BILLS OF EXCHANGE AND PROMISSORY NOTES

 Bills

of Exchange: It is an important instrument and widely used in discharge of business obligations ---- both in case of domestic trade and foreign trade. Some of the provisions of the Negotiable Instruments Act are applicable to Promissory Notes and Cheques also in addition to Bills of Exchange. Kinds Of Bills Of Exchange (1) Inland and foreign bills. (2) Time and demand bills.( 3) Trade and accommodation bills. (4) Clean and Documentary Bill
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(1) Inland and Foreign Bills Inland Instrument: ( Sction 11 )A negotiable instrument i.e. Bill of exchange, Promissory Note or a cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument. Thus it must satisfy following conditions.

(a)

It is drawn or made in India i. e. drawer must be in India and

It must be payable in India not necessarily by a person residing in India or,

(b)

(c)

It must be drawn on a person resident in India although it is payable outside India.

 The

following are the examples of Inland bills : (i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. (ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. (iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill.

 Foreign

Bill: A Negotiable Instrument which is not drawn made or made payable as provided in sec.11 is a foreign bill (sec12). The following are foreign bills: 1. If it is drawn in India but it is made payable outside India or is drawn on a person residing outside India and. 2. If it is drawn outside India and is payable in India or is drawn on any person residing outside India and is payable in India. 3.If it is drawn in India and made payable outside India or drawn on a person residing outside India and is payable outside India.

 Bills

in sets (Secs. 132 and 133): The foreign bills are generally drawn in sets of three, and each sets is termed as a via. As soon as anyone from the set is paid, the others become inoperative. These bills are drawn in different parts. They are drawn in order to avoid their loss or miscarriage during transit. Each part is despatched separately. To avoid delay, all the parts are sent on the same day by different mode of conveyance.
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 Rules

For Bills In Sets : 1) Each part must bear the number i.e. first of exchange, second of exchange. 2) Each part must have a reference to the other. If omitted it will be a separate bill. 3) Drawer to sign all parts, and despatch. Stamp duty to be paid on only one part. 4) Drawee should accept only one and on payment the entire bill will get extinguished

 5)

If a person accepts and endorses different parts in favour of different persons,, he and endorsers of each parts are liable on such part as if it were a separate bill. 6) In case each part is negotiated to different persons, who become holders in due course, the person who first acquired title to his part is considered to be the true owner and entitle to other parts and to claim the money
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2)

Time and Demand Bill: A) A bill of exchange may be payable on demand when it is expressed to be payable on demand, or at sight or on presentment. B) : A bill payable after a fixed time is termed as a time bill. In other words, bill payable after date is a time bill and payable after fixed period.

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The

expression "after sight" means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non- acceptance, or protest for non acceptance. The bill is payable after a fixed period. A bill may also be drawn payable after happening of an event which must be certain to happen, otherwise the bill will be invalid.

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"Maturity"-- The maturity of a promissory note or bill of exchange is the date at which it falls due for payment.(sec 22) Days of grace -- Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable. The additional days given for payment are called days of grace.

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 Although

it is not provided in the N I Act, some drawers may draw a BOE with the words Without grace or No days of grace . It means that the drawee will not enjoy the grace days. In absence of such words all bills are treated to be payable with days of grace.

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Sec 23 : Calculating maturity of bill or note payable so many months after date or sight : In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for nonacceptance or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month

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 Illustrations (a)

A negotiable instrument, dated 29th January, 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February, 1878 i.e. on 3rd Mar 1878 (b) A negotiable instrument, dated 30th August 1878, is made payable three months after date. That instrument is at maturity on the 3rd December, 1878. (c) A promissory note or bill of exchange, dated 31st August 1878, is made payable three months after date The instrument is at maturity on the 3rd December, 1878.

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Sec 24 : Calculating maturity of bill or note payable so many days after date or sight ---In calculating the date at which a promissory note or bill of exchange made payable a certain number of days after date or after sight or after certain event is at maturity, the day of the date, or of presentment for acceptance of sight, or of protest for nonacceptance, or on which the event happens, shall be excluded. Sec 25 : When day of maturity is a holiday.---When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day. Explanation:- The expression "public holiday" shall mean Sundays and the day or days declared by the Central Government, by notification in the official Gazette to be public holidays. As per Home Department order State Governments are also empowered.

