Nobody is interested to sell the goods or extended it services to customers on credit. But many retail traders sell goods and services on credit to increase their sales and profit. But in future, buyer may deny the payment for goods he purchased from the seller. So to ensure the payment seller draws a bill of exchange on buyer who want to purchase goods with no money. Buyer accept the bill of exchange drawn on him at a future date for the value of goods he purchased. Thus buyer enter into a legal binding / agreement to pay the money at a future date, for value received.
What is Bill of Exchange : Definition
As Per Negotiable Instrument Act 1881, Bill of Exchange is a negotiable instrument containing an unconditional order in writing signed by maker (creditor/drawer) directing a another person (debtor/drawee) to pay a fixed amount of money only to or to the order of, a certain person or to the bearer of the instrument. BoE is primarily used in International Trade.
Features of Bill of Exchange
♦ It is unconditional order to make payment
♦ It must be in writing
♦ It should be signed by the Maker of the Bill
♦ Amount should be specified or certain
♦ The date of payment should be specified on Bill.
♦ It should be payable to specific person.
♦ Amount in Bill is payable either on demand or on expiry of a fixed period of time.
♦ It must be stamped as per law.
Parties to Bill of Exchange
- Drawer: The person who makes the bill, or who gives the order to pay a certain sum of money, is the drawer of the instrument.
- Drawee: The person who accepts the bill of exchange, or who is directed to pay a certain sum, is called drawee.
- Payee: The person receiving payment is called the payee, who can be a designated person or the drawer himself.
Now, apart from the parties mentioned above, there are some other parties to a bill of exchange, described as under:
- Drawee, in case of need: If in any bill of exchange, a person’s name is mentioned in addition to the original drawee, who can be resorted for payment. Then, that person will be called as drawee.
- Holder: The holder of the bill of exchange, is the person who possesses the bill and who has the right to recover the amount from the parties.
- Acceptor: The person who accepts the bill is called acceptor. Usually, a debtor or drawee is the acceptor. However, it can be accepted by some other person also, on behalf of the debtor/drawee.
- Endorser: If the holder of the bill, endorses it to another person, then the person will be called as the endorser.
- Endorsee: The person to whom the bill of exchange is endorsed, is called as an endorsee.
How does a Bill of Exchange Works ?
Suppose Mr. Ram wants to purchase some electronics item from Manufacturer (Mr. Sham), but he has no money.
Manufacturer (Mr. Sham) agrees to sell the items to Mr. Ram on 60 days credit worth ₹50,000/-.
To ensure the payment on due date, Manufacturer (drawer) draws a bill of exchange for ₹ 50,000/- on Mr. Ram (drawee).
Before it is accepted by Ram it will be called draft. It will become a bill of exchange when it is accepted by Ram and sign it by writing the word ‘Accepted’.
It becomes Bill of Exchange Receivable for Mr. Sham and Bill of Exchange Payable for Mr. Ram.
Drawer keeps the Bill till due date and present it on due date before drawee and receive payment. It is known as realization of Bill.
