Bills of Exchange

Bills of Exchange

A bill of exchange is an important mode of exchange of undue liability. Let’s learn about the bill of exchange and its working in the market.

According to the Negotiable Instrument Act of 1881, a “negotiable instrument” means a promissory note, bill of exchange or cheque payable to the bearer. In other words, a bill of exchange is of the negotiable instrument; the amount mentioned on it must be paid to the bearer of the instrument or the order of the holder.

According to the Bills of Exchange Act, 1882, a Bill of Exchange 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 or determinable future time, a certain sum in money to, or to the order of, a specified person, or to bearer.”

A bill of exchange is a binding agreement between parties to pay a sum of the agreed amount on-demand or on a specified date as mentioned over the instrument. The ultimate liability of paying the amount falls upon the person to whom it was made. In general, the creditor draws or issues a bill to the debtor if the latter owes a sum of money for goods or services or both.

Parties of a bill of exchange

  • Drawer: The one who makes the bill of exchange. In other words, he is the creditor who asks for a sum of money from his debtor.
  • Drawee: The person who accepts the bill of exchange; upon whom it was drawn is the drawee. He is the debtor.
  • Payee: He is the person to whom the payment has to be made. It can be the drawer itself or can be the third party also.
  • Holder: The person possessing the bill of exchange, who has the right to recover the amount.
  • Endorser: If the bill of exchange is endorsed by another person, the person endorsing is called the endorser.
  • Endorsee: The person to whom the bill has been endorsed is known as the endorsee.

                                          Specimen of a bill of exchange

                                                      Bill Of Exchange

Amount- 50,000                                                                                              XYZ Place,


80 days after the date, pay to Mr KG (Payee) a sum of Rupees Fifty Thousand for the value received.


Accepted                                                                                                                  Drawer

Drawee’s Name                                                                                                      (Signature)

Drawee’s Address                                                                                                   Drawer’s Address

Essential Characteristics of a bill of exchange

  • A bill of exchange must be in written form. An oral agreement cannot be considered a bill of exchange.
  • Expresses order to pay.
  • The order to pay should not be dependent on the happening of an uncertain event.
  • The instrument must be signed by the drawer.
  • The drawer, drawee, and payee may not be three different persons. One can be two, but there must be two distinct persons in any case.
  • The sum to pay must be definite.
  • Must be paid in money only.
  • It must be stamped.

Timed Instrument

A bill of exchange is a timed instrument. A timed instrument is one which is payable after a fixed period or after sight or on a specific day, or on the happening of an event which is certain to happen.

In a bill of exchange, “at sight” and “on presentment” means payable when demanded. ‘At sight’ in the bill of exchange is the date on which it was accepted by the drawee.

Maturity of a bill of exchange

The maturity of a bill is the date on which it becomes due. 

General Rules

  • Three days of grace period must be given mandatorily after the due date. For example, in the above specimen, the due date after 80 days is 26 July 2022, add three days of grace period to this, so the final due date must be 29 July 2022.
  • If, after providing the grace period, the due date falls on official holidays, the preceding working day shall be considered. For example, after the grace period, if the due date falls on 2 October, then 1 October assuming it is a working day, shall be considered.
  • In case of an emergency, the following working day shall be the due date. 
  • In cases where time limits are mentioned in terms of months rather than in days, the last date of the due month shall be considered. For example, if it is mentioned three months after the date from 31 August, then 3 December (30 November + 3 days grace period) shall be the final due date.

Process of Bill of Exchange

Mr A (Creditor)

Sold goods to Mr B and drew a Bill of Exchange

The BoE is delivered to Mr B and is accepted by him unconditionally.

The drawer presents the instrument to 

           Drawee for payment on maturity


           Discounted from the bank before the maturity date


           Bill sent to the bank for collection


           Endorsed to Mr C


           Receives the payment from drawee


           The bill got dishonoured


  • Mr A being the creditor sells the goods to Mr C, and a BOE was issued and delivered to Mr B, which was thoroughly accepted by the latter. 
  • There are three rights with drawer before maturity- he can endorse it to his creditor, can get the bill discounted from the bank, or can send the bill to the bank for collection.
  • If he endorses Mr C, he gets discharged from his liability from Mr C till the amount mentioned on BoE. Now Mr B is liable to pay Mr C if he presents the bill before Mr B.
  • If Mr A discounts the bill from the bank, he gets the amount from the bank after deducting some charges. Now Mr B is liable to pay the bank on the presentment of the bill before him.
  • Suppose he sends the bill for collection to the bank, with the instruction to hold the bill till maturity. Here the bank gets the right to recover from Mr B on behalf of Mr A on maturity, only with the presentment of the bill. The amount will get credited to Mr A’s account only after collection.
  • If Mr A chooses none of the options above, then he has the right to recover from Mr B on the due date.

At maturity, there can be two scenarios-

Either the BoE gets discharged by payment of the amount by the party liable to pay (here, Mr A).

Or the BoE got dishonoured due to failure of payment.

In case of dishonour of BoE, the holder has the right to sue the party liable to pay after completion of the due date. Any notal charges paid by the holder can be recovered by the party liable to pay in addition to the amount he was liable with.

Renewal Of Bill of Exchange

If before maturity or on maturity, the drawee himself reaches the drawer, he is not in the condition to discharge his liability. And requests to extend the time limit while the bearer or the drawer agrees to the same, the prior bill of exchange gets cancelled. A new bill of exchange gets issued with new terms of payment, duly delivered and accepted by the drawee. The whole process is called the renewal of BoE.


A bill of exchange is a negotiable instrument that must be in writing and made unconditionally. As it is a medium of exchange, it must be duly signed and stamped. It is the responsibility of the drawer to deliver the BoE to the drawee and make it duly signed. The instrument can be endorsed, discounted, and sent to the bank for collection, but the ultimate burden of liability is always upon the drawee. A bill of exchange is guided under the Bill Of Exchange Act, 1882 & The Negotiable Instrument Act, 1881.