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 (3)

Trade and Accommodation Bill : Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an accommodation bill. Example: A, is need of money for three months. He induces his friend B to accept a bill of exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The bill is an accommodation bill.

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may get the bill discounted from his bankers immediately, paying a small sum as discount. Thus, he can use the funds for three months and then just before maturity he may remit the money to B, who will meet the bill on maturity. In the above example A is the accommodated party while B is the accommodating party. It is to be noted that an accommodation bill may be for accommodation of both the drawer and the acceptor. In such a case, they share the proceeds of the discounted bill.
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 Rules

regarding accommodation bills are: (i) In case the party accommodated continues to hold the bill till maturity, the accommodating party shall not be liable to him for payment of the bill since the contract between them is not based on any consideration (Section 43). (ii) But the accommodating party shall be liable to any subsequent holder for value who may be knowing the exact position that the bill is an accommodation bill and that the full consideration has not been received by the acceptor.

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 The

accommodating party can, in turn, claim compensation from the accommodated party for the amount it has been asked to pay the holder for value. (iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity is in the same position as a holder before maturity, provided he takes it in good faith and for value (Sec. 59). In form and all other respects an accommodation bill is quite similar to an ordinary bill of exchange.

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 There

is nothing on the face of the accommodation bill to distinguish it from an ordinary trade bill. 4) Clean or Documentary Bill : In case of genuine trade transactions when the drawer encloses with the bill of exchange, documents such as Railway Receipt or Motor Transport Receipt ( i.e. documents of title to goods) in addition to the regular invoice. the bill is called Documentary bill
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In case of foreign trade. bill of lading ( Shipping Document ) is enclosed. Such a bill is known as Documentary bill. The document of title to goods are delivered either against acceptance ( D/A bill ) or payment ( D/P bill ) by the banker to the drawee. When no such document is attached the bill is known as Clean Bill.

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 Sec

61: Presentment for acceptance. A bill of exchange payable after sight must, if no time or place is specified therein for presentment, be presented to the drawee there of for acceptance, if he can, after reasonable search, be found, by a person entitled to demand acceptance, within a reasonable time after it is drawn, and during business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. If the drawee cannot, after reasonable search, be found, the bill is dishonoured

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If the bill is directed to the drawee at a particular place, it must be presented at that place; and if at the due date for presentment he cannot, after reasonable search, be found there, the bill is dishonoured. [ Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.]

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 Drawees

time for deliberation: The drawee may require the holder to allow him 48 hours time (exclusive of public holiday)for considering whether he will accept it or not. The holder is bound to allow such time.(sec 63) ACCEPTANCE : When the drawee signifies his consent by writing his name across the face of the bill with or without the words accepted the bill is said to have been accepted. Drawee is called acceptor and bears the liability to pay the amount of bill.

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 Types

of acceptance:1) General Acceptance : The acceptance is given without any condition or qualification. 2) Qualified Acceptance : Drawee accepts the bill with any of the following conditions. i) Happening of a particular event. ii) Bill may be accepted partially. iii) Bill is accepted to pay at specified place and nowhere else,(other than one mentioned in the bill).

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 iv)

He accepts the bill and changes the period of its maturity. v) A bill is drawn on more than one person, who are not partners. If all of them do not accept it is qualified acceptance as all must accept the bill. Effect of qualified acceptance : In qualified acceptance the acceptor does not agree to the drawers order and if the drawer refuses to take qualified acceptance the bill is treated as dishonoured by non acceptance.

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 If

the holder acquiesces ( or keeps silence ) in qualified acceptance, all previous parties whose consent is not obtained to such acceptance are discharged against the holder. Presentment of Promissory Note for sight : Promissory Note payable at certain period after sight must be presented for acceptance.
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 Presentment

of NI for payment : Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided. In default of such presentment, the other parties thereto are not liable thereon to such holder, Exception -- Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof because the debtor is required to find the creditor and pay him.

