Topics Discussed
1) Bills of Exchange
A Bill of Exchange is a written, negotiable instrument used in financial transactions, where the drawer orders the drawee to pay a specified sum of money to the payee at a future date or on demand. It is a legal document and represents a formal agreement between parties for payment of a debt.
- Key Characteristics:
- It involves three parties: Drawer, Drawee, and Payee.
- It must be signed by the drawer.
- It can be endorsed (transferred) to other parties.
- It has a maturity date when the payment is due.
- It is negotiable, meaning it can be transferred from one person to another.
2) Types of Parties in Bills of Exchange
There are three key parties involved in a bill of exchange:
a) Drawer
The Drawer is the person or entity who writes and signs the bill of exchange. The drawer is the creditor or the one who is entitled to receive payment. They instruct the drawee to make the payment to the payee.
- Role: The drawer creates the bill and orders the drawee to pay the specified sum to the payee.
- Example: A supplier who sells goods to a customer may draw a bill of exchange.
b) Drawee
The Drawee is the person or entity who is directed by the drawer to pay the amount mentioned in the bill. The drawee is typically a bank or a debtor.
- Role: The drawee is required to pay the amount to the payee on or after the maturity date of the bill.
- Example: If a company draws a bill on its customer, the customer is the drawee.
c) Payee
The Payee is the person or entity to whom the payment is to be made. This party can be the drawer themselves or a third party.
- Role: The payee receives the money from the drawee.
- Example: In a transaction where a supplier draws a bill on a customer, the payee could be the supplier or a third-party beneficiary.
3) Promissory Note
A Promissory Note is a written promise made by one party (the maker) to pay a certain amount of money to another party (the payee) on a specified date or on demand. Unlike a bill of exchange, it involves only two parties.
- Key Features:
- It is a promise, not an order like a bill of exchange.
- Only two parties: the maker and the payee.
- It is a negotiable instrument.
- The maker is unconditionally obligated to pay the specified amount.
4) Parties in Promissory Note
a) Maker
The Maker is the individual or entity who makes the promise to pay the specified amount in a promissory note. They are also the debtor in the transaction.
- Role: The maker writes and signs the note, agreeing to pay the payee the amount mentioned.
- Example: A person borrowing money from a bank might sign a promissory note to repay the amount.
b) Payee
The Payee is the individual or entity who will receive the payment as specified in the promissory note.
- Role: The payee is the recipient of the money promised by the maker.
- Example: The person lending money to the maker is the payee in the promissory note.
Provision and Reserves Class 11 Notes
5) Difference Between Bills of Exchange and Promissory Note
| Basis | Bills of Exchange | Promissory Note |
|---|---|---|
| Parties | Three parties: Drawer, Drawee, Payee | Two parties: Maker, Payee |
| Drawer | There is a drawer that orders the payment. | There is no drawer. Only a maker who promises payment. |
| Order and Promise | It is an order to pay. | It is a promise to pay. |
| Acceptance | Requires acceptance by the drawee. | No acceptance is required |
| Liquidity | Highly liquid as it can be endorsed and transferred. | Can be transferred, but less liquid than bills of exchange. |
| Payee | The payee is the person who receives the payment. | The payee is also the recipient of the payment. |
| Noting | Noting and protesting can be done if payment is not made. | Noting is not required in promissory notes. |
| Copies | Multiple copies of the bill can exist. | Only one copy of the promissory note exists. |
| Stamps | It requires a stamp duty for validity in some cases. | Requires stamp duty for legal validity. |
6) Difference Between Trade Bills and Accommodating Bills
| Basis | Trade Bills | Accommodating Bills |
|---|---|---|
| Object | Trade bills are drawn for the purpose of commercial transactions (buying/selling goods). | Accommodating bills are used to help a party raise finances, often without an actual underlying transaction. |
| Consideration | Trade bills have a consideration (a transaction or goods/services exchanged). | Accommodating bills do not have a genuine consideration; they are drawn to provide credit or facilitate borrowing. |
| Proof of Debt | The debt or obligation is typically backed by a commercial transaction, like a sale of goods. | There is no debt or sale; the bill is drawn for accommodation purposes only. |
| Distribution of Proceeds | Proceeds of trade bills are distributed according to the underlying commercial transaction. | The proceeds of accommodating bills are usually shared based on an agreement between the parties. |
| Suit in the Court | In case of non-payment, trade bills can be used as evidence in legal suits related to the underlying commercial debt. | Accommodating bills cannot be used as evidence for actual debt in court; they are mainly for financial accommodation. |
This is all about Bills of Exchange Class 11 Notes. If you have any doubts, you can join my telegram channel or ask questions in the comments section.