Bill of Exchange
For a prolonged time, cancelling the old Bill and drawing up a fresh Bill is called the Renewal of Bill. Drawee is requested to pay interest for the extended duration, which can be charged in cash or added to the sum of the new Bill.
Bill of Exchange implies a Bill drawn up by a person directing another person to pay another person the amount of money mentioned. For instance, X orders Y to pay 50,000 for 90 days after the date, and Y accepts this order by signing his name, then it will be an Exchange Bill.
Characteristics of Bill of Exchange
A Bill of Exchange in writing is necessary to have in a Bill.
To make a payment, it must include a confirmation order and not just the request
No condition should be present in the order
The sum of the Exchange Bill should be definite,
Date set for the amount to be paid
Both the drawee and the drawer must sign the Bill,
The sum displayed on the Bill should be charged on demand or at the end of a set period.
The sum shall be payable to the beneficiary of the Bill, to a person, or against a definite order.
Types of Bill of Exchange
Documentary Bill- The Bill of Exchange is hereby accompanied by the related documentation confirming the validity of the sale or transaction between the seller and the buyer.
Demand Bill- When it is submitted, this Bill is payable. The Bill does not have a set payment date but once presented, the Bill needs to be cleared.
Usage Bill- It is a time-bound Bill that indicates that within the specified period and time, the payment has to be made.
Inland Bill- Only in one nation and not in any other foreign country is an Inland Bill payable. This Bill is the reverse of a foreign Bill.
Clean Bill- There is no evidence of a text in this Bill, so the interest is relatively higher than the other Bills.
International Bill- A foreign Bill is known as a foreign Bill that can be charged outside India. An export Bill and an import Bill are two examples of a foreign Bill.
Accommodation Bill- A Bill is regarded as an accommodation Bill that is supported, drawn, approved without any condition.
Trade Bill- This form of the Bill is only directly linked to trade.
Supply Payment- The Bill that is withheld from the government department by the supplier or contractor is known as the supply Bill.
Renewal of Bill of Exchange
The extension of the Bill of Exchange is an act of revocation of the old Bill before its maturity for an extended period in return for a new Bill, including interest. At the request of the drawee, it is done by the drawer. The drawee may often not be able to pay the balance of the Bill on the due date. He will ask the drawer to cancel the old Bill and for an extended period to draw up a fresh Bill. In some cases, the acceptor of the Bill will find it difficult to repay the balance of the Bill on the due date.
Therefore, in such a case, the acceptor may order the holder of the Bill to replace the old one with a new one, which would then allow the acceptor of the Bill to repay with some time extension. If such a proposal is agreed by the holder of the Bill, the old Bill is cancelled and the new Bill is drawn, which is then authorized by the drawee. This process of cancellation of the old Bill and its replacement with the new Bill is also called the Renewal of the Exchange Bill.
Learning Objective of Renewal of Bill of Exchange
If the original Bill is cancelled and a fresh Bill is drawn on the acceptor side, one should make journal entries in the drawer and acceptor books; so that it becomes easy for future redressal of payments. If the receiver of a Bill finds himself unable to pay the Bill on the due date, he will ask the drawer of the Bill to cancel the original Bill before it is due and draw on it a new Bill for an extended period. This is called renewing a Bill of Exchange. The acceptor has to pay interest for the extension of time. Therefore, the current Bill not only contains the cost of the original Bill, but also interest, etc.
Advantages of Renewal of Bill of Exchange
It is legal proof of debt.
It is a simple form of debt transfer.
On the Bill itself, a lender will sue.
It is a negotiable instrument and can without difficulty be Exchanged for settlement of one's debt.
It can be discounted before the due date.
A debtor enjoys the advantage of a full loan term.
This is a convenient way to send money from one location to another.
Bills of Exchange: The Basics
The following are the basic components of a Bill of Exchange:
A written Bill of Exchange is required.
The vendor who creates the Bill is known as the "Drawer," and the individual on whom the Bill is drawn is known as the "Drawee.
A Bill of Exchange must carry a specific amount and must only be in terms of money, not commodities or services.
The payment order should be unconditional.
