Bills of exchange are some of the most common types of negotiable instruments. Although they are similar to promissory notes, several differences exist between them. An introduction to bills of exchange and a note on their features can help us understand these differences.
Bills of Exchange
Section 5 of the Negotiable Instruments Act, 1881 defines bills of exchange. According to this definition, a bill of exchange is an instrument in writing containing an unconditional order. Furthermore, the bill’s maker directs a certain person to pay some money either to a specific person or its bearer.
This definition is similar to that of promissory notes but there are some differences between them. Hence, the essential elements, parties, and rules governing these two negotiable instruments are different.
Parties to Bills of Exchange
The following parties play a role in bills of exchange:
1) Drawer: This is basically the person who draws the bill.
2) Drawee: In contrast to the drawer, the drawee is the person in whose favour the bill is drawn.
3) Acceptor: This is the person who accepts a bill of exchange. Generally, the acceptor is the drawee but a stranger may accept it too.
4) Payee: Either the drawee or a stranger may be a payee, which is the person to whom bills are payable.
5) Holder: This is generally the payee of the bill. It could also be some other person to whom the payer endorses the bill. In case of bearer bills, the bearer himself is the holder.
6) Endorser: The holder becomes an endorser when he endorses the bill to another person.
7) Endorsee: This is the person to whom a bill is endorsed by the endorser.
Essentials of Bills of Exchange
After understanding the bills of exchange introduction and parties above, let’s see their features in detail. A typical bill of exchange contains the following elements:
- It should always be in writing and cannot be oral.
- The drawer must sign the bill and undertake to pay a specific sum of money.
- The parties must be certain; they cannot be ambiguous.
- It must comply with all legal requirements like stamping, date, signatures, etc.
Bills of Exchange v/s Promissory Notes
The following are some points of differences between promissory notes and bills of exchange:
a) A promissory note generally involves two parties, i.e. a maker (debtor) and a payer (creditor). On the other hand, bills of exchange include a drawer, a drawee and a payee.
b) As the bills of exchange introduction above shows, a bill orders the drawee to pay as per the drawer’s directions. A promissory note, however, is not an order but a promise to pay.
c) The liability of the maker of a promissory note is absolute, while that of the drawer of a bill is conditional.
d) Notes cannot be payable to their makers, while the drawer and the payee in bills can be the same person.
Forms of Bills of Exchange
The following are some common forms of bills of exchanges that the Negotiable Instruments Act recognizes:
a) Inland Bills
A bill of exchange may be an inland instrument under two conditions. Firstly, the bill must be drawn as well as payable within India. Secondly, it may also be drawn in India upon an India resident but payable in a foreign country.
b) Foreign Bills
All bills that are not inland bills are foreign bills by default. Generally, foreign bills require three copies and different rules govern them.
c) Trade Bills
A bill of exchange that comes into play during a genuine trade transaction is a trade bill. For example, when A sells goods to B, he may draw a bill directing B to pay later on. This bill will mention the purchase price as well as the specific date on which it is payable.
d) Accommodation Bills
Accommodation bills are different from trade bills because they do not involve any transactions of trade. Hence, consideration for the exchange of goods or services is not important here. In accommodation bills, one person lends his name to oblige a friend or some other person. This is basically similar to loan transactions.
Solved Examples on Bills of Exchange
Question: Name the missing words in the following sentences.
(1) Section __________ of the Negotiable Instruments Act defines bills of exchange.
(2) __________ is the person who draws a bill of exchange.
(3) The liability of the maker of a bill of exchange is __________.
(4) __________ bills involve genuine transactions of trade.
Answers: (1) Section 5 (2) drawer (3) conditional (4) trade