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Contents -
1) Introduction, Necessity, Meaning, Definition, Features of Bill of Exchange.
2) Draft / Format of Bills, Parties to the Bill of Exchange, Acceptance of Bill, Terms of Bill, Days of Grace, Date of Maturity, Due Date, Type of Bill of Exchange.
3) Honorable of Bill, Dishonour of Bill, Noting and Protesting of Bill, Notary Public and Noting Charges.
4) Four possibilities between Acceptance of a Bill and Honouring of a Bill of Exchange.
WHAT IS BILL OF EXCHANGE ?
Introduction -
Exchange of goods or purchasing and selling of goods is an important activity in modern business. This can be done with the help of payment in cash or credit basis. If the buyer purchase goods on cash basis he pays the amount immediately at the time of purchase, but for increasing sales large number of sales are done on credit basis.
WHAT ARE THE NECESSITIES OF BILL OF EXCHANGE ?
Necessity -
When the goods are sold out on credit basis. The seller is a creditor and a buyer is a debtor. The seller is in need of buyers from is for the payment on future date. The bill of exchange server this requirement. In modern business activities, a bill of exchange is becoming very popular and its necessity is increasing due to following reasons :
1) The creditor becomes free from the risks about the recovery of the amount i.e. the debts.
2) The creditor knows the exact date of receiving payment.
3) The debtors gives acknowledgement of debt in the nature of bill of exchange.
4) A bill of exchange can be discounted with the bank and the holder of the bill can receive the amount before the due date.
5) The creditor can transfer this bill to some other person.
Meaning -
Under credit sales, the seller gives goods to the buyer under the assumption that the buyer will make payment on some future date. To fix this date of payment and to make his side legally safe, a document is prepared by the seller.
This document is a written order gives by the seller to the buyer is an acknowledgement of debt therefore it is called a "bill of exchange".
The seller becomes creditor, when some goods are sold to the buyer. the buyer become a debtor after receiving goods on credit from the seller. The buyer owes some fixed amount to the seller.
e.g. Avinash is the seller and Vinod is the buyer. Avinash sell goods of rupees 5000 to Vinod on credit, Vinod owes rs.5000 to Avinash, so in this case Vinod is buyer become debtor, Avinash the seller become creditor.
A bill of exchange is an order given by creditor to the debtor for receiving some consideration in this example Avinash can draw a bill on Vinod for rupees 5000 i.e. the amount of the goods to be received by him.
Definition of Bill of Exchange -
A bill of exchange is a "Credit instrument" or it is a "Negotiable instrument". According to Negotiable Instrument Act 1881. A bill of exchange is defined as follows :
"An instrument in writing containing and unconditional order, signed by the maker, directing a certain person, to pay on demand or at a future date a certain sum of money only, to the order of a certain person, or to the bearer of the instrument."
WHAT ARE THE FEATURES OF BILL OF EXCHANGE ?
Feature of Bill of Exchange :
1) This instrument means and unconditional order.
2) This order is given in writing.
3) The maker of the bill of exchange sign the bill.
4) In the bill, the order is given to a certain person.
5) This order is given for the payment of a specific money.
6) The payment is to be made to a certain person or to the holder of the instrument.
7) The payment is to be made at a specific date for on demand as the case may be.
WHAT IS THE FORMAT OF BILL OF EXCHANGE ?
Draft or Format of a Bill of Exchange :
For preparation of Bill some information is essential for example on 1st January 2010, Rajan Verma 412, M.G. Road Delhi, sells good to Mohan Ranade 211, Panchavati Nashik, worth rupees 3000 on credit for 2 months, then Rajan draws a bill on mohans as follow :
In this bill Rajan has ordered to pay the certain amount after certain date to Mohan.
This order is sent to Mohan, Mohan will accept it sign on it as accepted and send to back to Rajan after the procedures such as document or draft is treated as a bill of exchange.
A draft or an order becomes a bill of exchange when it is signed and accepted by the debtor. before acceptance a bill is called Draft. It is given from creditor to debtor and after signing by debtor returned to the creditor. Such accepted bill has the format as shown below.
Parties to the Bill of Exchange -
1) Drawer -
First person involved in one who draws a bill, he is a creditor, he gives order to another person for payment of debt after specific period or on demand.
Drawer is the person or party who draws a bill of exchange. He is also known as maker of a bill of exchange.
2) Drawee -
Second person involved in the bill of exchange is one on whom the bill is drawn. He is a debtor. He receives an order from the creditor.
Drawee is a person or party on whom the bill of exchange is drawn.
3) Payee -
In some cases third person or third party is also involved in the bill.
e.g. Avinash draws a bill of Rs.5000 on vinod and gives order to pay the amount of bill to Ramesh. In such case Ramesh becomes "Payee". He is a creditor.
The third person involved in the bill as the case may be is known as payee. The payee is the person or the party to whom the bill is made payable, if the bill is made payable to the drawer himself, then the drawer and the payee are one and same person. The payee is the receiver of the amount of the bill.