A Bill of Exchange's Dishonour
Dishonour of a Bill of Exchange occurs when the acceptor of a Bill of Exchange fails to pay the Bill on the due date of maturity or refuses to pay. A payee may obtain a certificate from a Notary Officer appointed by the government for this purpose as proof of Bill Dishonour. In this case, the notary charges a fee known as "Noting Charges."
Parties to a Bill of Exchange
Drawer- A debtor or borrower is referred to as a drawer. The individual who promises to pay a debt to someone else.
Drawee- Is a creditor or a lender. The individual whose name is on the Bill.
Payee- The individual to whom money is to be paid or the person who is to be paid.
FAQs on Renewal of Bills: Procedures and Importance
1. What is the renewal of a Bill of Exchange in simple terms?
The renewal of a Bill of Exchange is the process of cancelling an old bill that is due for payment and replacing it with a new bill with an extended payment period. This happens when the drawee (the person who owes the money) is unable to pay the amount on the original due date and requests the drawer (the person who is owed the money) for more time.
2. Why is a Bill of Exchange renewed instead of simply being dishonoured?
A bill is renewed to maintain a good business relationship and avoid the legal consequences of dishonour. When a drawee foresees difficulty in payment, they can proactively request a renewal. This is seen as a more cooperative approach than defaulting on the payment, which would lead to the bill being dishonoured, potentially incurring noting charges and damaging the drawee's creditworthiness.
3. What is the main difference between the renewal and the retirement of a bill?
The key difference lies in the timing and reason for the payment settlement.
- Renewal of a Bill: This occurs when the drawee is unable to pay on the due date and requests an extension, leading to a new bill with interest charges.
- Retirement of a Bill: This happens when the drawee pays the bill before the due date. As an incentive for early payment, the drawer usually gives the drawee a discount, known as a 'rebate on bill'.
4. What are the typical steps involved in the procedure for renewing a bill?
The procedure for renewing a bill generally follows these steps:
- The drawee informs the drawer of their inability to pay the original bill on the due date.
- The drawer agrees and cancels the old bill.
- Interest for the extended credit period is calculated. This may be paid in cash by the drawee or added to the amount of the new bill.
- The drawer draws a new bill for the revised amount (original amount + interest, if not paid in cash) and for the new term.
- The drawee accepts the new bill and returns it to the drawer.
5. How are interest charges calculated and treated during the renewal of a bill?
Interest is charged by the drawer as a fee for granting an extended credit period. It is calculated on the amount of the original bill for the duration of the new bill's term. For example, if a ₹10,000 bill is renewed for 2 months at 12% per annum, the interest would be ₹10,000 x (12/100) x (2/12) = ₹200. This interest amount can either be paid immediately in cash by the drawee or be added to the principal, making the new bill for ₹10,200.
6. Can you give a real-world example of why a bill might need to be renewed?
Certainly. Imagine a retailer (drawee) purchased goods worth ₹50,000 from a wholesaler (drawer) on a 3-month credit, for which a bill was accepted. Towards the end of the 3 months, the retailer faces an unexpected cash flow problem due to a sudden drop in sales. Instead of defaulting, the retailer contacts the wholesaler to renew the bill for another 2 months, agreeing to pay interest for the extension. This allows the retailer to manage their finances without damaging their supply relationship.
7. What happens if the drawee fails to pay even the renewed bill?
If the drawee fails to honour the renewed bill on its new due date, the bill is treated as dishonoured. At this point, the drawer has the right to take legal action to recover the amount due. The drawer may also incur noting charges to get the fact of non-payment certified by a Notary Public. The drawee then becomes liable for the bill amount plus any noting charges and further interest.
8. What is the importance of a Bill of Exchange in commercial transactions?
A Bill of Exchange is a vital instrument in commerce for several reasons:
- Proof of Debt: It serves as a clear, written evidence of a credit transaction and the debtor's liability.
- Facilitates Credit: It allows sellers to offer credit to buyers, boosting trade and commerce.
- Certainty of Payment: It specifies a fixed amount and a fixed date for payment, providing certainty to the creditor.
- Transferable Instrument: The drawer can endorse the bill to a third party to settle their own debt or discount it with a bank to get immediate cash.
