Bill of exchange and promissory note

What Is A Bill Of Exchange?

Bill of exchange is an unconditional order in writing given by the creditor (seller of goods on credit) to the debtor (buyer of goods on credit) to pay on demand or at a specified future date, a certain sum of money only to or to the order of a specified person or to the bearer. Bill of exchange facilitates purchase and sale of goods on credit. So it is called as credit instrument or negotiable instrument.
There are three parties to a bill of exchange:-
(1) Drawer:- Drawer is the person who draws or prepares the bill. He is the creditor who sells goods on credit and is entitled to receive money for it. He signs the bill of exchange and sends it to the drawee for acceptance. 
(2) Drawee:- Drawee is the person on whom the bill is drawn. He is the debtor who purchases goods on credit from drawer and is required to pay money for it.
(3) Payee:- Payee is the person to whom the amount of bill is payable. Payee may be a third party or in most cases, the drawer himself.

Due Date Of Bill:-

The date on which the amount of bill becomes payable is the due date or maturity date of the bill. The period between the drawing of bill and due date of bill is the tenure of bill. Three extra days are added in the calculation of due date which are called as grace days. If the bill is payable on demand, it has no due date or maturity date as the amount of bill is payable as and when the bill is presented  for payment and not on a specific date. There are no grace days for bills payable on demand.

Acceptance Of Bill:-

Drawee has to accept the bill of exchange drawn by the drawer. Drawee accepts the bill by putting his signature and optionally writing the word “accepted” on it. By accepting the bill drawee agrees to pay the amount mentioned on bill on maturity of bill or on demand, as the case maybe. On acceptance of the bill by drawee, it becomes a legal document enforceable in the court of law.

Endorsement Of Bill:-

The drawer or holder of the bill of exchange may transfer his rights to some other person by writing his name and signing it. Such an act is called as endorsement of bill of exchange. The person who endorses the bill is called as endorser and the person to whom it is endorsed is called as endorsee. After endorsement, the endorsee is entitled to receive the money. Sometimes the drawer endorses the bill in favor of his creditor for clearing his own debt. 

Discounting Of Bill:-

If the drawer or holder of the bill wants to receive money before its due date, he sells the bill to a bank. Such an act is called as discounting of bill of exchange. The bank deducts some amount of the bill which is called as discount and pays the remaining balance amount in cash to the drawer or holder. Discount charged by bank is the interest at a certain rate on the amount of bill for its unexpired period. After discounting, bank becomes the holder of the bill.

Retirement Of Bill:-

If the drawee or acceptor of the bill pays the bill amount before its due date, it is called as retirement of bill of exchange. Drawer generally allows the drawee certain amount of rebate on the bill amount for the unexpired period of the bill.

Renewal Of Bill:-

When the drawee or acceptor of the bill finds that he may not be able to pay the amount of bill on due date, he may approach the drawer before the due date and request him to cancel the original bill and draw a new bill with an extended date. Such cancellation of old bill and drawing of new bill is called as renewal of bill of exchange. The drawee has to pay interest for the extended period. He may be required to pay the interest in cash or the interest may be included in the amount of new bill. Sometimes the drawee pays some part of the bill amount and accepts a new bill with the balance amount with interest.

Honour And Dishonour Of Bill:-

A bill of exchange is said to be honoured when the drawee or acceptor pays the amount of bill to the drawer when it is presented for payment.
A bill of exchange is said to be dishonoured when the drawee or acceptor refuses to pay the amount of bill to the drawer when it is presented for payment on its maturity. When the bill is dishonoured, the drawer or holder of the bill may approach a lawyer who is called as “notary public” to collect legal evidence of dishonour. The notary public takes the bill to the drawee and asks for payment. If the drawee does not pay, he notes the fact of dishonour which is called as “noting” and the reason for dishonour. The noting acts as a legal evidence if the drawer files a case in court against the drawee. The notary public charges fees for this service which is called as “noting charges”. Noting charges are to be paid by the drawer but they are recoverable from the drawee who is responsible for the dishonour. 

What Is A Promissory Note?

Promissory note is an unconditional undertaking in writing given by the debtor to the creditor to pay on demand or at a specified future date, a certain sum of money only to or to the order of a specified person or to the bearer. Promissory note is a credit instrument or negotiable instrument. 
There are two parties to a promissory note:-
(1) Maker:- Maker is the person who makes or prepares the note. Maker is the debtor who is required to pay the money. 
(2) Payee:- Payee is the creditor who is entitled to receive the money from maker.

Difference Between Bill Of Exchange And Promissory Note:-

Bill Of ExchangePromissory Note
Bill of exchange is prepared by the creditor.Promissory note is prepared by the debtor.
Bill of exchange is an unconditional order given by the creditor to debtor.Promissory note is an unconditional promise given by the debtor to creditor.
There are three parties to a bill of exchange – drawer, drawee and payee.There are two parties to a promissory note – maker and payee.
Drawer and payee can be the same person.Maker and payee cannot be the same person.
Bill of exchange requires acceptance from the drawee to be effective.Promissory note does not require any acceptance to be effective.

 

 

 

 

 

 

 

 

 

loading...

One thought on “Bill of exchange and promissory note”

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.