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Bill of exchange
When one wants to increase the business transactions, credits may be allowed and the amounts are received after some time. If the amount involved in the credit transaction is large, the seller needs security and evidence over the dealings. Here the Bill of Exchange solves the problems of the seller.
Definition
According to the Negotiable Instruments Act, 1881, ‘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’.
An analysis of the definition given above highlights the following important features of a bill of exchange.
i. It is a written document.
ii. It is an unconditional order.
iii. It is an order to pay a certain sum of money.
iv. It is signed by the drawer.
v. It bears stamp or it is drafted on a stamp paper.
vi. It is accepted by the acceptor.
vii. The amount is paid to drawer or endorsee.
Important terms
Explanation of some terms connected with bill of exchange is given below.
1. Drawing of a Bill
The seller (creditor) prepares the bill in the form presented above. The act of preparing the bill in its complete form with the signature is known as ‘drawing’ a bill.
2. Parties
There are three parties to a bill of exchange as under.
i. Drawer: The person who prepares the bill is called the drawer i.e., a creditor.
ii. Drawee: The person who has to make the payment or who accepts to make the payment is called the drawee i.e., a debtor.
iii. Payee: The person who receives the payment is payee. He may be a third party or the drawer himself.
3. Acceptance
In a bill drawee gives his acceptance by writing the word ‘accepted’ and also puts his signature and the date. Now the bill becomes a legal document enforceable in the court of law.
4. Due date and Days of grace
When a bill is drawn payable after a specified period the date on which the payment should be made is called ‘Due Date’. In the calculation of the due date three extra days are added to the specified period of the bill are known as ‘Days of Grace’. If the date of maturity falls on a holiday, the bill will be due for payment on the preceding day.
5. Endorsement
Endorsement means writing of one’s signature on the face or back of a bill for the purpose of transferring the title of the bill to another person. The person who endorses is called the “Endorser”. The person to whom a bill is endorsed is called the “Endorsee”. The endorsee is entitled to collect the money.
6. Discounting
When the holder of a bill is in need of money before the due date of a bill he can convert it into cash by discounting the bill with his banker. This process is referred to as discounting of bill. The banker deducts a small amount of the bill which is called discount and pay the balance in cash immediately to the holder of the bill.
7. Retiring of Bill
An acceptor may make the payment of a bill before its due date and discharge his liability, it is called as retirement of a bill. Usually the holder of the bill allows a concession called rebate to the drawee for the unexpired period of the bill.
8. Renewal
When the acceptor of a bill knows in advance that he will not be able to meet the bill on its due date, he may approach the drawer with a request for extension of time for payment. The drawer of the bill may agree to cancel the original bill and draw a new bill for the amount due with interest thereon. This is referred to as renewal.
9. Dishonour
Dishonour of the bill means the non-payment of bill, when it is presented for payment.
10. Noting and Protesting
If a bill is dishonoured, the drawer may approach the court, and file a suit against the drawee. In order to collect documentary evidence, the drawer may approach a lawyer and explain the fact of the dishonour of the bill. The lawyer will take the bill to the drawee and ask for the payment. If the drawee does not make the payment, the lawyer will note the statement of the drawee and get the statement signed by him. The lawyer will then put his signature. The statement noted by the lawyer will be the documentary evidence for the dishonour of the bill. Writing this statement by the lawyer is known as noting of the bill. The lawyer performing this work of noting the bill is called as the ‘Notary Public’. A notary public is an official appointed by the Government.
After recording a note of dishonour on the dishonoured bill, the Notary Public issues a certificate to this effect which is called protest. A protest is a certificate issued by the Notary Public attesting that the bill has been dishonoured.
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