Dishonour and Discharge of Bills in Detail
Goods are sold in lieu of cash or credit. The seller immediately gets the payment for the goods sold for cash; however, when it’s a credit transaction, the buyer intends to make payment within the agreed credit period. This promise of paying in the future by the purchaser can be noted in the written promise; in the sense that it can either be the promissory note or Bill of Exchange.
Definition of the Bills of Exchange
As per the Negotiable Instrument Act, 1881, the bill of exchange is the written instrument that holds the unconditional order which is signed by the drawer that directs a specific person for paying the certain amount only to, or to the order of, the bearer of the instrument or a definite person.
Conditions when Drawer is the Payee
Here the drawer is the payee himself and if he keeps the bill with himself until the date of the payment.
Conditions when Drawer is not the Payee
The drawer is not the payee if he gets the discounted bill or if the bill gets endorsed in favour of the creditor.
The Bills of Exchange Features
The bill of exchange should be in writing, and it cannot be verbal.
It is made and signed by the drawer.
It is the unconditional order to the person for whom credit has been granted.
The drawee or person is payable to the person whose name gets mentioned in the bill.
The bill also has a mention of the date by which the specified amount needs to be paid by the drawee.
The bill should be accepted by the drawee for making it legal.
The Types of Bills of Exchange
The types of bills of exchange are the trade bill and accommodation bill.
Trade Bill: The trade bill is the bill of exchange that is drawn and accepted for settling the trade transaction. It is known as the trade bill. This bill of exchange is essentially drawn by the seller of goods, and it is accepted by the purchaser.
Accommodation Bill: In this category, the bill of change is made and accepted for mutual help, and it is known as the accommodation bill. This bill is used for mutual benefit without the trade transaction. It doesn’t involve the purchase or sale of any specific goods or services. This type of bill has an agreement between the parties for giving financial assistance to others.
FAQs on Dishonour and Discharge of Bills: Legal Implications
1. What is a bill of exchange as defined by the Negotiable Instruments Act, 1881?
According to the Negotiable Instruments Act, 1881, a bill of exchange is a written instrument containing an unconditional order, signed by the maker (the drawer), directing a specific person (the drawee) to pay a certain sum of money only to, or to the order of, a specific person or the bearer of the instrument.
2. Who are the three main parties involved in a typical bill of exchange transaction?
The three primary parties in a bill of exchange are:
- Drawer: The person who creates or 'draws' the bill and orders the payment. This is usually the seller or creditor.
- Drawee: The person on whom the bill is drawn and who is directed to make the payment. This is usually the buyer or debtor.
- Payee: The person to whom the payment is to be made. The drawer and payee can be the same person.
3. What is the fundamental difference between the 'discharge' and 'dishonour' of a bill?
The core difference lies in the fulfillment of the obligation. Discharge of a bill means the parties involved are freed from their financial obligations, typically after the drawee makes the full payment on the due date. In contrast, dishonour of a bill occurs when the drawee fails to meet their obligation, either by refusing to accept the bill (non-acceptance) or by failing to pay on the maturity date (non-payment).
4. Under what circumstances is a bill of exchange considered dishonoured by non-acceptance?
A bill is dishonoured by non-acceptance when the drawee, after it is presented to them, refuses to accept it within 48 hours. It can also be considered dishonoured if the drawee is incompetent to contract or cannot be found after a reasonable search, making acceptance impossible.
5. What does it mean for a bill to be dishonoured by non-payment?
Dishonour by non-payment occurs when the drawee, despite having accepted the bill, fails to make the payment on its maturity date. This default in payment gives the holder of the bill the right to take legal action against the drawee and drawer.
6. What are the key legal consequences for the drawee if a bill of exchange is dishonoured?
When a bill is dishonoured, the drawee faces several legal consequences. The holder of the bill gains an immediate right of action to sue the drawee for the amount of the bill. The drawee also becomes liable to pay any noting charges incurred for officially recording the dishonour, along with potential interest as a penalty for the delay.
7. Why are 'noting charges' legally important when a bill is dishonoured?
Noting charges are legally important because they serve as formal, authenticated proof that the bill was presented for acceptance or payment and was subsequently dishonoured. A Notary Public officially records this fact, and the fee paid for this service is the noting charge. This official evidence is crucial if the holder needs to prove the dishonour in a court of law.
8. Can you provide a simple example of how a bill of exchange gets discharged?
Certainly. Imagine 'Shop A' sells goods worth ₹20,000 to 'Buyer B' on credit and draws a bill on 'B' for this amount, payable after 60 days. 'B' accepts the bill. The bill is considered discharged when, on the maturity date, 'Buyer B' pays the full amount of ₹20,000 to 'Shop A'. Once this payment is completed, all legal obligations under the bill for both parties are extinguished.
9. What is the significance of the 'days of grace' in determining the maturity of a bill?
The 'days of grace' are three additional days legally granted to the drawee after the nominal due date of a bill of exchange. Their significance is that the bill's legal maturity date is actually the last day of grace. For example, a bill dated Jan 1st for one month is nominally due on Feb 1st, but its legal maturity date is Feb 4th. This ensures the drawee is not in default if they pay within this grace period.
10. How does an 'accommodation bill' differ from a normal trade bill in its purpose and legal standing?
The primary difference is the underlying transaction, or 'consideration'. A trade bill is drawn to settle a genuine trade transaction, such as the sale of goods. In contrast, an accommodation bill is drawn, accepted, or endorsed without any consideration. Its sole purpose is to provide financial assistance to one or more parties by allowing them to get the bill discounted from a bank. Legally, while it is enforceable against the acceptor, the party accommodated is ultimately liable to the person who accommodated them.
