Chapter 8: Bills of Exchange

1. Promissory Notes

2. Cheques

The following four features are considered essential for a bill of exchange:

1. A bill of exchange must be in writing

2. A bill of exchange should contain an unconditional order to pay.

3. Drawer of the bill must sign the bill.

4. The amount and the expiry date should be mentioned specifically in the bill of exchange.

A bill of exchange involves three parties, and they are the following:

1. Drawer/Maker/Holder – Responsible for issuing the bill

2. Payee/Holder – The person who will receive the payment

3. Drawee/Acceptor – One who has to accept the bill

The date when the bill is ready for payment is called the maturity of a bill. The date of maturity is arrived at after adding 3 days of grace to the due date as per the terms of the bill. The concept of the due date will further help you understand the maturity of a bill. It consists of the following terms:

1. Bill at Sight: This type of bill is due as and when it is presented.

2. Bill after Sight: In this type of bill, the due date is calculated from the date the debtor accepts the bill plus the period as per the terms of the bill. The maturity date is calculated by adding 3 days to the due date.

3. Bill after Date: In this type of bill, the due date is calculated from the date on which the bill is drawn plus the period as per the terms of the bill. The maturity date is calculated by adding 3 days to the due date.

Exceptions to maturity of the bill: If the due date of the bill falls on a national holiday (like Independence Day) or on a Sunday, the bill due date is counted one day prior to the original date, and if the due date falls on an emergency holiday (like a nationwide strike), the bill due date is counted one day later.

The situation when the drawee of the bill of exchange is unable to process the payment as per the maturity date of the bill is known as dishonour of the bill of exchange. With this, the liability of the acceptor is re-established, and he/she becomes a debtor again. To reflect the changes, the receipt of the bill of exchange should be reversed.

Two parties are involved in a promissory note:

1. Maker/Drawer, Also known as promisor, is the one who is the maker of the note and is the one responsible for paying the sum as mentioned on the promissory note.

2. Promisee or Payee is the one who will be receiving the payment.

A bill of exchange drawn by a creditor upon a debtor involves an unconditional order to pay in writing, but the same must be accepted by the debtor or someone on his/her behalf in order to make the debtor liable to pay. It is a draft before acceptance by the debtor. So once the debtor has written the term “accepted” and signed the document, it is then known as a bill of exchange, and this process is called acceptance of a bill of exchange.

A bill of exchange is said to be dishonoured when the drawee is unable to make the payment upon presenting the bill by the drawer. To retain legal evidence of the dishonoured bill, the notary public needs to record it. The charges levied by the notary public for recording the failed transaction are called noting charges, and the process of recording is referred to as noting.

A bill of exchange is said to be renewed when the debtor/acceptor has insufficient funds to pay the drawer and hence requests for a time extension in order to make payment. A new bill of exchange is drawn on being agreed upon by the drawer of the bill. This process is called the renewal of the bill of exchange. The bill gets renewed only if the drawee agrees to pay a certain rate of interest as decided for the period of extension.