BILL OF EXCHANGE-Meaning and essential

 BILL OF EXCHANGE (Section 5) 

Section 5 defines a bill of exchange as follows;

"A Bill of Exchange is 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."

The bill of exchange is used when : 

- when a creditor sells goods on credit to his debtor or there exists a debt between them;

- the debtor agrees to make payment for goods on a future date after the expiry of the credit period;

- the creditor to ensure that the debtor shall pay for the goods;

- draws a bill, which is called as a bill of exchange;

- the creditor draws the bill, so he is called as drawer;

- the debtor is known as drawee;

- when the bill is drawn, the drawer (creditor) takes the bill to the drawee and gets his signature on it;

- when the drawee signs the bill, the bill is said to have been accepted; 

- once the bill is accepted, the due date is calculated from the date of acceptance 

Due Date = Date of acceptance + Time allowed + 3 Days of grace

on the due date (or maturity date), the drawer takes the bill to the drawee and demands payment, this is called as bill presented for payment.

If the drawee pays on the due date, the bill is cancelled.

If the drawee does not pay on due date, the bill gets dishonoured. 

EXAMPLES OF A BILL OF EXCHANGE

(a) B/E payable on demand

"Pay to R or Bearer/Order a sum of rupees ninety thousand only on demand." 

-Such a B/E is payable when ever R demands payment.

(b) B/E Payable on a future date

"Pay to R or Bearer/Order 15,000 only after three months" "The bill was accepted on 1 January 2015.

-Such a B/E is payable on due date

Due Date = 1" January (Date of Acceptance) + Three Months +3 Days of grace

Due Date = 4th April, 2015 

(c) B/E payable after sight

"Two months after sight, pay to R or Bearer/Order 25,000 only" The bill was accepted on 1 March 2015. -

-B/E payable after sight means after acceptance

Due Date = Date of Acceptance + Time allowed +3 Grace Days

=1" March 2015+2 Months +3 Days

=4th May, 2015

(d) Time bill of exchange 

A bill of exchange which is not payable on demand is known as time bill exchange. 

ESSENTIALS OF A BILL OF EXCHANGE

(1) Bill exchange is a Negotiable instrument  

A bill exchange is freely transferable i.e. negotiable therefore is called as a negotiable instrument. A bill of exchange is freely transferable any number of times before its due date. In other words, it must satisfy all the essentials of a negotiable instrument.

(2) In writing 

Every negotiable instrument has to be in writing. That is, therefore, it is one of the essential requirements of a bill of exchange according to Section 4. Writing includes printing or typing. 

(3) Is an order 

Unlike a promissory note, a bill of exchange is not a promise to pay but an order whereby the drawer orders the drawee to pay.

In a bill of exchange one person makes an order to another person to pay a certain sum of money to someone. A bill of exchange is different from a promissory note in so far as in a promissory note there is a promise made by the maker of a promissory note to pay a certain sum of money whereas in a bill of exchange there is an order to pay. 

But if the language of the draft does not show "an order to pay", the draft will not be bill of exchange :

For Example: 

Little v. Slackford (1882)

'Mr. Little, Please let the bearer have seven pounds and oblige. Yours humble servant, R. Slackford'

 In this case, it was held that this paper is not a demand made by a party ordering the other to pay. The fair meaning is that the party shall oblige by doing it. 

(4) Is an unconditional Order 

The order to pay should be unconditional. The word "unconditional" has already been explained in connection with a "promissory note" and the same considerations apply here.

(5) Must be signed by the drawer  

The drawer who draws the bill, must sign it. 

(6) Must be Accepted by the drawee

Unless the bill is accepted by the drawee, it is not a legal document in the eyes of the law.

Acceptance by the drawee is must in a bill of exchange. If the draweee has accepted the bill of exchange by writing the word "accepted" and then signing it, it would indicate that the drawee accepts or agrees to pay the amount on the date of its maturity. After the drawee has accepted the bill of exchange he is known as the "acceptor" of the bill of exchange.

It is only on acceptance: [IMPORTANCE OF ACCEPTANCE] 

(i) the drawee is called as "acceptor" of B/E U/S 7.

(ii) The due date is calculated from the date of acceptance. 

Due Date = Date of Acceptance (+) Credit Period Allowed (+) 3 Days of Grace

(iii) A bill of exchange payable after sight-means after acceptance.

(7) Parties of a bill of exchange 

Drawer- The one who draws the bill. 

Drawee- The one on whom bill is drawn. When drawee accepts the bill, he is called acceptor. 

Payee- Payee is the one who is entitled to receive the payment on the bill exchange 

(i) generally the drawer is the payee
(ii) but if the bill has been endorsed, then the party who has the custody of the bill i.e. endorsee is the payee.

(8) Bill of exchange payable on demand 

Like a promissory note, a bill of exchange can also be payable on demand. When a bill of exchange is payable on demand, the drawee has to pay the bill amount when ever the drawer demands the payment. The instruments payable on demand are meant for immediate payment, therefore no question arises for their maturity.

The following bill of exchanges are payable on demand 

(i) A Bill of exchange in which no time for payment is specified. (U/S 19)

(ii) A Bill of exchange payable at sight (U/S 21)

(iii) A Bill of exchange payable on presentment (U/S 21) 

(9) Bill of Exchange payable otherwise than on demand 

A bill of exchange can be expressed to be payable otherwise than on demand. Examples of such instruments are- 

(i) When it is made on one date but is expressed to be payable on some other future date. For example, a bill of exchange drawn on 1st January could be expressed to be payable on 1st April.

(ii) When the payment is to be made at certain period after date, for example, a bill of exchange drawn on 1st January could be expressed to be payable "Two months after date". It means that the drawer wants the payment of such a bill to be made Awo months after the date of its issue.

(iii) U/S 21 When the payment is to be made at certain period after sight. The expression "after sight" in a bill of exchange means after acceptance. Thus, if a promissory note payable "Two months after sight" is issued on 1st January and is presented for sight on 10th January, it is expressed to be payable two months after 10th January. 

(10) Maturity of a Bill of Exchange 

The maturity date of a bill of exchange is determined depending whether the bill was payable on demand or otherwise than on demand.