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 Consequence

of Non Presentment : If a bill. cheque and promissory note not presented for payment, other parties to the instrument shall not be liable thereon to the holder who makes such default. Other parties must exclude the maker of a cheque as he is a principal debtor. Rules for Presentment for payment of NI i) Must be presented on maturity ii)During usual hours of business iii) Pro- note payable in instalmentson maturity of each instalment.

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 iv)Drawn

payable at specified place must be presented at specified place and not elsewhere v) In absence of any place, it should be presented at usual place of business or residence. In absence of both, then wherever the drawer/maker is found vi) A NI payable on demand must be presented within a reasonable period after it is received
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 vii)

It can be made to -- a) duly authorised agent, b) legal representative in case of his death, c) his assignee in case he is declared as insolvent viii) Delay beyond the control of the holder is excused. When the cause is over then in reasonable time ix) Through Post Office by Reg. Post if agreed
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 When

Presentment is Unnecessary : i) Maker, drawer, or acceptor intentionally prevents it, ii) If payable at business place it is closed during business hours, If payable at specified place he or his duly authorised agent is not found, iii)Parties liable ,have undertaken w/o presentation iv) Drawee could not suffer due to non presentment and still he can be held liable.

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 Dishonour

of Negotiable Instrument : A) By Non acceptance : ] BOE is dishonoured by non acceptance when (i) drawee or one of the drawees, (not being partners) make default in acceptance, within 48 hours. (ii) Presentment for acceptance is excused and the bill is not accepted, drawee is not competent to contract or the acceptance given is qualified.
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 B)

By Non Payment : Sec 92: A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. When presentment is unnecessary if it remains unpaid on due date, it is treated as dishonoured.
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 Steps

to be taken in case of Dishonour by Non Payment : The holder to safeguard his interest must give notice of dishonour and get the bill/note noted and protested. A) Notice of dishonour : The holder or some party liable thereto or who remains liable thereon must give notice of dishonour to all other parties whom the holder seeks to make liable jointly or severally thereon.No notice is required in following cases: i) The maker of a Pro-note,ii) Acceptor or drawee of a dishonoured BOE or cheque.

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 Failure

to serve notice of dishonour except in circumstances mentioned in section 98 ) on all prior parties liable on the instrument discharges such parties from their liabilities. When Notice of D/H is not necessary: (a) when it is dispensed with by the party entitled thereto; (b) in order to charge the drawer when he has countermanded payment, (c) when the party charged could not suffer damage for want of notice.

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 (d)

when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it; (e) to charge the drawers when the acceptor is also a drawer; (f) in the case of a promissory note which is not negotiable; (g) when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.

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 Sec

94 : Mode of giving Notice: Notice may be given: i) to a duly authorized agent of the person to whom it is required to be given ii) where he has died, to his legal representative or where he had been declared an insolvent, to his assignee iii) may be oral or written; if written, be sent by post iv) may be in any form; but it must inform the party to whom it is given, either in express terms or by reasonable intendment, that the instrument has been dishonoured, and in what way, and that he will be held liable thereon, v) it must be given within a reasonable time after dishonour,

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 vi)

at the place of business or (in case such, party has no place of business) at the residence of the party for whom it is intended. vii) If the notice is duly directed and sent by post and miscarried, such miscarriage does not render the notice invalid. viii) Any party receiving notice of dishonour in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice as provided by
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 ix)

When the, instrument is deposited with an agent for presentment, the agent is entitled to the same time to give notice to his principal as if he were the holder giving notice of dishonour, and the principal is entitled to a further like period to give notice of dishonour. x) When the party to whom notice of dishonour is despatched is dead, but the party despatching the notice is ignorant, of his death, the notice is sufficient.
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 B)

Noting and Protesting : The second step is to get the instrument noted and protested: Noting : The holder of dishonoured instrument in order to sue the parties liable thereon, provides a mode of authenticating the fact of the bill having been dishonoured by noting the instrument. Noting means, minutes recorded by a notary public on the dishonoured instrument or on a paper attached to such instrument

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When a bill is to be noted, the bill is taken to a notary public who represents it for acceptance or payment as the case may be and if the drawee or acceptor still refuses to accept or to pay the bill, the bill is noted as stated above. Noting should specify in the instrument, (a) the fact of dishonour, (b) the date of dishonour, (c) the reason for such dishonour,if any (d) the notarys charges, (e) a reference to the notarys register and (f) the notarys initials.

