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What is Bill of Exchange?

Bill of exchange is similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. According to the Negotiable Instruments Act 1881, a bill of exchange is defined as “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 the bearer of the instrument”.

A Bill of Exchange is a negotiable instrument which is a legally binding document containing an order to pay a certain sum of money to a person within a pre-determined time frame or on demand by the bearer of the instrument. There are 3 parties involved in the bill of exchange, they are:

  1. Drawer: The drawer is the person who issues the instrument to receive a payment.
  2. Drawee: Drawee is the person who needs to pay the amount to the drawer.
  3. Payee: Payee is the person who receives the payment. In most cases, the drawer and the payee are the same individuals unless it is transferred to the third-party payee by the drawer.

Features of Bill of Exchange

  • It is important to have a bill of exchange in writing
  • It must contain a confirmed order to make a payment and not just the request
  • The order should not have any condition
  • The bill of exchange amount should be definite
  • Fixed date for the amount to be paid
  • The bill must be signed by both the drawee and the drawer
  • The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
  • The amount is paid to the beneficiary of the bill, a specific person, or against a definite order

Types of Bill of Exchange

  • Documentary Bill: In this, the bill of exchange is supported by the relevant documents that confirm the genuineness of the sale or transaction that took place between the seller and buyer.
  • Demand Bill: This bill is payable when it is demanded. The bill does not have a fixed date of payment, therefore, the bill has to be cleared whenever presented.
  • Usance Bill: It is a time-bound bill which means the payment has to be made within the given period and time.
  • Inland Bill: An Inland bill is payable only in one country and not in any other foreign country. This bill is the opposite of the foreign bill.
  • Clean Bill: This bill does not have any proof of a document, so the interest is comparatively higher than the other bills.
  • Foreign Bill: It is a type of Bill of Exchange where the charges to be paid are outside India. Whichever bill is not Inland is the Foreign bill. Foreign bills are further divided into Export bills and Import Bills.
  • Accommodation Bill: If a bill is accepted or drawn without any conditions involved is termed an accommodation bill.
  • Trade Bill: A type of Bill that is drawn for the purpose of a trade order transaction is termed a trade bill. These bills are common in the case of international trading.
  • Supply Bill: The bill that is withdrawn by the supplier or contractor from the government department is known as the supply bill.
  • Hundis: Hundis is the type of bills that are used for agricultural financing and inland trade and are indigenous in nature.

Difference Between Bill of Exchange and Promissory Note
A bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within a given period. The promissory note, on the other hand, is issued by the debtor and is a promise to pay a particular amount of money in a given period.
Bill of Exchange