A bill of exchange is a written and unconditional order in which one person (the drawer) directs another person (the drawee) to pay a certain amount of money to a specified person (the payee), either immediately or on a future date. It must be signed by the drawer and accepted by the drawee to become legally binding.
Definition:
According to the Negotiable Instruments Act, 1881, it is an instrument in writing that orders a certain person to pay a certain sum of money to a specific person or to the bearer of the instrument. Since it is a legal document, the holder can take legal action if payment is not made on time.
Features of Bills of Exchange:
- It must be in writing.
- It must contain an unconditional order to pay.
- It must be signed by the drawer.
- The amount payable must be certain.
- The parties involved must be certain.
- The payment must be in money only.
- It must be properly stamped as per law.
- It must be accepted by the drawee to become valid.
Parties to a Bills of Exchange:
A bill of exchange has three parties. These are explained below:
1. Drawer: The drawer is the person that had lent money to the other and has issued a bill of exchange, and is yet to receive the amount from the debtor. A drawer of a bill of exchange is also called the maker.
2. Drawee: It is the person who borrows the amount from the drawer and to whom the bill of exchange gets issued in exchange for the amount borrowed. A drawee is also called the acceptor of the bill.
3. Payee: The person that finally receives the amount specified on the bill is called the payee. In cases where the bill of exchange is not endorsed, the drawer of such bill is the payee. However, in the case of endorsement(s), the party that finally receives the amount specified in the bill is called the payee.
Advantages of Bills of Exchange:
- Provides Legal Evidence of Debt: A bill of exchange is a legally recognized document under the Negotiable Instruments Act, 1881 and serves as written proof of debt, which can be enforced in court if payment is not made.
- Ensures Certainty of Payment: It clearly states the exact amount and the due date, ensuring that payment is made at a fixed and definite time.
- Can Be Discounted with a Bank Before Maturity: The holder can obtain immediate cash by discounting the bill with a bank before its due date.
- Facilitates Credit Transactions: It allows the buyer to purchase goods on credit while giving security to the seller for payment.
- Can Be Endorsed and Transferred: Being a negotiable instrument, it can be transferred to another person by endorsement, making it flexible and convenient.