It is 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 [Section 5].

Explanation
(a)An instrument (i.e. a document to transfer rights) (b)In writing (i.e. not just verbally) (c)An order; not promise or request (d)Unconditional order (except certain events, like death of a particular person (e)Three parties in a Bill of Exchange:
(i) Drawer, who makes (draws) the bill of exchange (ii) Drawee, who is ordered to pay (iii) Payee, to whom the drawee is ordered to pay

But, if a person or party draws a bill in his own favour, he is both a drawer and a payee. But a person cannot be both drawer and drawee, because then it will become a promissory note. But, after endorsement and delivery (if order bill), and by delivery only (if bearer bill), some more parties come into play, viz., holder, endorser, and endorsee.

Explanation

(Continued)

(f) Signed by maker (drawer) (g)Directing a certain person (h)To pay ( and nothing else) (i) A certain sum of money (and money only) (j) To, or to the order of
(1) A certain person (i.e. the payee), or (2) To the bearer of the instrument.

Essential ingredients of Bill of Exchange

(i) In writing, i.e. printed, typewritten or computerprinted, or in pencil. But, if written in pencil, it enables undetectable material additions / alterations in the instrument (ii) An order to pay, not promise or request (iii) Unconditional order, except sure events, like death of a particular person (iv) Signed by maker (drawer) or his agent (v) Certain persons, i.e. all the three parties: drawer, drawee, and payee, be ascertainable (vi) Certain sum of money, i.e. amount payable should be certain or capable of being made certain.

Essential ingredients of Bill of Exchange

(viii) Date, place, necessary) number, and so on

(Continued)

(vii) Order to pay money only, and nothing else, like a car or scooter (though not legally

(ix) Duly stamped, but only time bills; demand bills do not attract stamp duty Only a major, of sound mind, not declared as insolvent, can make, draw, accept or endorse promissory note or bill of exchange. A minor, lunatic or insolvent person also can make, draw, accept or endorse a note or bill, but they can bind other parties, except themselves. But, companies can do so within capacity, to contract and borrow and lend money. Karta of Hindu Undivided Family (HUF) has implied authority to borrow for family on promissory note or a bill of exchange, which binds all members of the joint family, including minors, upto their share in business. But minor members cannot be held personally liable.

Two types of Bills of Exchange

1. Demand Bills of Exchange; and 2. Time (Usance) Bills of Exchange Demand bills are made payable on demand or at sight or on presentation [Section 19]. Time bills are payable after some specified days or months from the date of bill, or the date of its acceptance, or of some sure event taking place; like death of the drawer himself. If drawn after date, due date is counted from its date. If drawn after acceptance, it will be calculated from date of its acceptance. Bill can be drawn as either order or bearer.

Cheque is also a bill of exchange but invariably demand bill of exchange, where drawee is always a bank and drawer is the account holder of the Banks same branch. A bank draft is also a bill of exchange, invariably a demand bill of exchange, where both the drawer and drawee are two branches of the same bank or of two different banks. Cheques may be drawn as order or bearer. But, Bank Draft, as per law, has to be drawn as order only. [Sections 31 and 32 of the RBI Act]. Demand Bills do not attract stamp duty, but Time Bills are to be stamped, depending on its amount and period of its maturity.

Calculation of Due Date of a Bill of Exchange Made Payable after Specified Number of Days: Stepwise-

1. Find the starting point (i.e. the date of bill or the date of its acceptance, as the case may be) 2. Exclude this date 3. Calculate the remaining days of this month 4. Add to No.3, the remaining days of the next month(s), to arrive at the required number of days 5. Now add 3 days of grace to date at No.4 6. If such due date is a public holiday, it will fall due for payment on the next preceding business day' (and not on the next succeeding business day).

Calculation of Due Date of a Bill of Exchange, Payable after Specified Number of Months: Stepwise 1. Find out the starting point (i.e. the date of bill or the date of its acceptance) 2. Add required number of months to this starting point 3. If the month has no corresponding day, take the last day of the month 4. Now add 3 days of grace to the date at No.3 5. If such due date is a public holiday, the bill will fall due for payment on the next preceding business day (and not on the next succeeding business day).

Presentation of a Bill of Exchange for Acceptance

Before its maturity, at the usual place of drawees business, on a business day, during the usual business hours, or on a mutually agreed reasonable place and at a reasonable time. Mode of Acceptance of a Time Bill  In writing  Duly signed by the drawee or his authorised agent  On the face of the bill of exchange  With the date of acceptance, and  Its delivery to the holder, or to some person on his behalf  It must be accepted by writing as, e.g. Accepted for payment at State Bank of India, Hazaratganj, Lucknow (and not only as: Accepted). This way, the drawee will have to come to the specified branch of the bank on the due date, to make payment, in cash or otherwise.

General and Qualified Acceptance of a Time Bill

(a) General acceptance is, where it is accepted, in its absolute terms, without any condition or qualification, regarding its payment, etc. (b) Qualified acceptance is, where it is accepted, with certain condition(s) or qualification(s), and thereby changing its effect from the original bill. (c) The drawer can treat such conditional acceptance as its dishonour for non-acceptance, and may proceed, accordingly.