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 Protest

: Protest is a certificate issued by the Notary Public attesting that the bill or the note has been dishonoured. The holder however shall have to wait till the date of maturity to take any action against the acceptor. Section 101 of the Act lays down the contents of a regular and perfect protest which are as follows: (1) The instrument it self or a literal transcript of the instrument; (2) The name of the person for whom and against whom the instrument has been protested.

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 (3).

The fact of and reasons for dishonour i.e. a statement that payment or acceptance or better security, as the case may be, has been demanded of such person by the notary public from the person concerned and he refused to give it or did not answer or that he could not be found. (4) The time and place of demand and dishonour.(5) The signature of the notary public.(6) In the case of acceptance for honour or payment for honour the person by whom or for whom such acceptance or payment was offered and effected.

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Notice of protest :-- When a promissory note or bill of exchange is required by law to be protested, notice of such protest must be given instead of notice of dishonour, in the same manner and subject to the same conditions; but the notice may be given by the notary public who makes the protest. The NI Act requires that , the presentment for acceptance and for payment, service of notice of dishonour and noting must be done within reasonable time. In determining what is a reasonable time, regard shall be had to the nature of the instrument..(contd.)

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 and

the usual course of dealing with respect to similar instrument; and, in calculating such time, public holidays shall be excluded. If the holder and the party to whom notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within reasonable time if it is despatched by the next post or on the day next after the day of dishonour. If the said parties carry on business or live in the same place, such notice is given within a reasonable time if it is despatched in time to reach its destination on the day next after the day of dishonour.

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 Reasonable

time for transmitting such notice : Party receiving notice of dishonour, who seeks to enforce his right against a prior party, transmits the notice with a reasonable time if he transits it within the same time after its receipt as he would have had to give notice if he had been the holder. Public Holidays : According to Sec 5 public holidays includes Sunday and any other day declared by the Central Government by notification in the official gazette to be a public holiday. Such holidays are called bank holidays and notified in advance.

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 Rate

of interest on Bill and Promissory Note : If ROI is specified for payment, interest shall be calculated at specified rate from date of instrument till realisation. It shall be calculated @18% if not specified. Rules Regarding Compensation for Dishonour : (A) The holder is entitled the amount due and relative expenses. B) The endorser becoming liable and has paid the amount is entitled to (i) the amount paid, (ii) interest @18% p.a. and (iii) all related expenses.

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 (C)

The party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill. (D) In the case of currencies of two payment would be made at the current rate of exchange between two places.

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Drawee In Case Of Need : When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to, in case of need,(the bill remaining unpaid), such a person is called a "drawee in case of need". The bill is not treated as dishonoured until it has been dishonoured by such drawee in case of need. Acceptance For Honour : When a bill of exchange has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto.

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 Such

Acceptor by writing on the bill must declare that the bill has been accepted under protest and for whose honour he has accepted the bill. If he does not write it is deemed that he has accepted for the honour of that drawer. The following conditions are to be fulfilled for this. (i) It is to be made only after dishonour, noting and protest of the bill.( ii) Holder must give consent because his right against all prior parties for recovering the money is waived.( iii) Acceptor for honour should not be liable on the bill. (iv) Acceptor to signify his acceptance in his own handwriting.

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 Liability

of the Acceptor for Honour : An 'acceptor' for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not; and such party and all prior parties, are liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him in consequence of such acceptance. For making him liable on the bill the bill must have been presented to him within reasonable time after noting and protesting.

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 Payment

for Honour : When a bill of exchange has been noted or protested for non-payment, any person may pay the same for the honour of any party liable to pay the same, provided that the person so paying or his agent in that behalf has previously declared before a notary public the party for whose honour he pays, and that such declaration has been recorded by such notary public.
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 Right

of payer for honour : Any person, so paying is entitled to all the rights, in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment.

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THANK YOU

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