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Wednesday, January 25, 2012

Bill of Exchange

A bill of exchange, according to Section 5 of NI Act, is an instrument that is:
  • in writing;
  • containing an unconditional order;
  • ordering a certain person called drawee;
  • to pay certain money only;
  • ordering payment to certain person or to the order of certain person or to the bearer of  the   instrument.

A bill of exchange has three parties:
  • the drawer or maker,
  • the drawee, and
  • the payee.

The drawer gives an unconditional order, directing a certain person obviously other than himself – the drawee – to pay a certain sum. The drawee becomes liable upon his accepting the bill. If the drawee refuses to accept the bill, the holder of the bill can proceed against the drawer as a surety.

1.1 Different Types of Bills

Inland Bill: Drawn in India on a person residing in India whether payable in or outside India.

·         Bill is drawn by a merchant in Delhi on a merchant in Kolkata. It is payable in Mumbai.
·         Bill is drawn by a merchant in Kolkata on a merchant residing in Delhi. It is accepted for payment in Japan.
·         Bill is drawn in India on a person residing outside India payable in India.
·         Bill is drawn by a merchant in Delhi on a person in London but is made payable in India.

Foreign Bill: A bill that is not an inland bill is a foreign bill.

Demand Bill: Payable ‘on demand’, ‘at sight’, ‘on presentment’, or ‘when no time for payment is specified in bill’. Technically, a demand bill need not be presented for payment but banks usually present them for payment as a matter of practice.

Usance Bill: Contains an expression making it payable on the expiration of a certain period ‘after date’ or ‘after sight’. Here the word ‘date’ in the ‘after date’ refers to the date of the bill. ‘After sight’ means ‘after acceptance’, ‘noting for non-acceptance’, or ‘protest for non-acceptance’. ‘After sight’ or ‘on presentment’ bills must be presented before payment can be demanded.

Trade Bill: Drawn and accepted for a genuine trade transaction.

Accommodation Bill: Drawn and accepted, but not backed by genuine trade transactions.

Documentary Bill: A bill to which documents relating to goods are attached.

Hundi: It is a bill of exchange written in Hindustani languages. Incidentally, all the provisions applicable to the Negotiable Instruments Act apply to hundis, unless there is a local usage to the contrary. The difference between a bill of exchange and hundi is that a bill of exchange may include a hundi, but a hundi does not include a bill of exchange. Hundis are not accompanied by documents of title.

1.2. Parties to Bill of Exchange

The following are the parties to a bill of exchange:

·         Drawer: The maker of the bill of exchange

·         Drawee: The person on whom the bill is drawn

·         Acceptor: The person who accepts the bill, usually drawee but sometimes a stranger may accept on behalf of the drawee

·         Payee: The person to whom the sum stated is payable. It could be the drawer or any other person

·         Holder: Either the original payee or any other person to whom the payee has endorsed the bill. In case of a bearer bill, the bearer is the holder

·         Endorser: The holder, who endorses the bill to anyone else

·         Endorsee: The person to whom the bill is endorsed

·         Drawer in case of need: The person who may be resorted to in case of need

·         Acceptor for Honour: A person who, on refusal by the original drawee to accept or to furnish better security when demanded by the Notary, accepts the bill in order to safeguard the honour of the drawer or any endorser.

1.3. Common Rules regarding Bills of Exchange (Sections 132 and 133)

        i.            The bill of exchange is drawn in sets or parts; all the parts put together make a set and the whole set constitutes only one bill.
      ii.            The payment made on one part extinguishes the whole bill.
    iii.            Each part of the bill in a set shall be numbered and contains a provision that it shall continue to be payable only so long as the other parts remain unpaid.
    iv.            The drawer has to sign each part of the bill and deliver all the parts.
      v.            Only one part needs to be stamped. Similarly, one part only needs to be accepted.
    vi.            In case a person accepts or endorses different parts of the bill in favour of different persons, he and the subsequent endorsers of each part are liable for such parts as if it were a separate bill.

1.4. Acceptance

Acceptance of a bill is an indication by the drawee of his assent to pay to the order of the drawer. Oral acceptance is not considered an acceptance.

The Essentials of Acceptance

Acceptance must be written across the face or on the back of the bill and signed by the drawee. The process of acceptance is completed only when the accepted bill is delivered to the holder.

Who can accept (Section 33)

Any of the following can accept a bill:
·         The drawee of a bill
·         All or some of the several drawees, if the bill is addressed to more than one drawee
·         A person named in the bill as drawee in case of need
·         An acceptor for honour
·         An agent of the persons listed above.


Presentment refers to the showing of an instrument to the drawee, acceptor, or maker for acceptance, sight, or payment.

Presentment of Bill of Exchange for Acceptance (Section 61)

Presentment for acceptance is necessary in the following types of bills:
·         A bill of exchange payable after sight
·         A bill where there is an explicit stipulation that it shall be presented for acceptance.

Box 1: Bill of Exchange – Implications for Banks

A drawee may be permitted two full working days for acceptance of the bill. Bills should be presented at the drawee’s address during business hours on working days.

While advancing funds against bills, the banks should bear in mind the rules governing presentment, calculation of due dates/grace period, and stamping requirements under the provisions of the Stamp Act.

Every bill of exchange, which is not expressed to be payable on demand, at sight, or on presentation, is at maturity on the third day on which it is expressed to be payable. However, grace period need not be given if the drawer and the drawee so agree, but it should be indicated in the Bill.

