Bill
of exchange
The 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:
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. (sometimes written indorser)
Payee:
The person to whom the face value of a bill of exchange is to be
paid (as with a check). 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.
For more information
from the Financial Dictionary click on the link below:
The Language of Money
website: http://educationcenter2000.com
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