Bill of exchange

Bill of exchange A negotiable instrument, similar to a post-dated cheque, which is usually sold at a discount. The person holding it has proof of debt. A bill is an unconditional order in writing, addressed by the drawer to the drawee, requiring the drawee to pay a sum of money on demand or at a specified future time to the payee (who might be the drawer or another party) or to the bearer. If the drawee accepts the bill, by writing on it and signing it, he becomes the acceptor and therefore primarily liable to pay the bill when it becomes due. If the acceptor fails to pay, the drawer or an endorser must compensate the holder. (Every endorser of a bill of exchange is in the nature of a new drawer and is liable to every succeeding holder should the acceptor and drawer default on payment.) The formal definition of a bill of exchange under the Bills of Exchange Act 1909 - 1973 is: 'An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed and determinable future time, a sum certain in money to the order of a specified person, or to bearer.' Bills of exchange date from the fourth century BC and became popular in the eighteenth and nineteenth centuries as a means of financing expanding world trade. They are widely used in the money market, issued by companies borrowing funds and traded through a range of holders until they mature, at which point the holder receives face value from the acceptor. Bills of exchange can be bank-accepted or bank-endorsed, or can rank as commercial bills, in which case no bank name appears on the bill. Parties to a bill of exchange include the following: acceptor, the party to whom a bill of exchange is addressed and who accepts a bill of exchange drawn on him. Until the bill is signed and accepted, this party is called the drawee. The acceptor agrees to pay the person presenting the bill on the due date the face value of the bill. The acceptor of the bill has a direct liability through the bill; he is primarily liable to pay out the funds on the due date. But if the acceptor fails to pay, the drawer has to compensate the holder of the bill or any endorser who has paid out. drawee, the party to whom the bill of exchange is addressed, who is required to pay the stipulated sum of money (the face value of the bill) at a specified future date to the payee named on the bill or to bearer. Once the drawee accepts the bill, by writing on it and accepting it, he becomes the acceptor and is primarily liable to pay out when the bill matures. drawer, the party who issues the bill, who makes the order for the bill to be accepted and paid. The drawer signs the bill as its maker and has a contingent liability on the bill until it matures as, in the event of default by the acceptor, the drawer is obliged to pay out the face value of the bill on its due date to the holder. endorser, (sometimes written indorser) the party signing on the reverse of the bill as confirmation of purchase and title to the bill. The list of endorsers' signatures on the back of the bill establishes the chain of ownership of the bill. payee, the person to whom the face value of a bill of exchange is to be paid (as with a cheque). The payee appears as the first endorser on the reverse of the bill and this endorsement starts the chain of ownership of the bill. The picture becomes complicated when it is remembered that the payee on a bill of exchange can also be the drawer or another party.