Unit -5 Bills of exchange

Definition of Bill of Exchange

According to the Negotiable Instruments Act 1881, ‘a bill of exchange is defined as 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.’

Meaning of Bill of Exchange

Bill of exchange means a bill drawn by a person directing another person to pay the specified
sum of money to another person. A bill of exchange is of real use if it is accepted by the person
directed to pay the amount.

For example, X orders Y to pay ₹ 50,000 for 90 days after date and Y accepts this order by
signing his name, then it will be a bill of exchange.

In general practice, the seller gives a credit period to the buyer on selling goods or on
providing services.

But sometimes, the seller is not able to offer credit period to purchaser and purchaser also will
not be in a position to pay immediately.

In such a case, the seller will like that the purchaser shall give a promise in writing to pay the
amount on a certain date.

This written promise then turns into valuable instruments of credit when this written promise are
made in proper form and is properly stamped.

These written instruments are often accepted by banks and we can advance money against them.
Also, we can endorse this instrument i.e. can pass to another person.

Features of Bill of Exchange

1. A written document

A bill of exchange is a written promise that A contains the information about the business
deal between two parties where one party which seeks the services of other party get written a
bill of exchange which provides a legal promise to the service provider for the decided
payment in future.

2. The drawer of the Bill of exchange

As you have learned that a party draws a bill of exchange in the name of another party.
Therefore, one party gets the bill drawn from the drawer.
A drawer can be a legal organization or person which draws the bill on the request of the
drawee. It is possible that a drawer of the bill and drawee of the bill of exchange can be the
same person.

3. Drawee of the Bill of exchange 

The drawee of the bill of the exchange who makes a promise to pay the decided payment in
the future. A drawee in which get drawn the bill of exchange when he seeks services from the
other party. A bill of exchange contains a specific amount that a drawee is supposed to pay
after he receives services as decided.

4. Payee of the Bill of exchange

Another important party involved in the formation of a bill of exchange is the person to
which the amount written in the bill of exchange will be paid in exchange for his services.
The bill of exchange is a legal document which is prepared in favor of payee to protect him
from the fraud customers.

For example, if a person provides services to international customers, then how he would
know that the party which placed the order for his services is genuine or not? Rather than
going with the gut feeling or intuition.

The payee can ask for the bill of exchange and can receive his money using a bill of exchange
from the legal party involved in the transaction.

5. Bill of exchange is unconditional

The bill of exchange is unconditional that means the drawee of the bill of exchange is bound
to pay the money once he gets the services which are mentioned in the bill. In addition to this,
the drawee is bound to pay when the order is damaged due to some natural activity.

However, the drawee can refuse to pay when his expectations are not met, or the services
provided to him are not as mentioned in the bill of exchange.

6. Create Trust

In ancient times, people used to do transactions with the people living in the nearby them, and
they used to know each other to take risks with the money.

But when people from different countries started trading with each other, it became difficult
for them to trust people who they never met and with the introduction of internet people
involving in the trading transaction don’t even get a chance to meet each other face to face.

In such scenarios, the role of the bill of exchange became important. As it is a legal
document, it makes it easy for stranger people to trust each other to get involved in business
transactions.
7. Mentions the currency of the transaction

The Features of Bill of Exchange contains information about the currency of the payment in
the transaction.

For example, if two parties from different countries are getting involved in the transaction,
then the currency of transaction will be decided at the time of writing the bill of exchange,
and the drawee involved in the transaction can’t pay any other currency.

8. Bill of Exchange contains the date of payment

While writing the bill of exchange the date in future on which the drawer is supposed to pay
the full payment to the payee is mentioned clearly on the bill of exchange.

The payee can take legal actions if the drawer does not pay the full decided amount on the
final date mentioned on the bill of exchange. However, the drawee can pay the full payment
before the decided date.

9. The mode of payment

The mode of payment is also mentioned on the bill of exchange. Whether the drawee of the
bill of exchange will make the payment in cash or through internet transaction or cheque or
draft.

The payee can only accept the money if only it is paid in the form as it is mentioned on the
bill of exchange.

10. Details of the order

The bill of exchange also contains the details of the order placed. The bill of exchange
contains the amount of the products to be delivered, the date of the delivery, the quality of the
products, etc. if the payee of the transactions fails to fulfill any of the condition then the
drawee of the transaction can take legal action or can withdraw his participation from the
transaction.

