A Bill of Exchange is one of the primary negotiable instruments used in trade and commerce, facilitating credit transactions and promoting liquidity. It plays a vital role in international and domestic trade by ensuring payment certainty between parties.
What is a Bill of Exchange?
Legal Definition (Section 5, 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.”
Essential Features of a Bill of Exchange
- Written Instrument: It must be in writing.
- Unconditional Order: Must contain an unconditional order to pay.
- Signature of Drawer: Must be signed by the person who issues it (the drawer).
- Three Parties: Involves a drawer, a drawee, and a payee.
- Specific Sum of Money: The amount must be certain and clearly mentioned.
- Payable on Demand or at Fixed Time: It can be payable either on demand or after a specific time.
- Transferable: It is a negotiable instrument, meaning it can be endorsed and transferred.
Legal Provisions Under Indian Law
- Section 5, Negotiable Instruments Act, 1881 – Defines the Bill of Exchange.
- Section 32 – Drawee’s liability.
- Section 35 – Endorser’s liability.
- Section 118 – Presumptions regarding negotiable instruments.
- Indian Stamp Act, 1899 – Applicable for the proper stamping of the instrument.
Parties to a Bill of Exchange
| Role | Description |
|---|---|
| Drawer | The person who makes and signs the bill (creditor). |
| Drawee | The person who is ordered to pay (debtor). |
| Payee | The person who receives the payment. This may or may not be the drawer. |
Types of Bills of Exchange
- Demand Bill: Payable on demand.
- Time Bill: Payable after a specific period.
- Trade Bill: Drawn for trade transactions between buyers and sellers.
- Accommodation Bill: Drawn without any underlying transaction, often for credit arrangements.
- Inland Bill: Drawn and payable within India.
- Foreign Bill: Either drawn or payable outside India.
Format of a Bill of Exchange
textCopyEditDate: [DD/MM/YYYY]
Three months after date, pay to [Payee’s Name], or order, the sum of [Amount in Words] only for value received.
To
[Name of Drawee]
[Address]
(Signature)
[Name of Drawer]
Key Case Laws
K. B. Nagur v. Union of India (AIR 2009 SC 1333)
- Reiterated that the bill must be in writing and contain an unconditional order to pay a specified sum.
Kundan Lal Rallaram v. Custodian, Evacuee Property (AIR 1961 SC 1316)
- Held that bills of exchange are presumed to have been made for consideration unless proven otherwise.
Bill of Exchange vs Promissory Note
| Feature | Bill of Exchange | Promissory Note |
|---|---|---|
| Number of Parties | Three (Drawer, Drawee, Payee) | Two (Maker and Payee) |
| Type of Instrument | Order to pay | Promise to pay |
| Liability | Primary liability on drawee | Primary liability on maker |
| Drawn By | Creditor | Debtor |
Advantages of Bill of Exchange
- Acts as a written confirmation of debt.
- Facilitates trade and credit transactions.
- Negotiable and easily transferable.
- Legally enforceable in case of non-payment.
Limitations
- Requires formal acceptance and stamping.
- May lead to dishonor if not paid on time.
- Legal proceedings may be required to enforce it.