Under the Negotiable Instruments Act 1881, a bill of exchange is defined as a written instrument which contains an order, that is not moved by any conditions whatsoever, and it directs a certain person to pay a defined sum of money to a specified individual or on the order of a certain person or to the person bearing the bill of exchange.
For a bill of exchange to be legally binding, it must be signed by the person who makes it, i.e, the drawer.
Basically, a bill of exchange is a type of written instrument ordering a person to pay the debt he owes. It is a monetary instrument, wherein one party (maker or drawer) orders in writing to pay a determinate amount of money to the other (the payee or the drawer), either at a fixed, definite future time or on request of the payee subject to explicit terms.
The details of a bill of exchange generally include the principal sum, the interest rate (if any), the detail of the parties, and the maturity date. It is generally drawn by a creditor upon his debtor.
It can be categorised into various types, for eg – inland bill, foreign bill, clean bill, trade bill accommodation bill etc.
Following are the requisites of a bill of exchange:
- The bill should express an unconditional order to pay.
- The bill must be in writing according to the rules of Negotiable Instruments Act 1881.
- The bill should be signed by the maker for it to be legally binding.
- The bill must be payable to bearer or to the order of a certain person.
- The amount payable must be certain and should be mentioned in the bill.
- The document shall be properly stamped for it to be valid and legally binding.
- The bill should contain the date of payment and should be legally stamped.
A bill of exchange requires an acceptance or acknowledgement from the drawee or from someone on his behalf, otherwise it would be considered as a draft
For example, A made a credit sale of goods to B for Rs. 30,000 for three months. To ensure that B makes the payment after 3 months, A draws a bill of exchange upon B for Rs. 30,000 payable after expiry of 3 months. Till the time. This bill is not accepted by B, it will be called a draft. It will become a valid bill of exchange only when B signs it and writes the word “accepted” on it, thereby communicating his acceptance.
Parties to a Bill of Exchange: In a bill of exchange there are three parties; Drawer, Drawee and Payee.
- Drawer is that person who makes or draws the bill of exchange upon a debtor or buyer ordering him to pay a specific sum of money.
- Drawee is that person upon whom the bill of exchange is drawn or made. He is known as the debtor.
- Payee is that person to whom the amount agreed in bill of exchange is to be paid. If the bill is with the drawer then he would be considered as the payee. The payee would change in a situation when the bill of exchange is discounted or when it is endorsed.
For example, A made a sale of goods worth Rs. 50,000 to B and drew a bill of exchange upon him for the same amount to be payable after three months. So in this situation, A is the drawer of the bill and B is the drawee.
If A retains the bill for three months and receives Rs. 50,000 on the due date, then A will also be the payee. However, if A passes the bill onto creditor C, then C will be the payee. Or if A gets this bill discounted from the bank then the bankers will become the payee.
The bill of exchange is a written instrument that contains an unconditional order directing the debtor to pay a certain amount to the creditor. It is governed by the Negotiable Instruments Act 1881.