11. Legally stamped

A bill of exchange is considered valid if only it is properly stamped if it is not stamped

properly then it is of no value and is not considered a legal instrument for the business
transaction.

12. Revenue Stamp

To make a bill of exchange valid, it is important to paste the revenue stamp on the bill of
exchange. A revenue stamp is an adhesive label pasted on the document to make it legal for
the payment of the taxes or fees on the document.
PARTIES TO BILLS OF EXCHANGE

1. DRAWER OR MAKER

Drawer is the person who draws (or makes) the Bill. He is the person who is entitled to
receive the money (i.e the Creditor). He is required to sign the bill and send it to the drawee
for acceptance.

2. DRAWEE

Drawee is the person on whom the bill is drawn. He is the person who owes the money.

The Drawee must accept the bill of exchange drawn by the drawer. Acceptance is done by
signing his name across the face of the bill. Acceptance of the bill denotes that the drawee has
agreed to pay the amount mentioned in the bill on the maturity of the bill or on demand.

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.

3. PAYEE

Payee is the person to whom the money is payable. In most cases the drawer of the bill is
himself the payee.
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.

4. DRAWEE IN CASE OF NEED

If the drawer has a doubt that the original drawee will not accept or dishonour the bill, he
may write the name of another person for accepting the bill in case the original drawee does
not accept it (You may think him to be a backup for the drawee).

If the bill is not honoured by the original drawee, the bill must be presented to the drawee in
case of need.

EXAMPLE:

Mr C is a trader of cosmetics. He sells goods to Mr D worth Rs 30,000 on credit. Mr G is the

mutual friend of Mr C and Mr D and he has assured Mr C that Mr D has a good
creditworthiness. Upon his assurance Mr C made the sale on credit with a credit period of
two months.

After making the sale, Mr C draws a bill on Mr D for Rs 30000 payable after 2 months from
the date of the bill.

Below you can see the specimen of the Bill drawn by Mr C.

SPECIMEN OF BILL OF EXCHANGE

In the above example:

 Mr C is the creditor and drawer of the bill

 Mr D is the debtor and drawee of the bill
 Tenure of Bill is two months
 A certain amount i.e Rs 30000 is to be paid by the drawee
 Mr C is the payee here. The words “or his order” after Mr C in the bill denotes
that Mr C can endorse the bill in favour of someone who will, upon such
endorsement, become the payee of the bill.

Now assume that Mr C has also written the name of Mr G (the mutual friend who assured the
creditworthiness of Mr D) on the bill as Drawee in case of need. In such case, if the bill is not
accepted or dishonoured by Mr D (original drawee) then it would be presented to Mr G for
acceptance and payment. If Mr G also refuses to accept or pay then the bill will be considered
as dishonoured.

Types of Bills of Exchange

1) Documentary Bill :

A BoE which is always accompanied by supporting documents which confirm the

authenticity of trade or transaction that has taken place between the seller and the buyer is
called a documentary bill. The documents may include but not restricted to invoices, receipts,
bill of lading, railway bills etc.
Documentary bill is further classified into

1. D/A bill (documents against acceptance) Bills: When the documents are
delivered only against acceptance of a bill to the drawing it is termed as D/A
bill. The bill nullifies or becomes clear post the delivery of documents.
2. D/P Bill (documents against payment): When the documents are delivered
against payment of the bill it is termed as D/P bill. Post delivery of the
documents they are held by banker until the maturity of the bill has taken place.

2) Demand Bill :

 A bill which is payable on demand or when presented are at the site is called a demand bill.
The demand bill does not have a due date or time specifically mentioned for the payment and
hence the payment can be made when the bill is presented.

3) Usance Bill :

This is also termed as time bill which means it is the bill which has specifically mentioned
the time period for the payment on it. Usance bill is considered as a time-bound bill because
of the specific time and period mentioned on it.

4) Inland Bill :

A Bill drawn in India and payable only in India or a bill that is drawn by an Indian resident
table in India or any other country is termed an inland bill. Inland bill is quite opposite of
Foreign bill.

5) Clean Bill :

A bill without documents of proof is called Clean Bill. Clean bills charge higher interest
rate than the other documentary bills since there are no documents involved.

