How a Bill of Exchange Functions:
In order to fully grasp the transactions
relating to bill of exchange we thoroughly learn the procedure. The
following example will make it clear.
Suppose A sells goods to the value of $500 to
B. The most ready means of closing the transaction will be cash payment by B
to A. But payment of this nature are not many in actual practice. The
greatest volume of business is done on credit. That being the case A will
have to wait for some time to receive payment from B. A, merchant can hardly
afford to be out of funds for long. Moreover, to sell goods on credit is
rather a risky job. Therefore as soon as A sells goods to B, he will draw a
bill for $500 on B and forward the same to him together with the goods with
instructions to B to accept the bill and return the same to A. Upon receipt
of the bill, B would write on the face of the bill "accepted" and put his
signature below. It means that B approves the bill and also binds himself to
pay the amount thereof when due. The bill is thus complete and comes back to
A to remain in his possession till maturity or can be endorsed or discounted
by him. On the due date the holder of the bill presents it before the
acceptor and receives payment of the bill from the acceptor.
Thus the bill of exchange is the instrument,
rather the mechanism which finances the major portion of all commercial
transactions these days and it helps both the debtor and the creditor alike.
Tenor and Usance:
Tenor is the period of time after which a bill
becomes payable. Thus, where a bill is payable after 90 days from the date
of drawing or acceptance, the tenor of the bill is 90 days. Bill may be made
On Demand. The bill so drawn is
payable as soon as its payment is demanded by the holder of the bill.
A Sight. A bill of exchange so
drawn becomes payable immediately it is brought to the notice of the drawee.
After Date. When a bill is drawn
'after date' its due date is calculated from the date of the bill.
After Sight. When a bill is
drawn 'after sight' its due date is calculated from the date on which it is
sighted or seen by the drawee i.e., from the date of acceptance by the
Usance. It is the usual time of
payment of a bill of exchange as fixed by custom.
Days of grace:
In calculating the due date of payment it is
customary in business circle to allow three additional days to the drawee or
acceptor to meet the bill. The extra days are called "days of grace" or
"grace days". Thus a bill dated 15th March, for three months becomes payable
on the 18th June and this is the due date.
Holder of a bill is a person who is entitled
in his own right to the possession thereof and to claim the amount due
Holder in Due Course:
When a person takes a bill, complete and
regular on the face of it and before its due date, in good faith and for
valuable consideration he is called the holder in due course.
When a drawee signs his name across the face
of along with the word "accepted" the bill is said to be accepted and this
act of the drawee is called acceptance of a bill. Before this is done, the
drawee cannot be made liable for the bill.
Different Kinds of Acceptance:
When a bill is accepted without any condition
to the order of the drawer, it is called general acceptance.
When a bill is accepted with some
qualifications to the order of the drawer it is called qualified acceptance.
A qualified acceptance again may be of five
different types. These are following types:
Time. When the acceptor agrees
to pay the bill on some day other than the date required by the drawer, it
is called qualified acceptance as to time.
Place. When a bill is payable at
a particular place and there only, it is called local qualified acceptance.
Partial. When a bill is accepted
for a part of the amount of a bill, it is called partial qualified
Parties. When a bill is accepted
by one or two of the drawees, but not all, it is called qualified acceptance
as to parties.
Condition. When a bill is
accepted subject to a certain condition being fulfilled it is called
conditional qualified acceptance.