Notes, Bills and Cheques Compared; Bank Drafts and Bankers' Cheques

Once the three instruments have been defined, the differences between them become important: who is liable first, whether acceptance is needed, whether days of grace apply, and what happens on dishonour. This note sets out the distinctions between promissory notes and bills, and between bills and cheques, and then explains the banker's own instruments: demand drafts, pay orders and bankers' cheques, with the special provisions in Sections 85A and 131A.

1. Promissory Note and Bill of Exchange

Point	Promissory note	Bill of exchange
Nature	A promise to pay	An order to pay
Original parties	Two: maker and payee	Three: drawer, drawee and payee (drawer and payee may be the same)
Primary liability	Maker, from the start	Drawer until acceptance; then the acceptor (Section 37)
Acceptance	Not needed	Needed to bind the drawee; essential for bills payable after sight
Notice of dishonour	Not needed to the maker	Needed to the drawer and indorsers (Section 93)
Protest	Not required for foreign notes	Foreign bills must be protested where the foreign law requires (Section 104)
Payable to bearer	Barred altogether (RBI Act, Section 31(2))	Barred if payable on demand (RBI Act, Section 31(1))
Sets	Cannot be drawn in sets	Foreign bills may be drawn in sets (Section 132)

2. Bill of Exchange and Cheque

Every cheque is a bill of exchange, but not every bill is a cheque. The differences flow from the cheque's two special features: it is drawn on a banker and is payable on demand.

Drawee: bill: any person, including a banker; cheque: always a specified banker.
Time of payment: bill: on demand or after a period; cheque: only on demand.
Acceptance: bill: required to bind the drawee; cheque: never accepted.
Days of grace: bill: three days for time bills; cheque: none.
Stamp duty: bill: chargeable; cheque: not chargeable.
Crossing: bill: cannot be crossed; cheque: may be crossed (Topic 34).
Noting and protest: bill: available on dishonour; cheque: not used in practice.
Banker protection: bill: no special protection; cheque: paying and collecting bankers protected (Sections 85, 131).
Criminal liability: bill: none for dishonour; cheque: section 138 offence for insufficiency of funds.

3. Promissory Note and Cheque

A note is a promise by the maker; a cheque is an order to a banker.
A note may be payable on demand or after a period; a cheque is payable only on demand.
A note requires stamp duty; a cheque does not.
The maker of a note is primarily liable; the drawer of a cheque is liable as principal debtor, since the bank never accepts.
Dishonour of a note gives only a civil remedy; dishonour of a cheque for want of funds may also be an offence under Section 138.

4. Bank Drafts, Pay Orders and Bankers' Cheques

Demand draft: an order by one office of a bank on another office of the same bank (or on a correspondent bank) to pay a sum on demand to a named payee or his order. The customer pays the bank in advance, so a draft is treated in commerce as nearly equivalent to cash.
Pay order or banker's cheque: an instrument issued by a bank and payable by the same office or within the same clearing area, commonly used for local payments.

Because the drawer and drawee of a draft are the same bank, there is debate about its classification: it can be treated as a bill of exchange, or as a promissory note under the holder's election in Section 17 (Topic 10). The Act settles the practical questions by two provisions:

Section 85A, Negotiable Instruments Act, 1881

Where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.

Section 131A, Negotiable Instruments Act, 1881

The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque.

Section 85A protects the paying bank that pays a draft in due course on an indorsement purporting to be the payee's, even if the indorsement is forged (Topic 35).
Section 131A applies Chapter XIV, on crossing and the protection of the collecting banker, to drafts as if they were cheques (Topics 34 and 36).
Validity: under RBI directions, drafts, pay orders and bankers' cheques, like cheques, are valid for three months.
Large values: RBI rules require drafts and similar instruments of Rs. 50,000 or more to be issued only against debit to the purchaser's account or against other non-cash payment, and to carry the purchaser's name.

⚠ Note

Banks treat a draft issued for value as an irrevocable obligation and do not ordinarily stop payment at the purchaser's request, though they may refuse payment where the draft was obtained by fraud or is forged.

⚠ Key point

A note is a promise by the maker, who is primarily liable; a bill is an order that binds the drawee only on acceptance; a cheque is a bill drawn on a banker and payable only on demand, never accepted, without days of grace or stamp duty, capable of crossing, protected in banking law and backed by the Section 138 offence. A demand draft is an order by one office of a bank on another office of the same bank; Section 85A protects the bank paying it in due course, and Section 131A applies the crossing rules to drafts as if they were cheques.

5. Related Topics and Provisions

Promissory note, bill and cheque (Topics 6 to 8)
Crossing of cheques (Topic 34)
Protection of the paying banker (Topic 35)