Commerce · Ch 22 — The Negotiable Instruments Act, 1881
Bill of Exchange
Bill of Exchange
A bill of exchange differs from a promissory note in one crucial respect: instead of one person promising to pay, one person orders another person to pay a third person (or the same person who gave the order).
Definition (Section 5). Section 5 defines a bill of exchange 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.
Essential elements — largely mirror those of a promissory note, with the key difference being an order rather than a promise:
- In writing, and signed by the maker of the order (called the 'drawer').
- An unconditional order, not a request — 'pay ₹1,00,000 to Meena' is an order; 'kindly consider paying Meena if convenient' is only a request and does not qualify.
- Directed to a certain person, who must accept the order before becoming liable on it.
- A certain sum of money, payable to a certain person or their order, or to bearer.
Parties to a bill of exchange
- Drawer — the person who makes/draws the bill and gives the order to pay; usually the creditor.
- Drawee — the person to whom the order is addressed and who is directed to pay; usually the debtor. Once the drawee signs their acceptance on the bill, they become the 'acceptor' and are primarily liable to pay it.
- Payee — the person to whom, or to whose order, payment is to be made. The drawer and the payee may be the same person (a trader can draw a bill on their debtor, payable to themselves).
How a bill of exchange works in practice. Suppose a Tirupur garment exporter (the creditor) has supplied goods on credit to a buyer in another state (the debtor). The exporter draws a bill of exchange ordering the buyer to pay a fixed sum on a fixed future date. The bill is sent to the buyer, who signals acceptance by signing across its face — this acceptance is what fixes the buyer's own liability to pay on the due date. Once accepted, the exporter can hold the bill until maturity, or endorse and transfer it to someone else (for example, discount it with a bank for immediate cash, at a value slightly less than its face value).
Distinguishing a Promissory Note from a Bill of Exchange
| Basis | Promissory Note | Bill of Exchange |
|---|---|---|
| Nature of the document | An unconditional promise to pay | An unconditional order to pay |
| Number of parties | Two — maker and payee | Three — drawer, drawee and payee |
| Who is primarily liable | The maker, from the very beginning | The drawee, only after accepting the bill (before acceptance, the drawer alone is liable) |
| Acceptance | Not required — the maker's promise is enough | Required — the drawee must accept before becoming liable |
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 …
The drawer draws/makes the bill and gives the order; the drawee is directed to pay and becomes the 'acceptor' once they sign their acceptance, at which point they become …