Meaning of Bill of Exchange:
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 to the bearer of the instrument.
Features of a bill of exchange:
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
Mohit solds goods to Rohit on credit for Rs. 10,000 for three months. To ensure payment on due date Amit draws a bill of exchange upon Rohit for Rs. 10,000 payable after three months. Before it is accepted by Rohit it will be called a draft. It will become a bill of exchange only when Rohit writes the word “accepted” on it and append his signature thereto communicate his acceptance.
Parties to a Bill of Exchange:
1. Drawer is the maker of the bill of exchange.
2. Drawee is the person upon whom the bill of exchange is drawn.
3. Payee is the person to whom the payment is to be made.
Advantages of Bill of Exchange:
The advantages of Bill of Exchange are:
(i) Purchase and Sale of Goods on Credit: Goods can be sold and purchased on credit without difficulty with the Bill of Exchange as it is an unconditional promise to pay.
(ii) Discounting Facility: Bills of Exchange can be discounted with a bank so that the enterprise allowing the credit can receive the amount immediately without the debtor having to pay before time.
(iii) Easy to Recover the Amount: If a Bill of Exchange is dishonoured, it is easier to recover the amount legally than in the case of an ordinary debt.
(iv) Endorsement: A Bill of Exchange can be endorsed to other parties; thus it serves almost the same purpose as cash.
(v) Certainty as to Payment: Date of payment being certain; the enterprise which has to pay and that which has to receive the amount can thus plan cash management.
(vi) No Reminder to Debtor: The recovery of the debt is possible without having to remind the debtor.
(vii) Convenient Mean of Trade Remittance: Bill of Exchange is a convenient mean of making and receiving payment as the amount is transacted through bank.
(viii) Valid Evidence of Debt: Bill of Exchange is a written acknowledgement of debt duly signed and stamped. It is a legal document under the Negotiable Instruments Act, 1881.
Meaning of Promissory Note:
A promissory note is defined as an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.
Features of a Promissory Note:
• It must be in writing.
• It must contain an unconditional promise to pay.
• The sum payable must be certain.
• It must be signed by the maker.
• The maker must sign it.
• It must be payable to a certain person.
• It should be properly stamped.
Parties to a Promissory Note:
There are two parties to a promissory note:
1. Maker or Drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note.
2. Drawee or Payee is the person in whose favour the promissory note is drawn.
Basic differences between Bill of Exchange and Promissory Note:
|S.No.||Basis||Bill of Exchange||Promissory Note|
|1||Drawer||It is drawn by the creditor.||It is drawn by the debtor.|
|2||Order or Promise||It contains an order to make the payment.||It contains a promise to make the payment.|
|3||Parties||There can beparties to it, viz. the drawer the drawee and the payee.||There are only two parties to it, viz. the drawer and the payee.|
|4||Acceptance||It requires acceptance by drawee or someone else on his behalf.||It does not require any acceptance.|
|5||Payee||Drawer and payee can be the same party.||Drawer cannot be the payee of it.|
|6||Notice||In case of its dishonour due notice of dishonour is to be given by the holder to the drawer.||No notice needs to be given in case of its dishonour.|
• Maturity of Bill:
The term maturity refers the date on which a bill of exchange or a promissory note becomes due for payment.
In arriving at the maturity date three days, known as days of grace, must be added to the date on which the period of credit expires instrument is payable.
In case of a gazetted holiday i.e. 15th august, 2nd October, 26th January, a day prior to the date of maturity is considered to be due for payment In case of a emergency holiday the next day will be considered to be due for payment.
• Bill at Sight or Demand:
Bill at sight (or instruments payable on demand) means the instruments in which no time for payment is mentioned. A cheque is always payable on demand. A bill of exchange or a promissory note is payable on demand when no time for payment is specified or it is expressed to be payable on demand.
• Bill after date:
Where a bill is payable at a fixed period ‘after date’ the period begins from the date of drawing of the bill.
Three days of grace are allowed on such a bill For ex- a bill is drawn on 1st jan for 2 months but is accepted on 15jan even then the due date will be 4th march in the case of bill after date.
• Bill after sight:
Where a bill is payable ‘after sight’ the period begins from the date of accepting of the bill.
Three days of grace are allowed on such a bill For ex- a bill is drawn on 1st jan for 2 months but is accepted on 15jan and the bill is after sight in this case the due date will be 18jan and it will calculated from 18jan.