The Negotiable Instruments Act 1881 governs the provisions for bills of exchange. According to Section 5 of this act, the bill of exchange is an instrument in writing and incorporates an unconditional order with the maker’s sign. This instrument directs a specific person to pay a certain sum only to the order of the certain person or to the instrument’s bearer. Such an order in writing becomes a legitimate bill of exchange.
A bill of exchange, or simply a bill, is an order to pay money given by one person (the drawer) to another (the drawee) with the intention that it will be accepted and paid at some point in the future—usually after a stated period. The drawer usually gives the drawee a specified amount of time to pay, and the drawee must sign the bill as evidence that he has agreed.
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Basic Definition of Bill of Exchange
It is a document that orders a person or organization to pay a sum of money to another person or organization. It can be used in domestic and international transactions. It is commonly used when one party doesn’t have the money to pay the other party immediately.
The three parties in a bill of exchange:
- The drawer,
- The drawee, and
- The payee.
The drawer creates the bill of exchange and orders the drawee to pay the payee.
The drawee is usually a bank, and they’re responsible for paying the payee.
The payee is the person who’s supposed to receive payment from the drawee.
It is simply an order to pay, which can be used for any amount, but it must be paid within a specific time frame. If the bill of exchange is not paid on time, the drawer can take legal action against the drawee.
Key Role in Commercial Lending
A bill of exchange plays a key role in commercial lending, a document that guarantees a debt payment and outlines the repayment terms.
The debtor and creditor must sign it, and a third party must witness it, which can be used in court to enforce the debt repayment. It’s a written order from one party to another to pay a certain sum of money on demand or at a specified date.
They are often used in international trade to make payments between companies in different countries.
Types of Bills of Exchange
The three types of bills of exchange:
- Sight bills
- Usance bills
- Time bills
Sight Bill
A sight bill is payable on demand, meaning that the drawee must pay the sum of money as soon as the bill is presented.
Usage Bill
A usance bill is payable after a certain period has passed, usually 30, 60, or 90 days.
Time Bill
Time bill is payable at a specific date in the future.
The other kind is the promissory note. It’s distinguished from an ordinary bill of exchange because it contains an undertaking to pay money only when further action has been taken, such as posting collateral or giving additional security.
Advantages of the Bill of Exchange
- It is an essential tool in international trade.
- It’s a written agreement between two parties to exchange goods or services of equal value. The bill of exchange can be used to buy or sell goods and services on credit, and it means that you can agree to pay for goods or services at a later date.
- It can also be used to finance business transactions. It means you can use the bill of exchange to get a loan from a bank. It is an essential tool in international trade.
- It can be used to make payments in different currencies, which makes it an essential tool for businesses that operate in multiple countries.
- It also allows businesses to make credit payments, which can be helpful when you are trying to improve your cash flow.
- They are cheaper to set up and can be used to make payments even if the buyer does not have the money when the payment is due.
- It can help businesses to keep their cash flow under control. It is a written order used to make a payment.
Discounting Bill of Exchange
Discounting bill of exchange is a written order from one person to another person or entity, directing the payee to pay a specified sum of money to the drawer at a specific date or on demand.
It is commonly used in international trade, where one party may not trust the other party’s ability to pay. In this case, it acts as a guarantee of payment.
The bill of exchange can be traded or sold before it is due, and this is called a discounting bill of exchange. When you discount a bill of exchange, you sell it for less than its face value.
It allows you to get paid immediately rather than waiting for the bill to come due.
When you discount a bill of exchange, you sell it to a bank at a discounted rate. The bank will then hold the bill until it matures, at which point they’ll collect the full amount from the issuer.
Discounting bills of exchange is a common way for businesses to raise short-term capital. It’s also relatively low-risk since the banks are typically willing to take on the risk of non-payment.
Renewal of Bill
Sometimes, it’s going to happen that the drawee realizes that he will be unable to pay the amount of the bill to the drawer on the maturity date. During this case, he may request the drawer to cancel the old bill. When the drawer agrees to it, he cancels thill and draws a replacement bill along with the amount of interest on the drawee. This process is understood as the Renewal of Bill.
Conclusion
A bill of exchange is a formal document that orders the payment of money from one person to another. It’s typically used when one business owes money to another, and it can be used in domestic and international transactions.
It typically includes the amount of money owed, the date by which it’s due, and information about the two parties involved.
If it isn’t paid on time, the party who issued the bill can take legal action to get their money.
It is a written order to direct a bank to pay a certain amount of money to someone else.
FAQs
What is discounting of the bill?
It means encashment of the bill before its maturity date, and the bank deducts its charges from the bill.
What do you mean by the dishonour of the bill?
When the acceptor does not make the payment of the bill on its due date and non-payment may be due to insolvency or insufficient fund.
What do you mean by retiring the bill?
When the drawee pays the bill before its due date, it is called the retirement of the bill. It happens with a mutual understanding of drawer and drawee.
What are the characteristics of a bill of exchange?
There are two characteristics of a bill of exchange-
- It should be in writing.
- The order should be unconditional.
