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Meaning of Bill of Exchange

According to the Negotiable Instruments Act 1881, a 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, or to the order of a certain person or to the bearer of the instrument.

The following are the features of a bill of exchange:
  • A bill of exchange must be in writing and not oral.
  • It is an order to make payment.
  • The order to make payment is unconditional.
  • The maker of the bill of exchange must sign it.
  • The payment to be made must be certain.
  • The date on which payment is made must also be certain.
  • The bill of exchange must be payable to a certain person.
  • The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
  • It must be stamped as per the requirement of law.
According to the Negotiable Instruments Act, A bill of exchange is generally drawn by the creditor on his debtor. It has to be accepted by the drawee (debtor) or someone on his behalf. It is just a draft till it is accepted.

For example, Ram sold goods to Rohan on credit for Rs. 10,000 for three months.

To ensure payment on due date Ram draws a bill of exchange upon Rohan for Rs. 10,000 payable after three months. Before it is accepted by Rohan it will be called a draft. It will become a bill of exchange only when Rohan writes the word “accepted” on it and put his signature to communicate his acceptance.

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