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Businessmen do not like to sell goods on credit, but they have to sell it due to the competition in the market. Selling goods on credit does not mean that the sell.er should not ensure him about the payment for goods. The seller asks the purchaser, ‘·when he will be making the payment”. The purchaser may reply that the payment will be made within two or three months. Should seller take it as granted that the purchaser will be making the payment as promised? It has been our experience in life. “Words are very cheap”. “It is very easy to make promises but it is very difficult to keep it.” The seller would like to have a written statement to this effect. If the debtor agrees the creditor will write a formal instruction to debtor to make the payment of certain specified amount on the expiry of the specified period to him or to any one else according to. his instruction. This formal document is known as ‘Bills of Exchange·.

 

( BILLS OF EXCHANGE )

Meaning of Bills of Exchange

 

According to Indian Negotiable Instrument Act, “A bill of exchange is an instrument in writing, 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.”

 

Bills of exchange are drawn by a creditor upon his debtor. It instructs the debtor to pay a certain sum of money on demand or after the expiry of a specified period. It is a legal valid document. It is also an evidence of debt. Bills of exchange have following important features.

 

 

Features/Characteristics of Bills of Exchange

 

Bills of exchange has got the following important features :

  1. An unconditional order. It is an order by the drawer (creditor) to his drawee (debtor) without any condition. It becomes binding upon the acceptor of the bill to carry out the order.

 

  1. Written document. Bills of exchange must be in writing. It is a document, which can be produced in the court as evidence, in certain cases. It is forma! and authentic source of payment, so it must be in writing.

 

  1. Order to pay specified amount. It is an unconditional order to make payment of certain specified amount. It will not be a bill of exchange, if the drawer orders to make the payment of more money or lesser money. The amount must be specified in figures and words as $ 500 (Rupees five hundred only).

 

  1. Payment on specified date. The amount is payable after the expiry of certain period, so we calculate the exact date of payment (due date or the date of maturity). If a bill has been drawn on January 1. Payable after 3 months, its due date will be April 4, including 3 days of grace).

 

  1. Signed by the drawer. The bill must be signed by its maker. As it is an order, so the person who has been ordering for payment must sign it. It will also enable drawee to understand, whom payment has to be made. Without signature, it will not be a legal document.

 

  1. Payment to drawer or endorsee. The bill is drawn by the creditor, here known as drawer, who will realize the payment of the bill on its due date. The drawer may endorse the bill to some other party. In that case, the endorsee will realise the payment. The payment may also be realised by the bank, if the bill has been sent to the bank for collection or discounted with the bank.

 

Parties to the Bills of Exchange

 

Bills of exchange involves the following three parties :

1. Drawer

 

It is the party, who draws the bill. Drawer must be the creditor. He may either be a seller of goods or lender of money. The party who has to realise the payment will be the drawer. Drawer means the person who draws the money. In case of drawing money from the bank cheque is drawn. The account holder of the bank is known as drawer, when he withdraws the money. In case of bills of exchange also the person who draws the bill for receiving certain amount from the drawee is ‘drawer’.

 

2. Drawee

 

Drawee is the person or the party who has to make the payment or who accepts to make the payment. In case of withdrawal from bank, the drawee is the ‘bank’. In case of bills of exchange the person who accepts the bill, drawn by the creditor is ‘drawee’ .A purchaser of goods on credit, a borrower or a debtor who accepts the draft drawn by the creditor is known as ‘drawee’ . In case of bills of exchange, the initial step is to write a draft. This draft becomes the bill of exchange after its acceptance.

 

3. Payee

 

‘Payee’ is the person who receives the payment. In case of bills of exchange drawer will be the payee of the bill, if he retains the bill till the date of maturity and realises its payment. The bank may also be the payee of the bill, if the payment is received by it (In case the bill has been discounted). The endorsee of the bill may also become the payee of the bill, if he receives the payment of the bill. The payment of the bill may be received by the drawer, or the bank or the endorsee. ‘Payee’ is the word formed from the word ‘to pay’. Payee is the person whom payment is made.

 

 

Specimen of Bills of Exchange

Elements of Bills of Exchange

The important constituents (elements) of the bills of exchange have been explained as under:

 

1. Place and date of payment

 

The date of writing the bill must be clearly mentioned, because the due date is to be calculated on the basis of this date. The place of payment should also be specified. If it is not specified payment will be made at the address of the drawer written in the bills of exchange.

 

2.Stamp

 

Bills of exchange bears stamp or it is drafted on a stamped paper of the court. Stamps are fixed according to the amount of the bill. Stamped paper makes the drawee legally liable for the payment. It also makes the bill a legal document. Stamp is not fixed_ on the bills, whose payment is to be made ‘on demand’.

 

On the basis of term Bills of Exchange is classified as Bills at Sight and Bills after Date.

 

Bills at sight :

 

These bills are drawn by the drawer on the drawee with the condition that the payment of the bill will be made on its presentation. The drawee has to make the payment of the bill, whenever it is presented to him.

 

Bills after date :

 

These bills are drawn for certain specified period. The payment of these bills is made after the expiry of the specified period plus three days of grace. For example if the bill is drawn on April 1, 2002 payable after 3 months, its payment will be made on April 1 + 3 months+ 3 days of grace = July 4th 2002.

