Bills of Exchange: Meaning, Features, Parties, and Advantages
What is Bill of Exchange?
A bill of exchange is a written order that one party receives from another requiring them to pay the other a specific amount of money, either immediately or at a later date. It is important that such an order of payment should be unconditional and be accepted by both parties concerned, i.e., the creditor as well as the debtor. Since bills of exchange are official legal papers, the drawer has legal recourse if the drawee fails to pay the agreed-upon amount within the allotted time.
As per the Negotiable Instruments Act, 1881, “A 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.”
Features of Bills of Exchange:
- Bills of exchange are written documents. An oral agreement among the parties regarding repayment for the sum advanced can never be called a bill of exchange.
- A bill of exchange should bear an express order of payment due upon the part of one party to another, and not just a request.
- The order to make the payment should be unconditional in nature.
- It should specify the amount to be paid by the bearing party to the maker.
- A bill of exchange should also mention the exact date for the payment.
- It must be agreed upon and signed by both the drawer and the drawee.
- The amount specified on the bill is payable to the person whose name is mentioned on the bill.
- The bill must be settled in the legal currency of the respective country.
Parties to a Bills of Exchange:
A bill of exchange has three parties. These are explained below:
1. Drawer: The drawer is the party that had lent money to the other and has issued a bill of exchange, and is yet to receive the amount from the debtor. A drawer of a bill of exchange is also called the maker.
2. Drawee: It is the party who borrows the amount from the drawer and to whom the bill of exchange gets issued in exchange for the amount borrowed. A drawee is also called the acceptor of the bill.
3. Payee: The party that finally receives the amount specified on the bill is called the payee. In cases where the bill of exchange is not endorsed, the drawer of such bill is the payee. However, in the case of endorsement(s), the party that finally receives the amount specified in the bill is called the payee.
Advantages of Bills of Exchange:
1. Legal Document: A bill of exchange being a legal document, serves as legal evidence of the debt. It also sets up a lawful relationship between the maker and the acceptor. As such, the drawer is allowed to sue the drawee in the event of dishonour of the bill and recover the full amount.
2. Specifies all Terms and Conditions Related to Payment: A bill of exchange bears all important details regarding the terms and conditions of payment, like the total amount, date of payment, mode of payment, place of such payment, interest, etc. The maturity date is also mentioned on the bill so the acceptor can arrange funds well in time.
3. Drawee Enjoys Full Credit Period: The drawee is bound to make the payment against the bill of exchange upon the date of maturity of such bill, and as such, cannot be compelled to make such payment before maturity. Thus, the acceptor enjoys the full credit period before finally honouring the bill.
4. Discounting Facility: Another important advantage of bills of exchange is that they can be discounted by the drawer at the bank and money can be collected before the maturity date. Discounting means the process where the drawer presents a bill to his bank before its maturity date and collects the amount against it. The bank pays the drawer after deducting some service charge, called a discount. At the time of maturity, the bank receives the full amount of the bill from the drawee.
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