Let us make in-depth study of the definition, features, contents, parties and advantages of bills of exchange.
Definition of Bills 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 of the Negotiable Instruments Act, 1881.
Bill of exchange is a negotiable instrument which is payable either to order or to the bearer. Section 13 (1) of the Negotiable Instruments Act, 1881 defines negotiable instruments as “A promissory note, bill of exchange or cheque payable either to order or to bearer”.
A bill of exchange is generally drawn by the creditor on his debtor. It should be accepted either by the debtor or any person(s) on his/her behalf. It is worth mentioning that before its acceptance by the debtor, it is just a draft. It should be accepted either by a person upon whom it is drawn or someone else on his/her behalf. The stage at which the purchaser of goods signs the draft and writes ‘Accepted’ on it, it becomes a bill of exchange.
On 1.1.2011, Pawan sold goods to Harish on credit for Rs. 25,000. Pawan drew a bill for the same amount for two months and sent it to Harish for his acceptance on the same day. On 5.1.2011 Pawan got the acceptance of Harish. In this case, before 5.1.2011 it is known as mere draft. It becomes a bill of exchange only on 5.1.2011 when Harish accepted the bill.
Features of Bills of Exchange:
The features of bills of exchange are:
1. It should be in writing.
2. It is an order to make payment.
3. The order of payment is unconditional.
4. It should contain a certain amount to be paid.
5. The date of payment should be certain.
6. The amount must be payable either to a certain person or to his order or to the bearer of the bills of exchange.
7. It should be paid either on the expiry of a fixed period of time or on demand.
8. Bill of exchange must be signed by its maker.
9. In certain cases, it must be stamped also.
Parties to a Bill of Exchange:
There are three parties viz. ‘Drawer’, ‘Drawee’ and ‘Payee’ to a bill of exchange.
A bill of exchange is drawn upon the buyer/debtor by the seller/creditor and the drawer is the person who makes and draws the bill. The drawer is entitled to receive money from the debtor.
The person upon whom the bill of exchange is drawn is known as drawee. Bill of exchange is drawn on the drawee who is the purchaser of goods. The drawee of a bill is called the acceptor when he writes the words “accepted” and puts his signatures on it. This process is known as acceptance.
After acceptance, the bill of exchange becomes a legal document. This document now binds the drawee to honour the bill on due date. This acceptance may be general or qualified. In the case of general acceptance, without stating any conditions, only signature of the accepter is required. However, in the case of qualified acceptance, name of the bank or specified place for payment is mentioned.
The person to whom the payment is made is known as payee. In some cases, the drawer of the bill also becomes the payee when he himself keeps the bill till the date of maturity.
Drawer and Payee is usually the same person.
However, in the following cases drawer and payee are two different persons:
(i) When the bill is discounted by the drawer, the person who discounted the bill becomes the payee.
(ii) When the bill is endorsed to a creditor, the endorsee will become the payee.
Contents of Bills of Exchange:
The contents of bills of exchange are as under:
The date of the bill on which it is drawn should be written on the top right comer of the bill. This aspect is very important to determine the maturity date of the bill.
This is the tenure of the bill and runs from the date of the bill. This should be specified in the body of the bill. Grace period of three days should be given after the expiry of the term from the date of the bill.
Amount of the bill should be given both in figures and words. Amount in figures should be mentioned on the top left corner of the bill and amount in words should be mentioned in the body of the bill.
Stamp of proper value which depends on the amount of bill shall be affixed on the bills of exchange.
There may be three parties to the bills of exchange, drawer, drawee and payee. However, in some cases drawer and payee may be the same person. All the names of the parties and their addresses should also be invariably mentioned in the bills of exchange.
(vi) For Value Received:
This aspect is most important in the sense that law does not consider those agreements which have been made without consideration. Consideration means in lieu of and in the context of bills of exchange, it means that the bill has been issued in exchange of some consideration i.e., benefit has already been received.
Advantages of Bills of Exchange:
The bills of exchange are used frequently in business as an instrument of credit due to the following reasons:
(i) Legal Relationship:
Issuing bills of exchange provides a framework which converts and establishes a legal relationship between seller and buyer, from creditor and debtor to drawer and drawee. In the case of any dispute between the parties, this relationship provides a conclusive proof in the court of law.
(ii) Terms and Conditions:
Bill of exchange contains all terms and conditions of payments viz., amount of the bill, date of payment, place of payment, interest to be paid, if any. The maturity date of the bill is also known to the parties of the bill so they can make necessary arrangement for funds
(iii) Mode of Credit:
Bill of exchange has been defined as a negotiable instrument under the Negotiable Instruments Act, 1881. The buyer can buy the goods on credit and pay after the period of credit with the help of bill of exchange. In case of urgency, the drawer can also get the payment through discounting the bill from the bank and without waiting for the maturity period.
(iv) Easy Transferability:
Bill of exchange can be used for settling the debt of the creditors. Mere delivery and endorsement of the bill give a valid title to the endorsee.
(v) Wider Acceptance:
In case of foreign bill, wider acceptance is given to the parties through which payments can be received and made easily.
(vi) Mutual Accommodation:
Sometimes, bill can be issued for mutually accommodating the parties so that financial help can be given to each other.