 

3. Days of grace

 

While calculating due date of the bill, three days of grace have to be compulsorily added. Initially 3 days of grace were allowed to the drawee as a matter of sympathy and kindness but it became a practice. Ordinarily drawers allowed 3 days, as customary practice. It has now become a law. According to Indian Negotiable Instrument Act, the drawee can avail of 3 days of grace as a matter of legal right. For example, if a bill has been drawn of July l , 2006 payable after 2 months, its due date will be calculated as under :

 

July 1, 2006 + 2 months                                  = September 1, 2006

+ 3 days of grace                                            = + 3 days

= September 4, 2006

 

4. Due date or date of maturity

 

It is the specific date on which the payment of the bill has to be made. In other words, it is the date on which the bill matures for payment. In the above example, September 4, 2006 is the due date. The bill must be honoured on or before the due date. The bill will cease to exist after its due date. If it is not honoured by the due date, the bill will be supposed to be dishonoured. Calculation of due date is illustrated as under :

 

Illustration 1. Calculate the due dates of Bill in the following cases :

     Date of Bill

1. 1st January, 2003

2. 30th April, 2003

3 29th January, 2003

4. 3 I st January, 2003

5. 30th June, 2003

6 I st July, 2003

7. 30th June, 2003

8. 27th Nov., 2003

 

Solution.

1. January 1, 2003 + 3 months

+ Days of grace

 

 

2. 30th April, 2003 + 2 months

+ Days of grace

 

 

3. January 29, 2003 + 1 month

+ Days of grace    Period

3 months

2 months

1 month

1 month

30days

60days

2 months

3 months

 

 

= April 1, 2003

+ 3 days

April 4, 2003

 

= June 30, 2003

+ 3 days

July 3, 2003

 

= February 28, 2003

+ 3 days

March 3, 2003

 

Note. If we add one month to January 29, 2003 we shall get February 29, 2003. The year 2003 is not a leap year, so it will not have February 29 and one month will have to be completed on February 28, 3 days after February

28, means March 3, 2003.

4. January 31, 2003 +One month

+ Days of grace

 

 

5. June 30, 2003 + 30 days

+ Days of grace

 

 

6. July I, 2003 + 60 days

+ Days of grace

 

 

7. June 30, 2003 + 2 months

+ Days of grace

 

 

8. November 27, 2003 + 3 months

+ Days of grace

= February 28, 2003

+ 3 days

March 3, 2003

 

= July 30, 2003

+ 3 days

August 2, 2003

 

= August 30, 2003

+ 3 days

September 2, 2003

 

=August 30, 2003

+ 3 days

September 2. 2003

 

= February 27. 2003

+ 3 days

March 2, 2003

Note. The year 2003 is not leap year, in which February will have 28 days. This is why, February 27, 2003 + 3 days = March 2, 2003.

 

In case the due date falls on a gazette holiday, it will be supposed to be one day earlier. For example, if a bill has been drawn on July 12, 2004 for one month its due date will be :

 

July 12. 2004 + 1 month                                 =August 12, 2004

+ Days of grace                                               + 3 days

August 14, 2004

 

Note. August 15, being national holiday, August 14 has been supposed to be the due date.

 

If the due date has been declared as emergency holiday it will be supposed to be one day later. For example, if a bill has been drawn on September 28, 2004 for one month. Its due date will be October 31, 2004.

 

If October 31, is declared as emergency hoi iday the due date will be November I. 2004.

 

5.Amount

 

The bill must be drawn for certain specified amount. The amount must be written correctly in both words and figures.

 

6. Name of the drawee and his acceptance

 

The bill must specify the name of the drawee. It must be accepted by the drawee, otherwise it will not be a bill of exchange. Before the acceptance the bill is known as draft, meaning rough or sketch. The draft must be accepted by the drawee to make it a bill of exchange. The word ‘draft’ is sometimes confused with bank draft. Draft in case of bills of exchange requires to be accepted. This draft is payable after specified period. Bank draft on the other hand, is issued by a Bank to its branch to make payment of the specified amount to the specified party. The payment of bank draft is immediately made. It is never payable after certain period.

 

7. Value received

 

These words are written on every bills of exchange. ‘Value Received’ means that the drawee has already received the value for which he has -been accepting the bill. Bills are drawn against certain valid consideration. The word consideration here means in exchange or ‘something for somethings’. Bills are drawn on debtors, who have already received the value earlier in the form of certain goods or asset or cash.

 

 

Advantages of Bills of Exchange

 

A bill of exchange has got the following advantages :

 

1. Evidence of debt. Bill is accepted by the debtor. The acceptance of the bill by the debtor is itself a proof that the drawee owes the amount or he is indebted. Bills of exchange in this way serve as evidence.

 

2. Reminder not required. Bill is payable after the expiry of certain period on a specific date. The drawee accepts to make the payment on the due date through the bills of exchange. It is not, therefore, necessary to remind for the payment again.

 

3. Economy of money in circulation. Bills of exchange is the form of credit money. While making payment through bills, money in circulation will not be used. Bill is used and accepted as a form of payment by traders which is economical.

 

4. Legal document. Bills of exchange is a legally valid document in the eyes of law. If the drawee refuses or fails to make its payment, a suit can be filed against the drawee.

 

5. Convenient purchasing. The use of bills of exchange has facilitated credit purchases. The seller is ensured that the payment will be made on certain specified date.

 

6. Benefits of discounting. In case, the drawer is in the immediate need of funds, he can get the bill discounted with the bank and have the funds even before the due date.

 

7. Benefits of endorsement. The drawer can endorse the bill in favour of his creditor and repay back his debt through bills of exchange.

 

8. Financial planning. The drawer being ensured of the payment on certain specified date makes his financial plans accordingly.