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.
Parties to bills of exchange
The following are parties to a bill of exchange:
(a) The Drawer: the person who draws the bill.
(b) The Drawee: the person on whom the bill is drawn.
(c)The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a stranger may accept it on behalf of the drawee.
(d) The payee: one to whom the sum stated in the bill is payable, either the draweror any other person may be the payee.
(e) The holder: is either the original payee or any other person to whom, the payee has endorsed the bill. In case of a bearer bill, the bearer is the holder.
(f) The endorser: when the holder endorses the bill to anyone else he becomes the endorser.
(g) The endorsee: is the person to whom the bill is endorsed.
(h) Drawee in case of need: Besides the above parties. another person called the “drawee in case of need”, may be introduced at the option of the drawer.
Essentials of a Bill of Exchange
(1) It must be in writing.
(2) It must contain an unconditional order to pay money only and not merely a request
(3) It must be signed by the drawer.
(4) The parties must be certain.
(5) The sum payable must also be certain.
(6) It must comply with other formalities e.g. stamps, date,etc.
Types of Bills of exchange
(1) Demand Bill – A bill of exchange that is payable on demand or at sight or when presented is a demand bill. In a demand bill the time of payment and due date is not specified and hence it can made payable on presentment.
(2) Usance Bill – A bill which specifies the time period for the payment is a usance bill. It is also known as a time bill.
(3) Documentary bills – It is a bill which is accompanied by documents confirming genuineness of trade transaction that took place between the buyer and seller. These documents include invoices, railway receipts, lorry receipts, bills of ladding etc. They may be further classified into :
D/A (Documents against acceptance) Bills – If the documents are delivered to the drawee against acceptance of a bill, it is a D/A bill. The bill become a clean bill after delivery of documents
D/P (Documents against payment) Bills – If the documents are delivered to drawee against payment of the bill, it is a D/P bill. After delivery the documents are held by drawee’s banker till the maturity of the bill.
(4) Clean bills – A clean bill does not accompany any documents of proof. The interest rate charged on clean bills is usually higher than documentary bills
(5) Inland Bills – It is a bill of exchange that is drawn in India and payable in India or a bill drawn on an Indian resident, either payable in India or any other country.