What is Bill of Exchange?

In this article we made a study on the concept of Bill of Exchange under NI Act, including definition, essentials, parties, types and advantages of Bill of Exchange

 

1. Bill of Exchange

 

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. [Section 5]

 

2. Essential Requirements of a Valid Bill of Exchange

 

The following are the eight essential requirements of a valid Bill of Exchange:

 

1. It must be in writing:

2. It must contain an order to pay;

3.The order contained in the bill should be unconditional;

4. It must be signed by the drawer;

5. The drawee must be certain;

6. The payee must be certain;

7. The sum payable must be certain;

8. It must contain an order to pay money, and money only.

 

The essentials of bill of exchanges are that the instrument must be in writing and the instrument includes every document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished of recorded and it should be signed by the maker and there must be an order to pay. [Krishna Devi v Firm Tayaram Lekhraj Batra, I (2003) BC 644 (MP)]

 

3. Parties of Bill of Exchange

 

A bill of exchange has three parties:

 

a. Drawe;

b. Drawee and

c. Payee

 

a. Drawer:

 

• The drawer is the maker of a bill of exchange.
• The bill is signed by Drawer.
• A creditor who is entitled to receive payment from the debtor can draw a bill of exchange.

 

b. Drawee:

 

• Drawee is the person upon whom the bill of exchange is drawn.
• Drawee is the debtor who has to pay the money to the drawer.
• He is also known as ‘Acceptor’.

 

c. Payee:

 

• The payee is the person to whom payment has to be made.
• The payee may be the drawer himself or a third party.

 

4. Types of Bill of Exchange

 

1. Sight Bill: A sight bill of exchange is payable as soon as it is presented for payment to the drawee or the person on whom the bill is drawn. The payment is due immediately upon presentation if the drawee accepts the bill.
2. Time Bill: A time bill of exchange is payable on a specified future date, which is mentioned on the bill itself. The payment is due at the maturity date mentioned in the bill.
3. Usance Bill: An usance bill is a type of time bill that is payable a certain number of days after its date or sight. The number of days is known as the "usance," and it can vary based on the customs and practices of the particular market.
4. Clean Bill: A clean bill of exchange is one that does not have any accompanying documents or supporting goods. It is not backed by collateral and relies solely on the creditworthiness of the parties involved.
5. Documentary Bill: A documentary bill of exchange is accompanied by relevant documents, such as invoices, shipping documents, or insurance certificates. These documents provide evidence of the underlying transaction and are released to the drawee upon acceptance or payment.
6. Inland Bill: An inland bill of exchange is drawn and made payable within the same country's borders.
7. Foreign Bill: A foreign bill of exchange involves parties in different countries. The currency and legal systems of different countries might be applicable, which can complicate transactions and necessitate careful handling.
8. Trade Bill: A trade bill of exchange is used specifically for commercial transactions. It represents a promise to pay for goods or services provided.
9. Accommodation Bill: An accommodation bill of exchange is one where the drawer lends their name or credit to another party who might not have the required creditworthiness. This can be a risky arrangement, as the drawer becomes liable if the acceptor fails to pay.
10. Retired Bill: A retired bill of exchange is one that has been paid off before its maturity date. This can happen when the acceptor pays the bill before the due date, often at a discount.
11. Retirement of a Bill: When the acceptor of a bill pays the amount due before the maturity date, the bill is said to be retired.
12. Renewal of a Bill: If the parties agree to extend the payment date of a bill, it is known as renewing the bill.

 

These different kinds of bills of exchange provide parties with the flexibility to structure transactions according to their needs and circumstances, whether it involves immediate payment, future payment, accompanying documents, or cross-border trade. Understanding the various types of bills of exchange is crucial for businesses and individuals engaging in commercial transactions to ensure compliance with legal requirements and proper execution of financial agreements.

 

5. Advantages of Bill of Exchange

 

• Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be easier for the drawer to recover the amount legally.
• Discounting Facility- In cases where the drawer is in immediate need of money, the bill can be converted into cash by discounting it from a bank by paying some nominal charges.
• Endorsement Possible- This bill of exchange can be exchanged from one individual to another for the adjustment of the debt.

 

6. Conclusion

 

The Bill of Exchange stands as a testament to the enduring importance of financial instruments in facilitating trade and commerce across time and borders. From ancient trade routes to modern global markets, its ability to ensure payment, facilitate financing, and reduce risks continues to make it a cornerstone of international trade transactions.

 

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Difference between Promissory Note and Bill of Exchange

 

FAQ (Frequently Asked Questions)

 

1.  What is the difference between Cheque and Bill of Exchange?

 

Ans: The difference between Cheque and Bill of Exchange are as follows. Top of Form

1. A Cheque requires no acceptance as it is intended for immediate payment. Whereas, a Bill of Exchange, at least in certain cases, must be accepted before payment could be demanded.
2. A cheque is payable immediately on demand without any days of grace. Whereas, in a bill of exchange, in certain cases, grace days are allowed.
3. In the case of a cheque the drawee must always be a specified banker. On the other hand, in the case of a bill of exchange anybody can be a drawee.
4. If the cheque is not duly presented to the bank, the drawer will not be discharged. He will be discharged only if the delay in presenting the cheque for payment causes a change in his position by the failure of the bank, if he had sufficient funds deposited with the bank to meet the amount of the cheque. On the other hand, A bill must be duly presented for payment, otherwise the drawer will be discharged.

 

2. Discuss the liabilities of a drawer and drawee?

 

Ans: Liabilities of drawer and drawee - The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof to compensate the holder, provided due notice of dishonour has been given to or received by the drawer.

 

In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively and the acceptor of a bill of exchange on or after maturity is bound to pay the amount thereof to the holder on demand. [Section 31]. The liability of the drawee under this section arises only when he accepts the bill.