Bills Of Exchange

BILLS OF EXCHANGE

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.

Features of bill of exchange

1. It must be in writing.

2. It must contain an order to pay which is express or unconditional.

3. It must be signed by the drawer.

4. The drawer, drawee and payee must be certain, definite and individual.

5. The amount of the bill must be certain

6. The amount must be payable to a definite person or according to his order to the bearer of the bill.

7. The bill must be accepted by the party (drawee) on whom bill is drawn.

8. There must be definite date of payment.

9. It must be properly stamped and dated.

10. It is made by the drawer.

11. Basically there are three parties- drawer, drawee and payee.

Promissory Notes- A promissory note is an instrument in writing, not being a bank note or a currency note containing an unconditional undertaking signed by the banker to pay a certain sum of money only to the bearer of certain person.

Features of the promissory notes

1. It must be in writing.

2. It must contain clear promise to pay.

3. The promisor, the maker must sign the promissory note.

4. Maker must be a certain person.

5. The payee (one who is to receive money) must also be certain person.

6. The sum payable must be certain.

7. Promissory note must not be payable to bearer.

8. It must be properly stamped.

9. There are two parties of the promissory note – maker and payee.

10. It is made by the promisor.

Parties of a bill of exchange

1. Drawer- Drawer is the creditor who draws the bill. For him bill is the Bill Receivable.

2. Drawee- Drawee is the debtor who accepts to pay the bill. For him bill is the bill payable.

3. Endorser- Endorser is one who endorses the bill to settle his account with his creditor.

4. Endorsee- Endorsee is one who receives the bill from the endorser.

5. Payor- Payor is the drawee who pays the bill.

6. Payee- Payee is one who receives the payment from the drawee. One who holds the bill at  the time of maturity, receives the payment.

Different treatment of the bill

1.Honour of the bill- When bill is paid at the maturity, it is called honour of the bill.

2.Dishonour of the bill- When bill is not paid at the maturity, it is called dishonor of the bill.

3.Discounting of the bill- Sometimes holder of the bill being in need of money before the due approaches his banker to pay against the bill. Bank pays the amount of bill after deducting the interest for that period. This process of raising fund from the bank called discounting of bill.

4.Endorsement of bill- Sometimes holder of the bill sends the bill to his creditor to pay his dues. It is called endorsement of bill.

5.Bill sent for collection- Sometimes holder of the bill sends the bill to his banker for collection. This is called bill sent for collection. On due date bill collects the amount on behalf of the party and credits his account with the amount.

6.Renewal of the bill- In case drawee is not able to pay the bill on the due date sometimes he requests the holder of the bill to give him further time. At his request holder of the bill sometimes cancelles the old bill and draws a new bill. It is called renewal of the bill. New bill may include interest for the further period and noting charges, if any.

7.Retiring of the bill- Sometimes drawee having sufficient fund pays the bill before the due date. For making early payment he gets some rebate on the bill. So payment of the bill before the due date is called retiring of the bill.

"NOTES- * Interest on bill is generally added in the case of renewal of the bill.

** Rebate on bill is generally allowed in the case of retiring of bill."

Some More Important Terms

Grace Period- Additional period of three days given to the drawee to pay the bill, is called grace period.

Noting Charges- whenever a bill is dishonored, it is the customary for the holder of such bill to have the fact of dishonor noted and certified by an officer called Notary. The charges payable to the Notary for this services is called noting or protesting charges.

Rebate on bill- It is given to the drawee when bill is paid before the due date.

Accomodation of bill- Generally a bill is drawn when sum is due. But sometimes a bill is drawn not to settle amount due but for the financial accommodation of the drawer as well as drawee. Then the bill is discounted, and the proceeds are utilized. Then on due date the drawer remits the fund to the drawee to honour of bill.

Examples of Foreign Bill

1. A bill drawn in India on a person resident outside India made payable outside India.

2. A bill drawn outside India on a person resident outside India.

3. A bill drawn outside India made payable in India.

4. A bill drawn outside India and made payable outside India.