MODULE 2[C]: BILL OF EXCHANGE

1. NEGOTIABLE INSTRUMENTS
Although the act did not talk about what Negotiable Instruments are, it is however mentioned in section 13 that
Promissory Note, Bill of Exchange and Cheques payable either to order or to bearer.

Negotiable Instruments are instruments that violate the general principle of transfer of property i.e. these are
exceptions to nemodat quod non habet.

 Suppose person “A” steals a car from “B” and sells it to another person “C”, the ownership of the car will
still remain with “A”. But in case of negotiable instruments, the person who has it have its ownership.

Although by statute these 3 are the Negotiable Instruments, there are other such instruments that can be used as
Negotiable Instruments by customs like trade, lorry receipt, train receipt etc. This is mentioned in section 137 of
Transfer of Property Act, 1882:

 By custom if there are Negotiable Instruments then Transfer of Property Act, 1882 will not be applicable.

Section 4 of Negotiable Instrument Act, 1881: currency (Re:1) or bank notes are not negotiable instruments.

2. BILL OF EXCHANGE (BOE)

It is mentioned in section 5 ofNegotiable Instruments Act, 1881.

Bill of Exchange is an instrument that in writing contains

1. An unconditional order,
2. signed by the maker,
3. 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.

2.1. Purpose of Bill of Exchange

Bill of Exchange(BoE)is used to facilitate business transactions.

In a business, not every customer can pay for the goods in money. To not turn down those customers who can
immediately buy with money, a BoE is written by the LENDER or giver of goods.
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This is because in business, money may not always be available to make transactions. At such times BoE comes in
handy.

If the LENDER needs money, he can encash the bill at a discounted rate from the value on the BoE.

Cheque is a kind of BoE with the following exceptions:

1. Cheque is payable only on demand.

2. Written only on a bank.

2.2. Comparison with Promissory notes

PROMISSORY NOTE BILL OF EXCHANGE

Written by the DRAWER, the one who takes the Written by the DRAWEE, one who gave the
credit credit
There are just 2 entities There are 2 or 3 entities.
Promises to pay Orders to pay

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Here is how it works, let us assume a person “DRAWEE” wants to buy a commodity from a person "DRAWER”.

DRAWEE requests credit from DRAWER

DRAWEE (Buyer) DRAWER (Seller)

DRAWER writes BoE& gives it

to DRAWEE for approval

DRAWEE: the one to takes debt. DRAWER: the one who lends money.

However DRAWEE doesn’t have money to buy the commodity. Hence he requests DRAWER to give a credit and
promises to pay back the amount after a month.

DRAWER accepts the request and takes a white sheet of paper and writes like how it is shown below:

DATE & PLACE

AMOUNT (in figures)

REVENUE STAMP (of value according to the amount mentioned above)

30 days after the DATE pay to me or to my order, the sum of (value in letters) only, for the value received by you.

To (signature with date)

ACCEPTED
DRAWEE (Signature & Date of DRAWEE) DRAWER

(DRAWEE’s address) (DRAWER’s Address)

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DRAWER then gives the BoE to DRAWEE for getting their signature to agree to pay back the money. Here
DRAWEE and ACCEPTOR are the same. Suppose DRAWEE is just a worker of X, then X is called ACCEPTOR,
the person who accepts the payment.

A REVENUE STAMP is required to be fixed on the BoE if the value of money is more than Rs: 5,000 under Indian
Stamp Act, 1899.

3. TYPES OF BOE
There are two types of BoE.

1. Payable on Sight: these BoE are payable on demand by the DRAWER

2. Term Bill: these BoE are to be pain after a certain SPECIFIED period as mentioned in the BoE.

4. ENTITY BOE
When the transaction is limited to only 2 entities, then the DRAWER is the PAYEE too.

For instance, if the DRAWER encashes the BoE with the bank, then the bank becomes the PAYEE.Thus, PAYEE is
simply the person/entity to whom the money will have to be paid.

5. WHAT HAPPENS IN CASE OF NON-PAYMENT OF MONEY?

When DRAWEE is unable to make the payment then the BoE is said to be dishonoured. But dishonour can also
mean that the DRAWEE refused to sign the BoE.

Renewable of a bill: the acceptor of the BoE can request the Drawer/holder for extension of due date. Thus a new
bill is written if the HOLDER accepts.

The BoE should be presented to receive the payment from the DRAWEE. If it is dishonoured, then it should be noted
by a NOTARYPUBLIC who will also charge a fee called NOTING CHARGE for doing it. These charges will have
to be borne by the DRAWEE/ACCEPTOR.

If the money is dishonoured by the DRAWEE, then DRAWER should compensate the HOLDER, provided a
dishonour notice is given to or received by the DRAWER.

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Thus NOTARY PUBLIC is the authority who will redirect the bill to the acceptor to pay. In case the acceptor does
not pay back then the NOTARY PUBLIC will note the dishonour and its reason and give back the bill to the holder.
The holder can now file a case in the court.

Requests BoE to
be NOTED for Notes and gives
dishonour the BoE

HOLDER NOTARY PUBLIC ACCEPTOR

Either pays the

Gives BoE with the
amount + Notary
entire money.Or BoE
Charge orDishonours.
with fact & reason for
dishonour.

If the acceptor goes insolvent (liability more than asset) then a court appointed liquidator will sell the ACCEPTOR’s
assets to recover the money. In case of shortage, then the rest is treated as bad debts.

6. SUMMARY OF VARIOUS TERMS

Thus HOLDER of a BoE can be DRAWER or a different person.

PAYEE can be DRAWER or HOLDER of BoE.

HOLDER is the person to whom the money will have to be paid back. DRAWER is the one who writes the bill.
DRAWER and HOLDER can be the same entity.

ACCEPTOR can be DRAWEE or a different person. He is had the liability to pay the money back.

HOLDER becomes ENDORSER when he/she signs at the back of the BoE to transfer it to someone else. That
someone is called ENDORSEE.

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