6)  Foreign Bill :

A bill of exchange bound to be paid outside India is called foreign bill. The bill of exchange
which is not an inland bill is termed as a foreign bill. It is further divided into

a) Export bill :

 A bill drawn for a party outside India which is drawn by an exporter who is in India is
termed as an export bill. The bill is issued by Indian importers.

b) Import Bill :

A bill which is drawn outside India by an exporter who is outside India on the importer who
is in India is called import bill. This Bill is issued for Indian importers.
7)  Accommodation Bill :

Whenever a bill is accepted or drawn or endorsed regardless of any condition is termed as

accommodation bill. A bill, drawn or accepted or endorsed whatever may be the condition, is
called accommodation bill/ house bill. These bills are generally, drawn on one another by
concerned groups for serving borrowing purpose from banks where no actual transaction
occurs.

8) Trade Bill:

A Bill which is drawn for the purpose of a trade order transaction is termed as trade bill.
Trade bills are common in case of international trading.

9) Supply Bill:

When a bill is drawn on government department by a supplier or a contractor

to supply certain goods, it is termed as a supply bill. The objective of supply is used to obtain
cash from financial institutions against pending payment to meet the financial needs.
Government department usually does not accept this kind of business but they are eligible for
getting cash loans from commercial banks going to its non-negotiable characteristics.

10) Fictitious Bill :

A bill in which the name of either of the party that is drawer or drawee or both are fictitious,
it is termed as a fictitious bill. A bill where the name of the drawer or the name of the drawee,
or both are imaginary or fictitious, is called a fictitious bill. These bills are not good bills and
are unenforceable by law. But if a genuine person accepts the bill it turns into a good bill
provided that he is capable of showing that the bill’s first endorsement and the drawer’s
signature have the same handwriting and he (the acceptor) is liable for the bill’s payment.

11) Hundis :

Hundis are bills of exchange or promissory notes which are native in nature and are
generally, used for inland trade and agricultural financing. These are popular among traders
in India because hundi’s origin is in India. The term “Hundi” came from the Sanskrit and it
means ‘to collect.’ This negotiable instrument is available in different native languages in
India. Among them the following are mentionable:

Darshani:
These are like demand bills i.e. payable at sight.

Dhanijog:
Dhani is an Indian local term which means owner. This hundi is like bearer cheques as its
holder becomes a holder in due time if he considers it for value.

Miadi/Muddati:
These are like usance bills or time bills.
Namjog:
As per this hundi, the payable amount is to be paid to the person whose name is written on it.

Shahjog:
This hundi is only payable to a Shah means a respectable wealthy person in the market.

Promissory Notes Meaning

Section 4 of the Negotiable Instruments Act defines promissory notes. The definition says
promissory notes are basically instruments in writing. They are, however, neither bank notes
nor currency notes which also contain this feature.

The next important aspect of promissory notes meaning is that they are unconditional
undertakings. The maker of these notes agrees to pay a certain sum either to a particular person
or their bearers. This maker undertakes his responsibility to pay by affixing his signature on the
notes.

Parties of Promissory Note

All promissory notes constitute three primary parties. These include the drawee, drawer and
payee.

 Drawer: A drawer is a person who agrees to pay the drawee a certain amount of money
on the maturity of the promissory note. He/she is also known as maker.
 Drawee: She/He is an individual, in whose favour the note is prepared. In usual cases
the drawee is also the payee until and unless the promissory note is transferred
specifically in favour of the payee. For e.g. Ram is considered a drawer if he promises to
pay Shyam Rs.5000 (Shyam is the drawee). However, if the same promissory note is
transferred in favour of Rohan, then Rohan becomes the payee.
 Payee: A payee is someone to whom the payment is made.
Most of the times, the payee and drawee are the same people to whom the cash is paid. The
party who has loaned the money keeps the promissory note, and when the due is cleared, the
payee or drawee cancels the note and gives it to the drawer/payee.

Essential Elements / Features of a Promissory Note

A typical promissory note contains several features that separate it from other negotiable
instruments. The following are a few such distinct elements:

a) Written notes
A promissory note must always be in writing. It can never be an oral contractual promise to
pay money. This is a legal as well as a customary requirement of such instruments.
b) Express undertaking
The undertaking that forms the base of a promissory note must generally be express. Thus,
merely inferring an acknowledgement to pay and calling it a promissory note is not enough. For
example, A writing “I owe B Rs. 1,000” does not amount to such notes.

c) Unconditional promise
The promise to pay a certain amount of money must be unconditional in all cases. Hence, a
conditional promise cannot form the basis of such notes. For example, one cannot promise to
pay money only if he has it, as that amounts to a condition.

