Bill of Exchange: Explanation, Types, Features, Example

Sohini Mazumder October 27, 2020January 16, 2023 0 Comments

When we consider the business scenario, in reality, it includes heavy transactions. At times, these transactions are also done on credit. This means that the goods are sold on credit from one party to another party, where the buyers promise to pay the sellers after a given time period. To make sure that the buyers pay them, sellers usually ask the buyers to provide them with a written undertaking. This written undertaking would include that the buyers would be paying them after some time, also, the buyers mention all the terms and conditions in it regarding the exact amount required to be paid, the date of payment, everything regarding the credit. These documents are further read and agreed by the buyers and they also put their sign in it. After which the documents become Bills of Exchange. Bill of exchange in India are often known as “Hundis”. In Western countries, they are called “Bill of Exchange” and “Promissory Notes”.

Definition of Bill of Exchange:

“Bill of Exchange is an instrument in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”, ACCORDING TO INDIAN NEGOTIABLE INSTRUMENT ACT,1881.

In simple words, Bills of Exchange can be defined as written orders usually used during any kind of heavy transaction, which binds the buyers to make the appropriate payment to the seller after the given time period. It can be considered as an instrument of credit, which aids in promoting and facilitate selling goods at credit.

Definition of Promissory Note:

“A Promissory Note is an instrument in writing(not being a banknote or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person”, ACCORDING TO INDIAN NEGOTIABLE INSTRUMENT ACT.

Here in the Promissory note, the buyer of products or the debtor writes a note, after signing it gives it to the seller of the product. The Promissory Notes needs to be in writing and also it mist promises to pay the specified sum of money. A Promissory note must be signed by the promisor. It should also mention the name of the payee.

Difference between Bill of Exchange and Promissory Note:

Bill of Exchange has 3 parties- drawer, acceptor, the payee. Whereas, Promissory Note has only 2 parties- makers and payees.
The drawer of the Bill of the Exchange is the creditor, on the other hand, the debtor is the drawer of the Promissory Note.
The payee of the Bill of Exchange can be the drawer but for Promissory Note, the maker of it cannot be the payee.
Noting for the Bill of Exchange is done in the Case of Dishonor and for the Promissory Note, Nothing is not necessary.
The promise made in the Bill of Exchange needs to be accepted by the drawee but in Promissory Note, acceptance is not necessary.

Characteristics of Bill of Exchange:

Few characteristics have been mentioned below:

A Bill of Exchange should be in written form.
The amount mentioned in the Bill of Exchange should be definite.
The mentioned amount should be paid either on-demand or on the expiry date.
The acceptor and the maker should sign the Bill of Exchange.
The content of the Bill of Exchange should not be a request, instead, it should be an order.
The payment of the Bill of Exchange can be made either to the bearer or to a specified person.
A stamp should be done considering its amount.
This instrument of credit is governed by the Indian Negotiable Instrument Act, 1881.

Advantages:

Aids in facilitating credit sale or purchase of goods. It serves as a written proof that the buyer of goods owes the mentioned amount to the seller.
An option of accepting the Bill of Exchange gives the buyers some time so that they can comfortably pay after a given time period. This also helps in expanding the business by purchasing more goods.
Bills of Exchange serves as money. Through the bill, money is made to
Transferring of the Bill of Exchange is also possible. It can be easily transferred from one party to another to settle their debts.
Bills of Exchange is a legally valid document. If the drawee fails to make the payment then through legal procedures it becomes easy to recover it.

Parties of Bill of Exchange:

The Bills of Exchange, as we have seen above, deals with 3 parties. They are:

1. Drawer: The drawer is also known as the seller or the creditor. This party is responsible for receiving money from the buyer. They need to sign the Bill of Exchange.

2. Payee: It is the party that is responsible for making the payment. If the drawer retains the Bill of Exchange till its maturity date then they will be the payee of the Bill of Exchange. If the Bill of Exchange is endorsed by the drawer to a third party then the third party becomes the endorsee, and they are responsible for paying the Bill.

3. Drawee: Drawee is also known as the Acceptor. They are the purchaser or the debtor on whom the Bill of Exchange is made. After writing the term “Accepted” and signing the Bill of Exchange, they accept the Bill of Exchange. Before this, the Bill remains a draft.

Negotiation of Bill of Exchange:

For the purpose of Negotiating, there are 2 ways:

1. Negotiation by delivery: when the bill is payable to the bearer it can be negotiated with mere delivery.

2. Negotiation by endorsement and delivery: when the bill is responsible to be paid to a specific person then the negotiation is possible through endorsement and delivery.

Also Read: Memorandum of Association: Everything You Need To Know

Endorsement of a Bill:

With the purpose of transferring the Bill of Exchange to another party, is signed then it’s known as “Endorsement”. The holder of the Bill receivable can endorse it to some other party, then they will become the “Endorser” and the person receiving it becomes the “Endorsee”.

The endorsee can again endorse it to some other party, and this process of endorsement of the Bill of Exchange can continue.

Types of Bill of Exchange:

The Bill of Exchange can be of various types, a few of them have been mentioned below:

1. Demand Bill: It has to be paid whenever it is demanded. In the Demand Bill, the time of payment as the due dare is not mentioned.

2. Usance Bill: Also known as time bill, as it mentions the time period of the bill.

3. Documentary Bill: Bill with documents available to strengthen the authenticity of transactions between the buyer and the seller is known as Documentary Bill.

4. Inland Bill – Bill drawn and accepted in India and by India is known as Inland Bill.

5. Clean Bill: A type of Bill of Exchange with no proof or documents attached are known as Clean Bill.

6. Hundis: Specially used in India, includes the Bill of Exchange and Promissory Notes with the intention of fulfilling the need for agriculture is known as Hundis.

7. Foreign Bill: Any Bills of Exchange used for paying outside India is known as Foreign Bill. It includes Export Bill and Import Bill.

8. Trade Bill: Bill drawn or accepted for facilitating trade is known as Trade Bill.

9. Supply Bill: Are known as the bills drawn by suppliers or contractors on the government department for the supplies made.

10. Accommodation Bill: Any bill drawn or accepted without any consideration made is known as Accommodation Bill.

11. Fictitious Bill: Bill in which the name of the drawee and payee are not properly mentioned are known as Fictitious Bill.