Bill of Exchange: Meaning, Essentials, and Parties

A Bill of Exchange is one of the oldest and most popular negotiable instruments used in commercial transactions in India and across the world. It plays a significant role in facilitating credit transactions and ensuring smooth business operations between buyers and sellers. In the modern financial system, where credit sales and deferred payments are a common practice, the bill of exchange operates as a formal legal document that secures payment and reduces the risk of non-payment.

The Negotiable Instruments Act, 1881 (NI Act) provides the statutory framework governing bills of exchange, promissory notes and cheques. Among these, the bill of exchange occupies an important place due to its dual nature — it acts both as a negotiable instrument and as a contract of payment. 

Meaning of a Bill of Exchange

Section 5 of the Negotiable Instruments Act, 1881, defines a Bill of Exchange as:

“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.”

From this definition, it is clear that a bill of exchange is a written order to pay money, not merely a request or promise. It is primarily used in trade to ensure that payment is made on a specified future date for goods delivered or services rendered.

Sukhjinder Singh v. Buta Singh, CRM-M-30633-2019 (O&M):

Punjab & Haryana High Court held that once the accused admits his signatures on a cheque, it is immaterial who filled in its contents, as under Sections 5 and 6 of the NI Act a cheque is only a bill of exchange and its validity depends on the drawer’s signature, not handwriting.

Since the accused had already availed revision, a second challenge under Section 482 CrPC was barred, and handwriting comparison would not rebut the presumption under Section 138.

Essentials of a Valid Bill of Exchange

For a bill of exchange to be valid under the NI Act, it must possess the following essential elements:

1. It Must Be in Writing: No oral bill is recognised. The entire instrument, including the terms of payment, must be written and capable of being produced in evidence.
2. It Must Contain an Unconditional Order to Pay: The order cannot be subject to any condition. Words like request, hope or wish are not permissible; the tone must be mandatory.
3. It Must Be Signed by the Drawer: The validity of the instrument depends on the drawer’s signature. Without it, the document has no legal value.
4. There Must Be Three Parties: Unlike a promissory note (which has two parties), a bill involves: Drawer, Drawee and Payee.
5. The Drawee Must Be Certain: The person ordered to pay must be identifiable. A bill addressed vaguely to “the manager” without naming the manager is insufficient.
6. Sum of Money Must Be Certain: Specificity is essential. If interest is included, the rate must be explicitly mentioned.
7. The Payee Must Be Certain: The bill should identify the person who will receive payment. Ambiguity invalidates the instrument.
8. Must Be Stamped as Required by Law: An unstamped or insufficiently stamped bill is inadmissible in court as evidence and cannot be enforced.

Parties to a Bill of Exchange

A bill must involve at least three distinct parties, though in some cases roles may overlap.

1. Drawer

• The person who prepares and signs the bill.
• Usually the seller/creditor is entitled to receive payment.
• The drawer directs the drawee to pay a certain sum to the payee.

Example:

If A sells goods to B worth ₹1,00,000 on credit and draws a bill, A is the drawer.

2. Drawee

• The person upon whom the bill is drawn.
• The drawee is ordered to pay the sum mentioned.
• When the drawee accepts the bill by signing, he becomes the acceptor and is legally liable to pay.

Example:

In the above case, B is the drawee.

3. Payee

• The person entitled to receive payment.
• The payee may be the drawer, a third party, a firm, or the holder in due course.

Types of Bills of Exchange

Bills of Exchange can be classified into multiple categories depending on the nature of payment, the presence of documents, place of drawing and acceptance, and purpose. The major types are as follows:

1) Documentary Bill

A Documentary Bill is accompanied by relevant supporting papers that prove the genuineness of the commercial transaction between the buyer and seller. These attachments typically include documents of title and evidence of shipment, such as invoices, receipts, railway receipts, bills of lading, insurance papers, etc. The bill is not released to the buyer unless these documents are presented or the conditions fulfilled.

2) Demand Bill

A Demand Bill (also known as a “Bill at Sight”) becomes payable immediately on presentation. It does not specify a maturity date or fixed time for payment. The amount is due as soon as the holder presents the bill to the drawee.

3) Usance Bill

A Usance Bill or Time Bill is payable after a specified period mentioned on the bill, such as 30 days, 60 days, 90 days or the like. It is a time-bound instrument, meaning payment can only be demanded after the expiry of the usance period. Businesses often use such bills where credit is extended for a definite period.

4) Inland Bill

An Inland Bill is drawn within India and is either payable within India or drawn by a resident in India upon another resident. It operates entirely in the domestic domain. It is the opposite of a Foreign Bill.

5) Clean Bill

A Clean Bill is issued without any accompanying shipping or title documents. As it lacks documentary security, banks generally charge a higher discounting rate on such bills compared to documentary bills.

6) Foreign Bill

A Foreign Bill is a bill of exchange payable outside India. Any bill that does not qualify as an inland bill is treated as foreign. It plays a key role in international trade and may be of two sub-types:

a) Export Bill: Drawn by an Indian exporter on a foreign buyer, this bill represents payment for goods shipped outside India.

b) Import Bill: Drawn by a foreign exporter upon an Indian buyer/importer. It represents goods imported into India.

7) Accommodation Bill

An Accommodation Bill is drawn, accepted or endorsed without consideration, simply to help another party obtain funds. It is executed as a matter of mutual benefit or financial accommodation rather than against a genuine trade transaction.

8) Trade Bill

A Trade Bill arises directly from a lawful business transaction. It is drawn by a seller to the buyer for payment of goods sold or services rendered. Trade bills are widely used in commercial activities, particularly in domestic as well as cross-border dealings.

9) Supply Bill

A Supply Bill refers to a bill drawn by a supplier or contractor upon a Government department for materials supplied or services rendered. Though Government agencies generally do not accept bills in the commercial sense, supply bills can be pledged to banks for obtaining advances due to delayed payment from Government authorities. They are typically non-negotiable.

10) Fictitious Bill

A Fictitious Bill is one in which either the drawer, drawee, or both are imaginary or non-existent. The bill is not supported by any genuine contract and is therefore void and fraudulent.

Conclusion

A Bill of Exchange is a powerful commercial instrument essential to modern business and financial transactions. Governed by Section 5 of the Negotiable Instruments Act, 1881, it constitutes a written, unconditional order to pay money involving at least three parties — drawer, drawee and payee. Its negotiability, transferability, acceptability in courts, and ability to facilitate credit transactions make it indispensable in trade and commerce.

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