A bill of exchange is a Negotiable Instrument which comes under the Negotiable Instrument Act 1881. It is the most important Instrument under the Negotiation Instrument Act. Bills of exchange are widely used for domestic and international trade. In this blog we will discuss the concept of Bills of exchange and how this instrument is being used in 21st century.
Definition of Bills of Exchange
According to Section 5 of the Negotiable Instruments Act, 1881, 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.
In simple words, bills of exchange are an alternate for currency per se, wherein the negotiable instrument is given, and in return, the seller gives the goods and any services. The seller will agree to buyer that he will pay the amount mentioned in the bill of exchange in a certain period of time.
Example- A party sells goods worth Rs 1 lakh to B who is a buyer of the goods. So, Party A draws a bill of exchange in favour of B.
Parties for bill of exchange
There are three parties involved in the bills of exchange:
- Drawer- The person who makes the bills and orders payment to the Drawee
- Drawee – The person to whom the bill is drawn and ordered to pay
- Payee – The person in whose favour payment is made
Features of the Bills of Exchange
- It must be a document in writing
A Bill of Exchange must be a document in written form while accepting the order. Without writing, the order is invalid. It cannot be recognised in the oral form because it would not be a tangible proof.
- Dishonour of Bills of Exchange
The bills of exchange are dishonoured when the drawee has not accepted the bill or when the drawee accepts the bill but lacks the sufficient money for the payment.
- Signature of Drawer
Without the drawer’s signature, the Bill of Exchange is invalid.
- Unconditional order
To become a valid bill of exchange, there should not be any conditional order in the said bill of exchange. The order should be unconditional. If it unconditional, it becomes invalid.
Example- If a person buys goods from a seller and states that after selling his goods he will accepts bills of exchange then it becomes conditional order and thus invalid.
- Parties in Bill of Exchange
There should be three parties in the Bills of Exchange – drawer, drawee and payee. If a bill of exchange is drawn but it is not clear in whose favour the same is drawn, the same loses its validity.
- Specified payment on time
The payment of order should be specified on time. It means a fixed date has been decide to make the payment of order through the said bill of exchange.
- Payment in legal tender
The payment of bills of exchange should made in the legal terms of money, for example, dollar, rupees etc. It not accepted in terms of the exchange of the goods (barter system).
Types of Bills Of exchange
- Inland Bills of Exchange
The inland bills of exchange mean the ones drawn and payable in India or drawn outside but payable within the India.
Example-Mr. Arjun (Delhi) draws a bill on Mr. Rohan (Mumbai), payable after 90 days. This is an inland bill since both parties and payment are within India.
- Foreign Bills of exchange
The bill of exchange either drawn or payable outside India is called foreign bills of exchange. This requires a foreign stamp and may be governed by the International Trade laws.
- Demand bill
The demand bill refers to the bill that is paid on demand. This bill does not have a specific time and date. It is paid whenever the bill is presented.
- Supply bill
The bill that is drawn for supply of goods to any government department by any supplier or contractor is known as a supply bill.
Dishonour of Bills of exchange
Section 30 of the NI Act obliges the drawer of a bill of exchange to compensate the drawee in case of dishonour. The bill of exchange may be dishonoured in case of non-acceptance or non-payment. The law further states about presentment of the bill of exchange at specific place or as specified. Contravention of the presentment requirement may constitute dishonour of bill of exchange. In case of dishonour of cheque under Section 138 of the NI Act, the drawer may be punished with imprisonment upto 2 years or with fine twice the amount involved in such cheque.
Procedure after dishonour of Bills of Exchange
Notification of Non-Payment (Sections 93–94):
The holder is required to provide a written notice to the drawer and endorsers in a timely manner in case of dishonour of bill of exchange. The legal notice for cheque bounce holds a lot of importance since the same decides further course of action before the Court.
Submitting a Complaint:
If the drawer does not pay amount involved in cheque within 15 days of receiving the notice, the payee may lodge a criminal complaint with the Magistrate as per Section 138 in conjunction with Section 142.
Judicial Proceedings:
Since cheque dishonour results in criminal proceedings, the Magistrate has the authority to call the accused, carry out the trial, and impose penalties according to the law.
Conclusion
A Bill of Exchange comes under the Negotiable Instruments Act, 1881. It is an important financial instrument which facilitates structure for the Domestic and International trade. It also provides the legal framework where seller receives the payment and buyer gets credit period to settle his dues.
However, their validity depends on certain conditions—like being in writing, carrying an unconditional payment order, and having a specified payment date.
Bills of exchange make transaction smoother for the businesses, but if any one fails to pay the amount, it may also attract penalties like imprisonment and fine. despite these challenges, they remain a fundamental tool in modern commerce, ensuring trust and stability in financial dealings.