In short -
1. Drawer - Who draws a bill. He is the maker of a bill.
2. Drawee - On whom the bill is drawn.
3. Payee - To whom the amount of Bill is to be paid.
Acceptance of Bill -
The seller or creditor or drawer draws a bill on the buyer or debtor or drawee. The bill received by drawee is accepted by him. It means he write the words "Accepted" on the bill and puts his signature on it, then this bill is said to be accepted by the drawee and it becomes a bill of exchange in the eyes of law.
When the bill is drawn by drawer and accepted and signed and dated by the drawee, it is known as a acceptance of a bill of exchange. if the bill is accepted, the drawee should pay the amount on the specified date. He is responsible for the payment. If he refuses to sign on the bill, he is not liable for payment and the bill is treated as a rejected bill.
Qualified or Conditional Acceptance -
In some cases the drawee accept the bill with some condition, such condition is written on the bill. It shows that the drawee is ready to pay the bill but with some conditions or changes made by him. Some of the following conditions are generally specified -
a) Condition related to the place -
The drawee accept the bill but put a condition as to the place of payment which is different from the place mention in the bill by the drawer.
e. g. Ram draws a bill on dilip. this bill is payable at Mumbai but Dilip accepts the bill with condition that the bill will be paid at Pune.
b) Condition related to the period of a bill -
The drawee accept the bill by changing the period of the bill mentioned by the drawer.
e.g. Ram draws a bill on dilip for three months but Dilip accepts the bill for the period of 4 months it is the change in condition.
c) Condition related to the party -
The drawee is not ready to pay the amount of the bill to the payee mentioned in the bill. The that bill is known as the bill accepted with condition related to the party.
e.g. Ram draws a bill on dilip to pay the amount to Rajesh but dilip refuse to pay to Rajesh. It is the change in the condition related to party.
d) Condition related to the amount -
The drawee accept the bill after changing the amount payable is the conditional acceptance relating to amount.
e.g. Ram draws a bill on Dilip for rupees 4500/-, dilip accepts the bill for rupees 4000/- only.
Terms of Bill -
As discussed so far the bill of exchange has some conditions this conditions are treated to the party, place, amount and period.
The terms of the bill of exchange means the period or duration for which the bill is drawn for example if the bill is drawn for 60 days for by the drawer the period or term of the bill is 60 days. it is known as the term or period of a bill of exchange.
Days of Grace -
At the time of calculating the due date of a b three extra dry days are added three days should be added to the specific period given in the bill days of grants means 3 extra days allowed by law to the drawee over and above the period of the bill to prepare himself for the payment the due date before adding these three days is called as nominal due date the due date after reading this 3 extra days for example a girls day is called as legal due date
Due Date -
At the end of the period of a bill, the bill Falls due for payment. This date is called as nominal due date after adding 3 extra days the date is known as legal due date. it is also known as the date of maturity for example if a bill is drawn on 1st April 2009 for one month then the bill become due date on 1st May + 3 extra days of grance = 4th may 2009. calculation of due date.
1) If the bill is drawn as "after sight" - then due date = the date of acceptance of a bill + period of a bill + three days of grance.
2) If the bill is drawn as after date - then due date = date of bill drawn + period of a bill + three days of grance.
3) If the bill is drawn as payable some months after date or after sight, then the due date should be calculated in months.
4) If the bill drawn is payable after date or after sight in some days the Due date should be calculated in days.
5) If the bill is drawn as payable "on demand" or "at sight", 3 days of grance are not allowed. the payment of such bill should be done on the date of expiry of the period.
6) If the due date falls on Sunday or any other public holiday the payment of the bill should be made on the immediately preceeding working days for example if a bill for due on 26 January, it must be paid on 25th January. if in any case 25th January is Sunday the payment must be made on 24th January.
7) If a bill is drawn "after side" the period of the bill should be counted from the date on which the bill is presented for acceptance, if the date is presentation is earlier to the date of acceptance, the period of bill should be calculated from the date of presentation.
For calculating of days in the month of February 1 should find whether it is the leap year. in the leap year there are 29 days in the month of February. Otherwise February has 28 days. A leap year is one which is divisible by 4, e.g. 2004, 2008, 2012 etc.
WHAT ARE THE TYPES OF BILL OF EXCHANGE ?
Types of Bill of Exchange -
1) Inland Bill -
Inland bill is one which is drawn in India and made payable in India both the drawer are the drawee are living India, Such bill is known as inland bill for example, bill of exchange drawn by a trader in Mumbai upon another trader in Delhi made payable in India.
In the case, the bill is drawn by the drawer living in India, on a resident of India but the place of payment is outside India such bill also known as an inland bill. for example, a bill of exchange drawn by a trader in Pune Upon A trader in Nagpur and payble in London is also an inland bill of exchange.
2) Foreign Bill -
Foreign bill is one which is drawn in one country and made payable is some other country. a bill which is drawn by resident at one country upon the person who is resident of a foreign country is known as a foreign bill of exchange.
