Elements of Bill of Exchange
When dealing with monetary issues, there are many instruments of exchange that we maintain for official reasons. One such tool for administering money transfer matters is a Bill of Exchange. Since these matters act as official documentation, we have rules and regulations for these. For the governance of bills of exchange, we have the Negotiable Instruments Act of 1881. You can see the meaning of the Bill of Exchange or the definition in Section 5 of the Act. The Bill of Exchange definition states that it is a document in writing that contains an unconditional order signed by the issuer, and this order directs a person to pay an amount of money only to the order of that person or to the one who bears the Bill of Exchange. We have a valid Bill of Exchange when a person accepts an order in writing. This article will speak about the features of bills of exchange.
Meaning of Bill of Exchange
A Bill of Exchange is a document in writing which instructs a person to pay another party a certain amount of money by a specified period. A Bill of Exchange only becomes valuable when the person who is going to pay accepts it with a signature or stamp. For example, A draws a Bill of Exchange against an amount of 5000 rupees against B. B agrees with this by signing it. Generally, the sellers often provide a credit period to the purchaser when it comes to goods or services. However, at times the seller is not in a position to give this window of time, and the purchaser isn't in a place to pay right away. In such a condition, a Bill of Exchange is crucial as it is a written promise that the party in debt will pay the mentioned amount by a specific time. These bills can often become instruments of credit, and banks will also accept these and pay the person in advance. One can also pass these bills to another party.
Features of Bills of Exchange
The following are some features of bills of exchange that one must keep in mind:
It is a piece of writing and an instrument of monetary negotiation
The person drawing and signing the bill is known as the drawer
The person on whom the drawer drafts the bill, asking for a specific amount is known as the drawee
The bill is an unconditional order for the drawee
For the bill to be an instrument of value, the drawee needs to accept it
The drawee shall pay the amount mentioned to the person specified in the bill or to his/her order or the drawer
The bill cites the date by which the drawee must carry out the transaction
The payment is valid only in the legal currency of the nation
A Bill of Exchange must have a proper stamp and a revenue stamp
Solved Examples
Q. Mention the Uses of the Bill of Exchange
Answer: A Bill of Exchange is essentially a document that instructs one party to pay a certain amount of money to another at a specified time or when the latter demands. The uses of a Bill of Exchange are as follows:
It helps draw up an official agreement between three bodies in general. We have the drawer, i.e., the person who is issuing the Bill of Exchange. Then we have the payee who receives a certain amount of money and the drawee, who has to pay the money to the payee by order of the drawer or when demanded.
A Bill of Exchange is often used in international markets and trade to assist the groups of importers and exporters in completing their payments.
Although a Bill of Exchange is not a contract, it can still help in composing the terms and conditions of a transaction.
FAQs on Bills of Exchange: Meaning and Key Features
1. What is a Bill of Exchange as per the NCERT syllabus for Class 11 Commerce?
A Bill of Exchange is a formal written document, recognised under the Negotiable Instruments Act, 1881. It contains an unconditional order, signed by the person creating it (the creditor), directing another person (the debtor) to pay a specific sum of money either immediately on demand or after a certain period. This payment is to be made to a specified person or to the bearer of the instrument. For it to be valid, the debtor must formally accept it.
2. Who are the main parties involved in a Bill of Exchange transaction?
There are typically three parties involved in a Bill of Exchange:
- The Drawer: The person who creates or writes the bill and orders the payment. This is usually the seller or creditor.
- The Drawee: The person who is ordered to pay the amount specified in the bill. This is usually the purchaser or debtor. Upon signing the bill, the drawee becomes the 'acceptor'.
- The Payee: The person who is entitled to receive the payment from the drawee. The payee can be the drawer themself or another person specified by the drawer.
3. What are the essential features of a valid Bill of Exchange?
According to the CBSE curriculum, a Bill of Exchange must have the following features to be considered valid:
- It must be in writing.
- It must contain a clear and unconditional order to pay, not a request.
- The amount to be paid must be certain and specific.
- The date of payment must be certain.
- It must be signed by the drawer.
- The drawer, drawee, and payee must be certain individuals or entities.
- The payment must be made in the legal currency of the country.
- It must be properly stamped as per legal requirements.
4. How is a Bill of Exchange different from a Promissory Note?
While both are negotiable instruments, they differ in several key aspects:
- Nature: A Bill of Exchange is an order to pay, whereas a Promissory Note is a promise to pay.
- Parties: A Bill of Exchange has three parties (drawer, drawee, payee), while a Promissory Note has only two (maker/debtor and payee/creditor).
- Creator: A Bill of Exchange is drawn by the creditor (drawer), while a Promissory Note is made by the debtor (maker).
- Acceptance: A Bill of Exchange requires acceptance by the drawee to be valid. A Promissory Note does not require any acceptance as it is a promise from the start.
5. What does the term 'discounting a Bill of Exchange' mean?
Discounting a Bill of Exchange is the process of encashing the bill from a bank before its due date. If the holder of a bill (the drawer or payee) needs funds immediately, they can sell the bill to a bank. The bank pays the holder the face value of the bill after deducting a small service fee, known as the discount. The bank then becomes the holder and collects the full amount from the drawee on the maturity date.
6. Why is an 'unconditional order' a critical feature for a Bill of Exchange?
The 'unconditional' nature is crucial because it ensures the instrument's certainty and negotiability. If the payment were dependent on a future event (e.g., "Pay ₹10,000 if the goods are sold"), it would introduce uncertainty. This would make it difficult for others, like banks, to accept the bill for discounting or for it to be transferred to another party. The unconditional order guarantees that the payment obligation is absolute, making it a reliable financial instrument.
7. What happens if a Bill of Exchange is dishonoured?
A Bill of Exchange is considered dishonoured if the drawee refuses to accept it (dishonour by non-acceptance) or fails to pay the amount on the due date (dishonour by non-payment). When a bill is dishonoured, the holder's right to receive money from the drawee is restored. The holder can then take legal action against the drawee and any prior endorsers to recover the amount after giving them due notice of dishonour.
8. What are the common types of Bills of Exchange a student should know?
The main types of Bills of Exchange are:
- Trade Bill: A bill drawn and accepted for a genuine trade transaction, such as the sale or purchase of goods.
- Accommodation Bill: A bill drawn and accepted without any underlying trade transaction, created solely to provide financial help to one or more parties.
- Inland Bill: A bill drawn and payable within the same country.
- Foreign Bill: A bill drawn in one country and payable in another.
- Demand Bill: A bill where payment must be made immediately when it is presented to the drawee.
- Time (or Usance) Bill: A bill where payment is due after a specific period of time.
9. Can a Bill of Exchange be transferred to another person, and if so, how?
Yes, one of the key features of a Bill of Exchange is its negotiability, meaning it can be transferred. This is done through a process called endorsement. The holder (endorser) signs on the back of the bill and delivers it to another person (the endorsee). This transfers the ownership and the right to receive payment to the new holder, allowing it to be used to settle other debts.
