DEPARTMENT OF MANAGEMENT SCIENCES

BILL OF EXCHANGE
MONEY AND BANKING
BBA-6

BILL OF EXCHANGE
Negotiable instrument act 1881 defines bill of exchange as: 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.

PARTIES TO BILL OF EXCHANGE:

The parties to a bill of exchange are: The Drawer who prepares/issues the bill. The Drawee in whose name the bill has been drawn. The Payee to whom the bill has to be paid. The Endorsee to whom the bill has been transferred by way of endorsement by the payee.

CONTENTS OF BILL OF EXCHANGE:

A bill of exchange contains: The term bill of exchange inserted in the body of the instrument and expressed in the language employed in drawing up the instrument. The name of the person who is to pay (drawee). A statement of the time of payment. A statement of the place where payment is to be made. The name of the person to whom or to whose order payment is to be made. A statement of the date and of the place where the bill is issued. The signature of the person who issues the bill (drawer). A bill of exchange is the most often used form of payment in local and international trade, and has a long history- as long as that of writing.

THE BILL OF EXCHANGE - CREDIT INSTRUMENT

The main role of the bill of exchange, namely that of a credit instrument, consists in stipulating a payment term, namely a period within which the debtor, while not being forced to pay the amount, benefits from credit. Similarly to the loan agreements, the bill of exchange may also specify an interest that is to accrue up to the date when the payment is made, which interest shall be to the benefit of either the initial beneficiary or a person to whom such right is conveyed. Moreover, the beneficiary is not obliged to wait for the due date, as the same has the possibility to procure the cash amount by selling the bill of exchange to a specialized bank (in which case the seller of the bill of exchange shall not also benefit from the value of the interest).

TYPES OF BILLS OF EXCHANGE:

A bill of exchange is of the following types: Inland Bill A bill of exchange which is drawn in a country and is payable anywhere in the same is called an Inland Bill. For example if a bill is drawn in Pakistan and is payable in any city of the country it will be considered as an Inland Bill. Foreign Bill If a bill is drawn in one country but is payable in any other country, this type of bill of exchange is called a foreign bill. For example it has been drawn by a businessman in Pakistan in the name of other businessman living in Japan, the payment of the bill of exchange will be among the two businessman of different nations therefore this kind of bill of exchange is called Foreign Bill. Commercial Bill A bill which is drawn for business purposes is called a Commercial bill. Sometimes a businessman does not pay in cash but issues a bill which is payable in some future date such type of a bill is called a Commercial Bill. Accommodation Bill An accommodation bill is a bill whereof the acceptor according to the terms of the instrument stands as a surety for some other person who may or may not be a party thereto. Time Bill These are such type of bills which are payable on demand on some specified dates. These specified dates may be of present or future. Demand Bill The bills which are payable on demand are called demand bills. Such type of bills are generally used for specific purposes.

PRESENTMENT FOR ACCEPTANCE:

Presentment for acceptance refers to presenting of a bill of exchange to the drawee named in the bill of exchange for his acceptance and agreement to pay the bill, usually at some time in the

future. It is an act which amounts to a notification of the holding of a bill of exchange with a request to accept, accompanied by the bill. In order to charge the drawer, presentment for acceptance to the drawee is necessary (except where excused by circumstances) in the following cases: Where the bill is payable after sight, or in any other case where presentment for acceptance is necessary in order to fix the maturity of the instrument. Where the bill expressly stipulates that it shall be presented for acceptance; Where the bill is drawn elsewhere than at the residence or place of business of the drawee.

Essentials of a valid acceptance For valid acceptance, presentment of acceptance must satisfy the following things: It must be in written on the bill. It must be signed by the drawee personally. The accepted bill must be deliver to the holder Modes of acceptance General acceptance: accept the bill without any condition Qualified acceptance: accept with some qualified conditions-Conditional, Partial, Place, Time,

PRESENTMENT FOR PAYMENT

Every instrument is to be presented for payment. So bill of exchange must be presented for payment to the maker, acceptors or drawee thereof respectively. It must be presented by or behalf of the holder. In default of such presentment the other parties thereto are not liable thereon to such holders.

PAYMENT FOR THE BILL OF EXCHANGE

The bill of exchange is a circulating security which may be transferred many times until its maturity (and with a certain limitation even after maturity). The debtor may usually only guess who will present him the bill at the time of its maturity. Neither the original assignee nor the new ones have the duty to notify him about transfers. The debt from the bill is therefore constructed in such a way that the right to payment is exercised by the possessor by presenting the bill for payment to the direct debtor. The possessor has the right to payment against direct debtors in the first place. It is either the acceptant or the drawee. Presenting the bill for payment to these persons within prescribed periods is not only a right but in a sense a very important duty of the possessor the failure of which is sanctioned by the law in a relatively harsh manner.

BILL OF EXCHANGE--DISHONOURED
When a bill of exchange is drawn in the favor of a specified person or firm, it is not necessary that the bill will be accepted. Due to some complexities the drawee does not accept the bill. The circumstances under which a bill of exchange is dishonored are as follows.

Dishonor by Non-Acceptance When a bill of exchange is drawn against the drawee and the drawee defuses to accept the same, this refused is called dishonor by non-acceptance. Dishonor by Non-Payment When the bill is presented to the drawee for its payment, sometimes the drawee fails to pays it. This failure of the drawee to the payment of the bill dishonors the bill by non-payment. In such a situation the drawer of the bill holds the complete right to take lawful action against the drawer.

ADVANTAGES OF BILLS OF EXCHANGE:

Companies have used Bills of Exchange for hundreds of years. Their longevity is due to the advantages they provide in a trading transaction.

A bill of exchange facilitates the granting of trade credit to a buyer. A Bill of Exchange provides a legal acknowledgement that a debt exists. It can provide the seller with access to financing. It can provide easy access to the legal systems in the event of non-payment.

Legal Protection afforded by Bills of Exchange: An advantage for a seller in using a bill of exchange is the capability of the bill of exchange to provide formal documentary evidence that the demand for payment or acceptance has been made to the buyer. In addition, it may be possible to sue the buyer for non-payment based solely on this documentary evidence. A seller can protect their interests by requesting that a bill of exchange be noted or protested for non-payment or non-acceptance. When a Bill is not paid or accepted it is said to have been "dishonored".