Bill of Exchange- Definition, Types and Features


A bill of exchange is defined as per Section 5 of the Negotiable Instruments Act, 1881 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”.

A creditor draws a bill of exchange on his debtor. It should be accepted either by the debtor or any other person on his/her behalf. A bill of exchange before being accepted by the debtor is a mere draft only. Only after signing and writing “accepted” by the debtor, it is considered as a bill of exchange.

Types of Bills of Exchange

  1. Documentary Bill: It is a type of bill of exchange that is supported by documents to confirm the authenticity of the transaction.
  2. Usance Bill: It is a bill that mentions the time period for the payment.
  3. Clean Bill: A clean bill does not have any supporting documents. Higher interest rates are charged on these bills due to lack of any documents.
  4. Foreign Bills: Such type of bills are bound to be paid outside India. It can be of two types: import bill and export bill.
  5. Demand Bill: A bill that is payable on demand is called a demand bill. It does not have a specific due date mentioned hence can be cleared as and when demanded.
  6. Supply bills: These bills that are drawn by a supplier on government for payment for the supply of certain goods.
  7. Fictitious Bills: Bills in which name of either drawer or drawee or both are fictitious.
  8. Accommodation Bill: A bill which is drawn and accepted without any obligations.
  9. Trade Bill: A bill which is drawn for international trade-related purpose.
  10. Inland Bill: A bill that is payable only within domestic limits. It is opposite in nature to the foreign bill.

In this section, the types of bills of exchange are enumerated; these are the types which are commonly used in business transactions.

Features of Bills of Exchange

Following are the features of bills of exchange:

  1. It should always be made in writing.
  2. It should be an order to make a payment
  3. The order of payment should be unconditional
  4. Both drawee and drawer must sign the bill.
  5. The amount should be payable to a certain person or to a person on his behalf or to the bearer of the bills of exchange
  6. The amount mentioned on the bill should be paid on-demand or on the expiry of a fixed period.

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