For example, A bill of exchange drawn by a businessman in Mumbai upon another Businessman who is a resident of New York is a foreign bill of exchange.
Foreign bills are generally drawn in a set of three, because if one bill is lost the second or third copy of it may be used. Each bill in the set includes a reference to the other and only one path must be accepted when one of of these is being paid, the others become of no use.
Honouring of Bill of Exchange -
If on due date of a bill the drawee or an acceptor makes full payment to its drawer or holder the bill is said to be honoured.
For example, Mahesh draws a bill, on Rahul on 1st January 2009, for two months worth rupees 3500/- Rahul accepts the bill and he gives the amount on due date i.g. on 4th March 2009, the bill is said to be honoured by the drawee.
Dishonoured of Bill of Exchange -
If drawee fails to pay or refuses to pay the amount of a bill on its due date the bill is said to be dishonoured.
For example, Mahesh draws a bill on Rahul on 1st January 2009, for 2 months worth rupees 3500/- Rahul accept the bill, but on due date i.g. on 4th March 2009, he shows his unability to pay the amount or refuses to pay then the bill is treated as dishonored.
Noting and Protesting of Bill of Exchange -
When the bill is dishonoured the holder of the bill has a right to take action against the drawee. For getting legal proof of dishonoured Bill, the holder gives this bill to 'Notary Public'.
Notary Public and Noting Charges -
Notary Public -
Notary public is a person appointed by the government for these specific purpose. He presents the bill again to the drawee, if it is again dishonoured by the drawee, the notary public notes on the bill the particular about dishonouring. He records the date the actual fact of dishonour, the reason of dishonouring. The charges of notary public and the reference of his register is also recorded with his signature on the bill. Such note made by notary public is known as a Noting of a bill.
Protesting of a bill of exchange -
Notary gives a certificate of dishonouring of a bill of exchange. This certificate is known as Protest.
Protest is a certified copy of the note made by notary public in the register maintained for the specific purpose.
A protest is a legal proof, recognised by the court, about dishonouring of a bill. It should be made within a reasonable time after dishonour. Such noting of dishonour of a bill is not compulsory in case of Inland bills but it is compulsory in case of foreign bills.
Noting charges -
Notary public present the bill to the drawee and if it is dishonoured, he records the fact of dishonour with its reasons. Then the returns it to the holder. For this service, small fee or charges are paid to notary public.
These charges are known as noting charges.
Such charges are paid by the holder but it should be recovered from the person who is responsible for the dishonour. It should be recovered from the acceptor of a bill.
Following are four possibilities between Acceptance of a Bill and Honouring of a Bill of Exchange :
1) The accepted bill is retained by the drawer with him till due date.
2) The accepted bill is endorsed to endorsee by the drawer.
3) The accepted bill is discounted with the bank by the drawer.
4) The accepted bill is sent to bank for collection by the drawer.
The accounting treatment as these four possibilities under -
Retaining of the Bill of Exchange -
If drawer is not in hurry to get the money, he can keep the bill with him till due date and on that date he can collect money from the drawee. This is known as retaining of a bill.
Endorsement of Bill of Exchange -
To endorse means to transfer. The main purpose of the endorsement is to transfer the title of the document to some other person. A bill of exchange can be endorsed by signing on its back by the maker.
When the owner or a maker of bill of exchange sign on its back, this act of signing is called an endorsement and the bill is said to be in Endorsed.
Endorser - The person who is signing on the back of the bill transfer is called as an endorser.
Endorsee - The person to whom the bill is endorsed is called as an endorsee.
Bill of Exchange Discounted with the Bank by the Drawer -
If the drawer is in need of money earlier than the due date, he can discount the bill with his bank the bank credit the amount of holder. Small part of the total amount is taken by bank on account of discount for early payment before due date. Ownership of bill is transferred to bank. This procedure known as discounting of bill of exchange with bank
Bill sent to Bank for Collection -
When the drawer has no time to spend for collecting various bills, he may sent Such bill to his bankers, for collecting the amount on his behalf. The bank acts as an agent for the drawer. the bank collects the amount of the bill on respective due dates from various drawees on behalf of the drawer. The proceeds so collected by credited to the account of drawer. For providing the service, Bank take some charges from the drawer. The difference between discounting of bill with bank and bill sent to bank for collection is as follows :
Discounting a bill of exchange -
In this case the drawer gives the accepted bill to bank. The total amount of Bill less discount to the bank on the date of discounting the bill. The drawer receives the amount of bill on the date of discounting at the bill. The bank pays to the drawer the amount of the people out of its own funds. It is a sort of loan / advance given by bank on the security of the bill. Hence, holdership transferred to bank.
Bill send to bank for collection -
In this case also the drawer gives the accepted bill to bank but the bank collect the amount of the bill from the drawee on due date of a bill and gives it to the drawer. The drawer receives the amount of bill on due date of a bill. The bank pays the amount only after collecting the same from drawee. Holdership of bill remains with drawer only.