1. Meaning and Definition
A Bill of Exchange is a legally binding written document directing a person to pay a specific sum of money to the bearer or to a specified person at a determined future date or on demand.
According to the Negotiable Instruments Act, 1881, it is defined as: "An instrument in writing containing 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."
2. Parties to a Bill of Exchange
- Drawer: The maker of the bill who orders the payment to be made (Usually the seller/creditor).
- Drawee/Acceptor: The person upon whom the bill is drawn and who is directed to pay the amount (Usually the buyer/debtor). The bill becomes a legal document only after the drawee 'accepts' it by signing across its face.
- Payee: The person to whom the payment is to be made. The drawer and the payee can be the same person.
3. Promissory Note
A Promissory Note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking (promise) signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person.
- Parties: Maker (debtor) and Payee (creditor).
- Difference: A bill contains an 'order' to pay, while a promissory note contains a 'promise' to pay.
4. Important Terms
- Term of a Bill: The period intervening between the date on which a bill is drawn and the date on which it becomes due for payment.
- Days of Grace: Three extra days added to the period of the bill to arrive at the due date.
- Date of Maturity (Due Date): The date which comes after adding three days of grace to the term of the bill. (If the due date falls on a public holiday, the due date is the preceding business day. If it's an emergency holiday, it's the succeeding business day).
- Discounting of a Bill: Encashing the bill from a bank before its due date. The bank deducts a small charge (discount).
- Endorsement of a Bill: Transferring the bill to a third party (a creditor of the drawer) in settlement of a debt.
- Bill Sent for Collection: Sending the bill to the bank merely for the purpose of collecting the amount on the due date. The bank acts as an agent.
5. Dishonour of a Bill
When the drawee fails to make the payment on the date of maturity, the bill is said to be dishonoured.
- Noting Charges: To have legal proof of dishonour, the bill is handed over to a 'Notary Public' who notes down the fact of dishonour. The fee charged by the Notary Public is called noting charges. These charges are initially paid by the holder of the bill but are ultimately borne by the drawee.
6. Renewal and Retirement of a Bill
- Renewal: When the acceptor is unable to pay on the due date, they may request the drawer to cancel the old bill and draw a new one, usually with interest added for the extended period.
- Retirement: When the drawee pays the bill before the due date, it is called retiring the bill under rebate. A rebate (discount) is allowed by the drawer to the drawee for early payment.