The rules for calculation of due date are:
 A usance bill is payable at maturity. As per Section 22 of the Negotiable Instruments Act, a usance bill is at maturity on the third day on which it is expressed to be payable.

Sections 23 to 25 of the Negotiable Instruments Act provide the rules to calculate the ‘due date’ of a usance bill. It must be remembered that these rules must be meticulously observed. Or else, in case of dishonour of the bill, the banks may face problems due to legal disabilities.

There are two types of usance bills:
1.                   Bills which are payable a certain number of months after date or sight. In this type, the period of usance will terminate on the corresponding day of the month, and if the month does not have the corresponding day, on the last day of the month. The grace period will be calculated thereafter.

Example 1: Presume a bill dated 20th March, 1999, payable two months after date. Therefore, the usance period will terminate on 20th May, 1999. Adding grace period, the bill becomes due for payment on 23rd May, 1999.

Example 2: Presume a bill dated 31st March, 1999, payable one month after date. Therefore, the usance period expires on 30th April, 1999. Adding grace period, its due date will be 3rd May, 1999.

Example 3: Presume a bill dated 20th September, 1999, payable two months after sight. The said bill is accepted on say 10th October, 1999. The usance will terminate on 10th December, 1999. Adding grace period, the due date will be 13th December, 1999.

2.       Bills which are payable a certain number of days after date or sight. In this type, the usance period will be calculated according to the actual number of days stated in the bill by excluding the date of the bill or the date of presentment (sight), as the case may be.
Example 1: Presume a bill is dated 10th June, 1999 payable 30 days ‘after date’. Therefore, the usance terminates on 10th July, 1999. Adding grace period of three days, it will fall due on the 3rd day after 10th July, 1999 i.e., 13th July, 1999.

In the case of any type of usance bill, if the due date calculated as above falls on a public holiday, the bill will be deemed to fall due on the previous working day.

Banks have to meticulously observe these regulations, particularly, in cases where such bills have been discounted/purchased.

Presentment: By Whom and To Whom

A bill must be presented by a holder or his authorized agent. And it must be presented to:
·         The drawee;
·         His authorized agent;
·         His legal representative, if the drawee is dead;
·         His official receiver or assignee, if he has been adjudged an insolvent; and
·         All the drawees, if there are several drawees.

Drawee’s Time for Deliberation (Section 63)

The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee 48 hours exclusive of public holidays to consider whether he will accept it.

Consequences of Non-presentment

No party to the bill will be liable to the holder, if default is made in presentment.

Presentment for Payment

Practically necessary for every instrument, since no holder may proceed against an acceptor in a court of law, unless he has demanded payment of the bill and the same has been refused. Secondly, in order to charge the other party to a bill in the event of its non-payment, presentment for payment of the bill and notice of dishonour to the parties concerned are necessary.

Presentment for Payment should be made to the acceptor himself or to his authorized agent. It should be made during business hours on a working day.


It means recording of the fact of dishonour by a Notary Public on the bill, or paper, or on both. Such noting must be made within a reasonable time after dishonour and must specify the date of dishonour, the reason, if any, assigned for such dishonour, and the notary’s charges. It is, in fact, an authentication by the Notary Public that the bill has, in fact, been dishonoured.

Omission to get the instrument noted does not in any way affect the rights of the holder thereon.


When a bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a +. Such a certificate issued by the Notary is called the Protest (Section 100).

When a bill of exchange is required by law to be protested, notice of such protest must be given instead of notice of dishonour, preferably by the Notary Public, who makes the protest.

Foreign bills of exchange must be protested for dishonour, when such protest is required by the law of the place where they are drawn (Section 104).

Contents of Protest
The contents of the protest include:
·         The instrument itself
·         The name of the person for whom and against whom the instrument has been protested
·         The fact and the reason for dishonour
·         The place and time of dishonour
·         The signature of the Notary Public.
A    Advantages of Protest 
·         Protest provides an authentic evidence of dishonour to the drawer or endorsers
·         The same is also upheld in courts unless and until such fact is disproved.

Box 2: Bank’s Lending Against Bills – Precautions

Banks do purchase/discount bills, i.e., they lend money against bills. In such cases, it becomes essential to comply with the provisions under the Negotiable Instruments Act for protecting their interests.

·         Whenever a demand bill is returned unpaid, the banks must immediately recover the amount from the drawer with overdue interest.

·         Whenever a usance bill is dishonoured by non-acceptance/nonpayment, the discounting bank must send notice of dishonor within a reasonable time to all other liable parties.

·         The drawer’s liability arises only when there is dishonour either by non-acceptance or non-payment and the banker has taken the necessary steps to obtain acceptance/payment. Therefore, the instructions given by the drawer regarding the procedure to be followed upon non-acceptance/non-payment must be scrupulously implemented.

·         Wherever there is a ‘drawee in case of need’ to a bill, it should be presented to him for acceptance/payment if the drawee has dishonoured the bill. A bill cannot be said to be dishonoured till the drawee in case of need (of course, wherever available) also dishonours it.

·         A dishonoured bill may have to be noted or protested for nonacceptance or non-payment unless there are contra instructions by the drawer. Notice of noting or protest has also to be sent to all the parties to the bill (Sections 99-104).

·         Once a bill is dishonoured the bank must initiate prompt action to recover the funds from the drawer or by disposing of the goods under the bill/documents and appropriate the proceeds.


Keywords: Banking, Drawing of Bills, Different kinds of Bills, Risks associated with payment of Bills, Acceptance of Bills 

Speciman of Bill of Exchange - Courtesy:


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