A Bill of Exchange is something that reduces our credit risk, Let’s understand this concept better with the help of an example; Omkar being the seller sold goods worth Rs 10,000 to Ishaan being the buyer on credit. In the given case, Omkar has sold goods to Ishaan believing that on some future date he will make payment. Now, we can analyze that Omkar is a little skeptical regarding the certainty of receipt and time of such payment. In order to set an exact date of payment and to make his transaction legally valid, Omkar will draw a document in writing. Such a document is called Bills of Exchange.
Hence, we can derive the meaning of Bills of Exchange from this example, It is a document in writing given by seller to buyer, directing the buyer to pay his debt amount on a date mentioned in it. In simple words, a Bill of Exchange is a credit instrument.
As per the Negotiable Instrument 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.”
For Example, Arjun sold goods to Sahil worth Rs 10,000 on July 18, 2013. On the same day, Arjun drew a bill of Rs 10,000 on Sahil for 90 days which is duly accepted on the same date.
Forms of Bills of Exchange
Bills of exchange are major of two types:
1) Trade Bill: Trade as we know means an exchange between two or more parties whereby all of them have something or the other to offer in a transaction. Hence, it is either drawn in case of an exchange of goods or when a loan is given. Therefore, the drawer of such a bill is the seller or creditor and the drawee is the buyer or debtor. Banks also discount (i.e. pay the amount written in the bill before the due date) such bills willingly. Also, legal action can be initiated in case of default because it works as evidence of the transaction between the parties involved.
2) Accommodation Bill: It is only drawn and accepted when funds are provided to one of the parties or both parties involved. Hence, is drawn with the motive of mutually helping each other. No legal remedy is available for such kinds of bills as they are self-drawn bills.
Features of Bill of Exchange
- It is anunconditional order directing a certain personto pay amount specified in it.
- It is always inwriting.
- It is drawn and signed by the Drawer of the bill.
- This amount isto be paid either to person whose name is specified in the bill (Drawer) or on to order of that person (Endorsee) or bearer of instrument.
- It should beaccepted by buyer.
- It also specifiesexact datetill which amount is to be paid.
Parties to Bill of Exchange
Drawer: The person who makes and signs the Bill of Exchange is known as Drawer. He/ She is the seller of the goods.
Drawee: The Person who accepts the Bill of Exchange is known as Drawee. He/ She is the buyer of the goods.
Payee: Payee is the person whose name is mentioned in the Bill of Exchange, to whom the payment is to be made. A payee can be either Drawer or some other person.
Advantages of Bill of Exchange
The advantages of bills of exchange are listed below.
- Legally Valid: It is a legally valid written, signed and stamped acceptance of the debt by the Drawee. In case of a failure on part of Drawee to honour his commitment a suit against him/her can be filed in the court of law on the basis of the Bill.
- Can be Endorsed: Bill of Exchange can be easily endorsed (or transferred) in favour of Creditors or Suppliers or any other person.
- Ensures timely payment: As date of payment is fixed in the Bill of Exchange, so this ensures seller that he/she will receive his/her payment in full and in time. Due to this certainty he/she can plan his future cash flows.
- No fear of dishonour,easily recoverable: As Bill of Exchange is a legally acceptable document, so in case it gets dishonoured then the debt can be easily recovered as compared to other debts.
- Can be discounted: It can be discounted with the bank any time before its maturity. It provides liquidity to the instrument because, whenever drawer requires cash then he/she can discount the bill of exchange with the Bank. Bank will deduct some amount of discounting charges and pay the remaining amount to Drawer.
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