However, promising to pay on a specific date or upon the happening of an inevitable event is
fine. For example, A can promise to pay B three years from the date of the note’s execution.

d) Specific amount
Every promissory note must mention a specific and precise amount. There can be neither
additions nor subtractions to them. For example, A cannot make a note promising to pay to B
any future amount that is not specific.

e) Legal tender
The money payable under a note must always be expressible in legal tenders like Rupees or
Dollars. Hence, a maker of a note cannot promise to pay the payee with bags of grains.

Apart from these elements, a typical promissory note has other important requires as well. For
example, the maker has to stamp the notes according to the Indian Stamp Act. Furthermore, the
makers, payees and endorsees should be specific persons.

Promissory Note Format/Specimen

Difference between bills of exchange and promissory note
Negotiable instruments are signed documents that contains a promise to pay a specific
amount of money to the bearer or assignee at a specified date or on being demanded. These
instruments are transferrable in nature, allowing the person or entity to use the instrument
most appropriately.
There are three types of Negotiable Instruments, namely Bill of Exchange, Cheques and
Promissory Note.

Meaning of Bill of Exchange

Bill of Exchange is a negotiable instrument which is a legally binding document containing
an order to pay a certain sum of money to a person within a pre-determined time frame or on-
demand by the bearer of the instrument.
A creditor issues Bill of Exchange to a debtor for payment of money owed by the debtor for
the goods and services availed. A prominent feature of Bill of Exchange is, it needs to be
accepted by a debtor to in order to be valid.
It is used in business to settle the outstanding debt between the parties involved in the
transaction. There are 3 parties involved in the bill of exchange, they are:

1. Drawer: Drawer is the person who issues the instrument in order to receive a
payment.
2. Drawee: Drawee is the person who needs to pay the amount to the drawer.
3. Payee: Payee is the person who receives the payment. In most cases, the drawer and
the payee are the same individuals unless it is transferred to third party payee by the
drawer.

Meaning of Promissory Note

A promissory note is a negotiable instrument containing written promise to pay a certain
amount of money to its holder by an individual or an entity either on demand by the holder or
at a pre-specified date.
The most important feature of Promissory Note is, once it is drawn by the debtor, it need not
be accepted by the creditor.
Two parties are involved in the promissory note. They are:

1. Drawer/Maker: Drawer is the debtor who promises to pay the amount to lender or
creditor.
2. Payee:  Payee is the creditor who is been promised by the borrower or debtor about
the pending payment.

There is a difference between Bill of Exchange and a Promissory Note, is as

under-

Particulars Bill of Exchange Promissory Note

 A promissory note is an
A bill of exchange contains
instrument in writing
an order from the creditor to
containing an unconditional
Meaning the debtor to pay a specified
undertaking, signed by the
amount to a person
maker to pay a certain sum
mentioned therein.
of money.

Negotiable Bill of Exchange defined Promissory Note defined

Instrument under section 5 of under section 4 of
Act Negotiable Instrument Act. Negotiable Instrument Act.

There may be three parties

There are only two parties
Parties i.e. the drawer, the acceptor
i.e. Maker and Payee
and the payee.

Drawn by It is drawn by the creditor It is drawn by the debtor

The liability of a drawer of The liability of the maker of a

Liability bill of exchange is secondary promissory note is primary
and conditional. and absolute.

Promissory Note does not

Bill of Exchange requires an
Acceptance require any acceptance by
acceptance by the drawee.
the drawee.

A single copy is prepared,

One copy is prepared in all
Copies except in case of foreign
cases.
bills. (3 copies are made)

In case of dishonour of bill of

exchange either due to non- In case of dishonour of
Notice in
payment or non-payment or promissory note, notice of
case of
non-acceptance, notice dishonour to maker is not
dishonour
must be given to all person necessary.
liable to pay.

Stamping is necessary for a Stamping is necessary for

Stamps bill of exchange except for promissory notes without
“bills payable on demand”. any exceptions.
 A bill of exchange can be so
Payable to drawn provided it is not A promissory note cannot be
bearer payable to bearer on made payable to a bearer.
demand.

In the case of bill of

In a promissory note, the
Payable to exchange, the drawer and
maker cannot pay to
maker the payee may be one
himself.
person.

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.

Noting and Protesting of Bill

(please click on to this link and learn the whole thing with the case laws)

https://www.lawnn.com/noting-and-protesting/

Retrinig of bill :