Feature of bill of exchange and how does it work
What is negotiable instrument;-
The word 'negotiable' means, "transferable from one person to another in return for consideration". The word 'instrument' means, "a written document by which a right is created in favour of some person". Hence, the term Negotiable Instrument means "a document in writing which creates a right in favour of some person", and which is freely transferable by delivery.
According to Section 13(1) of the Negotiable Instrument Act, "A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer".
Types of Negotiable Instrument;-
Three major types of Negotiable Instruments
The three major forms of a negotiable instrument discussed under the Negotiable Instruments Act of 1881 are:
l Promissory Note,
l Bill of Exchange and
l Cheque.
What is Bill of Exchange?
A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed or determinable future time, a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
Features of Bill of Exchange :-
l It is unconditional order to make payment
l It must be in writing
l It should be signed by the Maker of the Bill
l Amount should be specified or certain
l The date of payment should be specified on Bill.
l It should be payable to specific person.
l Amount in Bill is payable either on demand or on expiry of a fixed period of time.
l It must be stamped as per law.
Parties of bill of exchange;-
There are three parties involved with a Bill of Exchange :
Drawer :-
The Person who write the Bill or seller of goods is called the drawer.
Drawee :-
The person on whom the Bill of Exchange is drawn is called the drawee or who pay the amount specified on bill of exchange to payee. The person may be buyer of goods. Drawee becomes acceptor on acceptance of Bill of Exchange for payment.
Payee :-
The person who is entitled to receive the amount from acceptor is called “Payee”. Drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment.
How does a Bill of Exchange Works ?
Suppose Mr. Ali wants to purchase some electronics item from Manufacturer (Mr. Raza), but he has no money.
Manufacturer (Mr. Raza) agrees to sell the items to Mr. Ali on 60 days credit worth ₹50,000/-.
To ensure the payment on due date, Manufacturer (drawer) draws a bill of exchange for ₹ 50,000/- on Mr. Ali (drawee).
Before it is accepted by ALI it will be called draft. It will become a bill of exchange when it is accepted by Ali and sign it by writing the word ‘Accepted’.
It becomes Bill of Exchange Receivable for Mr. Raza and Bill of Exchange Payable for Mr. Ali.
Drawer keeps the Bill till due date and present it on due date before drawee and receive payment. It is known as realization of Bill.