Drawee in case of Need A person, named in the bill, as an alternative drawee (when a need may arise), to approach him for acceptance and/or payment of the bill of exchange, i.e. when the original drawee refuses to accept and/or pay the bill, or may not be available at the given place. It is usually done in the cases of foreign bills. Effect of Dishonour Drawer and all endorsers involved, are liable to its holder. But their liability can be invoked only if the holder gives them the notice of such dishonour. Drawer, can be liable only if the instrument is dishonoured for non-payment.

Noting and Protesting for Dishonour

A notary public is a lawyer, specifically appointed by a competent authority, for the purpose of noting, under Notaries Act, 1952. Noting is a formal method of authenticating the fact of dishonour of a bill, by its non-acceptance and/or non-payment. Here, the holder must first give notice of such dishonour, and only thereafter he should get the instrument noted by the notary public, within a reasonable time. Notary public presents the note or bill to the maker or drawee, and then notes down in his register, the date of such dishonour, and its reason, if any, given by the maker or drawee or acceptor of the bill. In case the note or bill is expressly dishonoured, the reason as to why the holder treats the note or bill as dishonoured, as also the charges of the notary public, must be mentioned. Further, the holder may ask thje notary public to note such dishonour upon the instrument, or upon a paper attached thereto, or partly upon each. Notary public must have and use his own seal, to evidence his such act, performed as a notary public.

Protest is a formal certificate, issued by the notary public, attesting

the dishonour of the bill, based on the noting itself.

Acceptance for Honour; after noting or protesting of a bill

In such cases, if any other person accepts it, supra protest, for the honour of the drawer, or of any one of the endorsers, he is referred to as acceptor for honour [Section 7]. Even after acceptance of the bill for honour (after noting or protesting), such bill has to be presented, on the due date, by the payee or holder, first to the drawee for its payment. And only after it is dishonoured for non-payment by the drawee, and it is noted or protested for nonpayment, it must be presented by him to the acceptor for honour, for its payment, but not earlier.

Payment for Honour; after noting or protesting of a bill

Any person, making payment of a bill, supra protest, which is already noted and protested for non-payment, for honour of any party liable on the bill.

Some other categorization of a Bill of Exchange

1. DA Bill and DP Bill
(i) DA Bill, meaning delivery against acceptance is one, where
documents to the title to goods (like Railway Receipt, Lorry Receipt, Bill of Lading, Air-way Bill), are to be delivered against acceptance of the bill.

(ii) DP Bill, meaning delivery against payment is one, where

documents to the title to goods, are to be delivered only against payment of the bill.

2. Documentary Bill and Clean Bill

(i) Documentary Bill is one, which is accompanied by the
relative title to goods, which is delivered against acceptance or payment of the bill, as required by the drawer.

(ii) Clean Bill of exchange is one, which is not accompanied by

any documents to the title to goods (mostly when such documents are sent to the drawee direct, but only where the drawer (seller) considers the drawee (buyer) to be highly creditworthy. Bank should also have full faith in the integrity and honesty of the drawer (seller), while discounting such time bills.

Some other categorization of a Bill of Exchange

(Continued)

3. Inland Bill and Foreign Bill

(i) Inland bill (domestic bill) is one, wherein both the drawers
(sellers) and the drawees (buyers) are of the same country. But, inland bill must be drawn and made payable in India, or drawn in India, and also upon a person resident in India, though made payable outside India.

(ii) In foreign bill of exchange, the drawers and the drawees are of
two different countries. Foreign bills are drawn in sets of three, each known as via. But, only one of these three vias (sets) are accepted and paid, when due. Thereafter, the other two sets (vias) become inoperative. But, if a person endorses different parts of the bill, in favour of different persons, he himself, as also all the subsequent endorsers of each part of the bill are liable on such part, as if it were a separate bill [Section 132].

Some other categorization of a Bill of Exchange

(Continued)

4. Trade Bill (or Genuine Bill) and Accommodation Bill

(i) Trade bill, or Genuine bill, represents genuine business
transactions, involving actual sale and purchase of goods.

(ii) Accommodation bill does not represent any genuine

business transactions of sale and purchase. Such fake bills are drawn to raise some funds from a bank for some time, and the drawer himself pays, when it is returned unpaid.

Compensation payable to the Holder Holder can receive amount of the bill plus amount of interest and expenses incurred for noting and protesting. If the holder of the bill resides in a foreign country, he can receive such amount at the current exchange rate, on due date. Compensation payable to Endorser Endorser of a bill, who has already paid the amount, can receive the amount so paid, plus expenses for noting and protesting, with interest @ 6 % p. a. from the date of his such payment upto the date of his receiving back the amount. If the endorser resides in an other country, he will be paid the amount at the current exchange rate.

Compensation payable by a Banker for wrongful dishonour of cheques Such compensation would include damages to the credibility and reputation of the drawer. In such cases, Court generally awards exemplary and / or vindictive damages. Amount of such damages may be far higher in the case of dishonour of a cheque, say, for Rs 5, in comparison to the damages for the wrongful dishonour of a cheque, say, for Rs 50, 000. Undue Delay in Presentation of a Cheque [Section 84] If the payee or holder of a cheque fails to present the cheque within a reasonable time, and if the drawee bank fail in the mean time, such drawer is discharged of his liabilities, but only upto the actual damage suffered by him (drawer) in this regard.