According to Indian Negotiable Instrument Act, 1881
” A 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.”
Characteristics of Bills of Exchange
On the basis of the above definition following are the main characteristics of bill of exchange :-
- A bill of exchange must be in writing.
- It must contain an order to make payment.
- The order must be unconditional.
- The amount of bill of exchange must be definite.
- The date of payment must be a fixed one.
- It must be signed by the maker of the bill.
- It must be signed by the acceptor.
- The amount mentioned in the bill is payable either on demand or on the expiry of a fixed period.
- The amount is payable either to the bearer of the bill or to a specified person or to his order.
- It bears stamps according to its amount or is drafted on a stamped paper of the court.
Parties to a Bill of Exchange
There are three parties to a bill of exchange:
He is the seller or creditor entitled to receive money from someone. He writes or draws the bill and is known as drawer. The bill of exchange is signed by the drawer of the bill.
2. Drawee or Acceptor
He is the purchaser or the debtor on whom the bill is drawn and who is liable to pay the amount mentioned in the bill.
He accepts to pay the amount by writing the word ” Accepted ” on the bill and then signs it. A bill is called a draft before it is accepted.
The person to whom the payment is to be made is called payee.The drawer himself or a third party may be the payee of the bill.
The drawer will be the payee of the bill, if he retains the bill till the date of maturity and receives the payment. The bank may also be the payee of the bill if the bills is discounted from the bank.
In case the bill is endorsed by the drawer to a third party, the third party known as endorse will be the payee of the bill. As such, the drawer himself or the bank or the endorse may be the payee of the bill.
Advantages of Bills of Exchange
1. Helpful in the purchase and sale of goods on credit
A bill of exchange serves as a written evidence of debt. It is a proof that the purchaser of goods owes the amount written in it. As such the goods can be sold on credit without difficulty.
2. Legal Document
It is a valid document in the eyes of law. If the drawee fails to make its payment, it would be easier to recover the amount legally in comparison to a verbal promise.
3. Discounting Facility
The holder of a bill need not wait till the due date of the bill to receive as he can easily turn it into cash by discounting it from the bank before its due date.
4. Endorsement possible
A bill of exchange can be easily transferred from one person to another in settlement of debts as it is a negotiable instrument.
5. Relief from sending reminders
The seller need not approach the purchaser time and again to demand the payment because the date of payment is fixed and written on the bill of exchange.
6. Helpful in planning cash operations
The seller knows the time when he would receive the money and, as such, he can plan his cash operations accordingly.
7. Convenient means of making foreign payment
Bills of Exchange enable the firms to receive and make payments in case of foreign trade also. It avoids the trouble and risk of transmitting the foreign currency from one place to another.
8. Saving of money in circulation
A bill of exchange performs the functions of money.
By making payment through bills, the money in circulation will not be used and hence results in the saving of wear and tear in the currency.
9. Convenience for the purchaser
By accepting a bill a purchaser gets time to make the payments. As such he can purchase more goods and increase his business. Moreover, he cannot be called upon to make the payment at a date earlier than the one fixed in the bill.
Due to these advantages, bills of exchange have become extremely popular device for the grant of credit in business.
Sometimes the purchaser of the goods or debtor himself writes a note, signs it and gives it to the seller of the goods. It is called a Promissory Note.
According to Indian Negotiable Instrument Act, ” A Promissory Note is an instrument in writing the containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person”.
1. It must be in writing.
2. There must be a promise to pay a certain sum of money in it. For example, ” I owe rupees ten thousand ” is not a promissory note because it is merely an acknowledgement of debt and there is no promise to pay.
3. The promise to make payment must be unconditional.
4. The amount to be paid must be specified.
5. It must be signed by the maker or promisor.
6. The name of the payee must be mentioned in it.
7. The promissory note cannot be made payable to bearer.
8. It must be stamped according to its value.
Parties to a Promissory Note
There are two parties to a promissory note:
He is the person who writes a promissory note.
He is the person who is entitled to get the payment.
There is no acceptor in case of a promissory note because the maker himself is liable to pay the amount.