TheNegotiable Instruments Act 1881 governs the provisions for bills of exchange. According to Section 5 of this act, the bill of exchange is defined as “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 the order of the certain person or to the bearer of the instrument.” When such order is accepted in writing it becomes a valid bill of exchange. Learn theFeatures of Bills of Exchange here.
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For example, X orders Y to pay ₹ 50,000 for 90 days after date and Y accepts this order by signing his name, then it will be a bill of exchange.
In general practice, the seller gives a credit period to the buyer on selling goods or on providing services.
But sometimes, the seller is not in a position to offer credit period to purchaser and purchaser also will not be in a position to pay immediately.
In such a case, the seller will like that the purchaser shall give a promise in writing to pay the amount on a certain date.
This written promise then turns into valuable instruments of credit when this written promise are made in proper form and is properly stamped.
These written instruments are often accepted by banks and we can advance money against them. Also, we can endorse this instrument i.e. can pass to another person.
Mr. Anant Sharma draws a bill on Mr. Ram Kumar Goyal for 3 months for ₹ 50,000, payable to Mr. Rajiv Ranjan or his order on 15th April 2018.
Mr. Anant Sharma has ordered Mr. Ram Kumar Goyal to pay ₹ 50,000 to Mr. Rajiv Ranjan. If the order is acceptable to Mr. Ram Kumar Goyal, he will write across the bill as follows:
Mr. Ram Kumar Goyal
When the drawee writes such acceptance on the bill, it becomes a bill of exchange.in the above example Mr. Anant Sharma is the drawer of the bill, Mr. Ram Kumar Goyal is the acceptor and Mr. Rajiv Ranjan is the Payee. Mr. Ram Kumar Goyal will pay the amount to Mr. Rajiv Ranjan.
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