Bills of Exchange

Bill of Exchange

According to the Indian Negotiable Instrument Act, 1881

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

Now-a-days many transactions in a business are made on credit basis. That means payments are to be made after certain period. In that case the seller of goods would like to get a written document from the purchasing party to get the payment after a fixed period. So he prepares the document for the same in which he puts all the terms and conditions of the payments in writing and that is to be signed by the buyer. It is known as Bill of Exchange, Promissory Notes or Hundis (in India).

Characteristics of Bills of Exchange:-

·        It must be in writing.

·        It must be in order form or not request form to make payment.

·        Order must be unconditional.

·        Date of payment and Amount must be fixed.

·        It must be signed by both the parties i.e. the maker and the acceptor.

·        It bears stamps according to its amount or is drafted on a stamped paper of the court.

·        The amount must be payable either on demand or on expiry of a fixed period.

·        The amount must be payable to the bearer of the bill or to a specified person.

Parties to a Bill of Exchange

There are three parties:

1.     Drawer: Writer of the Bill means the person entitled to receive the money. Basically he is the seller or creditor. He draws the bill and signs it.

2.     Drawee: Acceptor of the Bill means the person who is liable to pay the amount mentioned in the Bill. Basically he is the purchaser or debtor. He accepts to pay the amount of the bill drawn on him and then signs it. Until bill is accepted by drawee, it is called a draft.

3.     Payee: The person who receives the payment. At the time of maturity of the Bill, the person who receives the amount written in the bill is called Payee. It can be Drawer himself, if he retains the bill till the date of maturity or the Bank, if the bill is discounted from bank or the third party, if the Bill is endorsed by the Drawer to a third party.

Example:

On 1^st April, 2016, A of Jaipur sell goods of the value of 1,00,000 to B of Mumbai on credit, the payment of which is two be made after 3 months. A draws a Bill on B who accepts it and returns it to A. In this case, A will be Drawer and B will be Drawee (Acceptor) of the Bill.

·        If A retains the bill till 3 months and receives the payment on maturity, then A will be Payee of the Bill.

·        If A discounts the bill from bank before maturity and bank receives the payment on maturity, then bank will be Payee.

·        If A endorsed the bill to C before maturity and C receives the payment on maturity, then C will be Payee.

Important Terms

Date of Maturity: The date on which the payment is due is called the date of maturity. On this date the duration of the bill ends.

Days of Grace: It is compulsory to add 3 days to the period of bill while calculating the maturity date. These 3 days are called Days of Grace.

While calculating the date of maturity, the following points should be kept in the mind:-

Ø If the period of bill is stated in days, the calculation of maturity date will be in days. it includes the date of payment but exclude the date of transaction.

Ø If the period of the bill is in months, calculation of the maturity date will be in terms of calendar months, ignoring the number of days in a month.

Ø In case the due date of a bill falls on a holiday (Sunday or a public or a gazetted holiday) the due date will be supposed to be one day earlier.

Ø If the due date has been declared as Emergency Holiday, the due date will be supposed to be one day later.

Bill at Sight: Means payable at demand. If the payment time is not mentioned in the bill then it is payable on demand. Such bills become due when the bill is presented for payment. Days of grace are not applicable on such bills.

Bill after Date: When the bill is payable at a fixed period after the date, then the period starts from the date of drawing the bill. On such bills, days of graces are applicable.

Bill after Sight: Means after accepting. When bill is payable at a fixed period after sight, the period starts from the date of acceptance. Days of grace are allowed on such bills.

Negotiation of bill: Means transfer of the Bill of Exchange to another person. In that case the transferee of the Bill becomes its holder. He has the right to possess the bill in his own name and receive the amount mentioned in the Bill from the concerned party.

Modes of Negotiation: There are 2 modes in which a Bill of Exchange may be negotiated.

1.     By Delivery: When the Bill is payable to the bearer, it may be negotiated by delivery.it does not require the signature of the transferor.

2.     By Endorsement & Delivery: When the Bill is payable to the Specified person then it can be negotiated only by endorsement and delivery. In this case, endorsement is signing the Bill for negotiation.

Endorsement of a Bill: It means signing the Bill for the purpose of transferring to another. The holder of the bill can transfer it to another person. It can be done by putting signature at the back of the bill. The person who transfers the bill is known as ‘Endorser’ and the person to whom the bill is endorsed is known as ‘Endorsee’. The endorsement can be done many times. But the person holding the bill at the date of maturity will be entitled to receive its payment.

Retiring a Bill: When the Drawee makes the payment before its due date, it is called retiring the bill. In these cases, the holder of the bill usually allows discount or rebate which is calculated at a specified rate. Discount is calculated for the period the payment is being made too early at the rate per annum. It is a profit to the party who is making the payment early. On the other side, expense to the party who receives the payment.

Dishonor of a Bill: When the payment of the Bill is not done at maturity by the acceptor, it is called dishonor of the Bill. He can refuse to pay or become insolvent. In that case, holder of the bill can recover the amount from endorser or the drawer. But before this holder must serve a notice to the drawer or endorser that the bill has been dishonored. Such notice must be served within a reasonable time otherwise holder will lose the right to recover the amount.

Renewal of Bill: Sometimes Acceptor of the Bill requests the holder to cancel the original bill because he finds himself unable to pay the amount on the due date. In this case a new bill is drawn to replace the old one if the holder agrees. The new bill will be either of the full amount or the partial amount which acceptor may agree to pay. Drawer can charge interest for this which may be paid in cash or added in the new bill amount.
 

Advantages of Bill of Exchange

ü It is a written evidence of debt. Therefore, it is helpful in the purchase and sale of goods on credit.

ü It is a legal document as it is written on stamp paper issued by court. So in case of failure of payment, amount can be recovered legally.

ü The holder of the bill can discount the bill from the bank in case he needs cash before the due date.

ü It can be transferred (endorsed) to another person in settlement of debts.

ü Seller can plan his cash operations accordingly.

ü It is a convenient means of making foreign payments as it avoids the risk and trouble of transmitting the foreign currency from one place to another.

ü Seller needs not to send reminders for the payments as the date is fixed.

ü Purchaser gets time to make payment. So he can purchase more goods and expand his business.