What is Bill of Exchange? Example, Features, Characteristics

  • Post last modified:27 January 2021
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What is 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.

  • A bill of exchange may be made payable to bearer on demand or after a definite period of time.

  • A bill of exchange cannot be made payable to bearer on demand because Section 31 of the Reserve Bank of India Act prohibits the issue of such bills of exchange.

Bill of exchange is an instrument ordering the debtor to pay a certain amount within a stipulated period of time. Bill of exchange needs to be accepted in order to call it valid or applicable. And the bill of exchange is issued by the creditor.


Promissory Note, on the other hand, is a promise to pay a certain amount of money within a stipulated period of time. And the promissory note is issued by the debtor.

Example of Bill of Exchange

  1. ‘A’ wrote and signed an instrument ordering ‘B’ to pay Rs 500 to ‘C’ this is a bill of exchange.

  2. ‘On-demand pay to ‘A’ or order the sum of Rs. 500 for value received’.

Features of Bill of Exchange

The following are the features of bill of exchange:

  1. It is an order to make payment.

  2. The order to make payment is unconditional.

  3. The maker of the bill of exchange must sign it.

  4. The payment to be made must be certain.

  5. The date on which payment is made must also be certain.

  6. The bill of exchange must be payable to a certain person.

  7. The amount mentioned in the bill of exchange is payable either on-demand or on the expiry of a fixed period of time.

  8. It must be stamped as per the requirement of law.

Characteristics of a Bill of Exchange

To be a Bill of Exchange, an instrument must possess the following essentials characteristics of a bill of exchange:

Characteristics of a Bill of Exchange
Characteristics of a Bill of Exchange
  1. In writing: It must be in writing.

  2. Express order to pay: There must be an express order to pay and not a mere request to pay.

  3. Definite and unconditional order: The order must be definite and unconditional.

  4. Order to pay certain sum: The order must be to pay a certain sum.

  5. Order to pay money only: The order must be to pay money only.

  6. Certain three parties: The three parties (i.e., drawer, drawee and payee) must be certain and must be mentioned in the instrument. It may be noted that the drawer and payee can be the same person but the drawer and drawee cannot be the same person.

  7. Signed by the drawer: It must be signed by the drawer.

Bill of Exchange Parties

  1. Drawer
  2. Drawee
  3. Payee

Drawer

Drawer is a debtor or borrower. The person who makes the promise to another to pay the debt.

Drawee

Drawee is a credit or lender. The person on whom the bill is drawn.

Payee

Payee The person to whom the money is to be paid or a person receiving payment.


Difference Between Bill of Exchange and Cheque

Basis for DistinctionBill of ExchangeCheque
MeaningA written document that shows the indebtedness of the debtor towards the creditorA document used to make easy payments on demand and can be transferred through hand delivery is known as cheque
Defined inSection 5 of The Negotiable Instrument Act, 1881Section 6 of The Negotiable Instrument Act, 1881
Validity PeriodNot Applicable3 months
Payable to bearer on demandCannot be made payable on demand as per RBI Act, 1934Always
Grace Days3 days of grace are allowed.Not Applicable, as it is always payable at the time of presentment
AcceptanceBill of exchange needs to be acceptedA cheque does not require acceptance
StampingMust be stampedNo such requirement
CrossingNoYes
DraweePerson or BankBank
Noting or ProtestingIf a bill of exchange is dishonoured it can be noted or protestedIf the cheque is dishonoured it cannot be noted or protested

Business Law Notes

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Business Law Book References

  1. Goel, P. K. (2006). “Business Law for Managers” Wiley
  2. Sheth, T. (2017). “Business Law” (2ed.) Pearson.
  3. Kuchhal. M.C. & Prakash. “Business Legislation for Management” (2ed.) Vikas Publishing.

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