Discounting and Endorsement of the Bill

Discounting and Endorsement of the Bill

Bill of Exchange: Under the Negotiable Instruments Act 1881, a bill of exchange is defined as a written instrument which contains an unconditional order, directing 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 bearer of the instrument.

The drawee would have to pay the amount to the bearer of the instrument in case of discounting and endorsement of the bill.




What is discounting and endorsement of the bill?

1. Discounting of Bill

Upon making a credit sale to the buyer, the holder draws a bill of exchange due after an agreed period of time which contains an unconditional order asking the drawee to pay the specified amount.

However, if before the expiry of the due period mentioned in the bill of exchange, the holder or the drawers faces the need of funds he need not wait till the end of the expiry date and can instead approach the bank to get the said bill encashed.

The bank charges some interest from the holder of the bill for early payment of funds to him. This interest amount is deducted from the payment made to the holder. It is referred to as a discount in this case and the entire process of encashing the bill of exchange with the bank is known as discounting the bill. The bank then recovers the full amount from the drawee on the expiry of due date.




2. Endorsement of Bill

Sometimes, the holder of the bill transfers the bill in favour of his creditor. However, this is only possible where the bill does not prohibit transferring it in favour of someone else.

This act of transferring the bill is known as endorsement of bill. The bill is considered to be validly endorsed only when the holder affixes his signature at the back of the bill and mentions the party name to whom it is to be endorsed. The endorsement of the bill leads to settlement of liability of the holder.

The drawee would then have to make the payment to the bearer of the instrument and not the original holder. The bearer of the bill is also known as the payee.

For eg – A made a credit sale to B and drew a bill of exchange upon him due after a period of three months. After the end of second month, A endorsed the bill by signing at the back of the bill in favour of C, who is a creditor of A. As a result of endorsement, the liability of A is disposed off and now at the end of third month, B would be liable to make the payment to C as the bill stands endorsed in his favour.

Thus, in both discounting and endorsement of the bill of exchange, the debtor or the drawee would pay the amount to a person other than the original holder of the bill. This is because in case of discounting, the bankers become the payee and in case of endorsement the bill is transferred to another party.

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