of exchange, a promissory note does not require acceptance by the payee. The maker's signature is sufficient to create a binding obligation.
Bill of Exchange:
A bill of exchange is a written order issued by one party (the drawer) to another party (the drawee) directing the drawee to pay a specified sum of money to a third party (the payee) either immediately or at a future date. The key features of a bill of exchange include:
Three Parties: A bill of exchange involves three parties: the drawer (issuer), the drawee (who is usually the debtor), and the payee (the party to whom payment is to be made).
Order to Pay: A bill of exchange contains an order by the drawer to the drawee to pay the specified amount to the payee. It is a negotiable instrument that can be transferred by endorsement.
Acceptance Required: Unlike promissory notes, a bill of exchange requires acceptance by the drawee (or an authorized agent) before it becomes legally binding. Acceptance indicates the drawee's commitment to pay the specified amount.
Trade Transactions: Bills of exchange are commonly used in commercial transactions, especially in international trade, to facilitate payments between parties located in different countries.
Cheque:
A cheque is a written instrument issued by an account holder (the drawer) to direct their bank (the drawee) to pay a specified sum of money to the bearer of the cheque or to a named payee. The key features of a cheque include:
Drawer and Drawee Bank: A cheque involves two primary parties: the drawer (account holder) and the drawee bank (bank where the drawer holds an account).
Payment Instruction: A cheque contains an unconditional order by the drawer to the drawee bank to pay the specified amount to the bearer or the named payee.
Negotiability: Cheques are negotiable instruments that can be transferred by delivery or endorsement. The bearer cheque is payable to whoever presents it for payment, while a order cheque is payable only to the named payee.
Bank's Liability: The drawee bank is legally obligated to honor the cheque and make the payment to the rightful holder, provided there are sufficient funds available in the drawer's account.
In summary, while all three instruments serve as means of payment in commercial transactions, they differ in terms of parties involved, payment obligation, acceptance requirement, and negotiability. Promissory notes involve a unilateral promise to pay between two parties, bills of exchange are orders to pay issued by one party to another party involving three parties, and cheques are payment instructions issued by an account holder to their bank for payment to a bearer or named payee.