Laws relating to Bill Financing

Shyam Uppuluri us.prakash@gmail.com

Bill financing involves discounting or purchasing of commercial bills arising out of sales. It is more advantageous than a CC / OD, as the underlying transaction is known. The date of repayment is known. Its transferable and can be rediscounted to improve the bank s liquidity.

Bill of Exchange
Section 5 of the NI act defines a bill of exchange as an instrument in writing containing an unconditional order signed by its maker / drawer directing the drawee to pay a sum of money to the payee or his order or the bearer of the instrument. The maker of the bill is the drawer / creditor / seller. The person who is liable to make the payment is the drawee / debtor / buyer The person who entitled to receive the payment is the payee. When the bill is assigned to a 3rd party, the assignee becomes the creditor and the drawer becomes liable to the assignee if the drawee defaults in payment.

Provisions related to the Bill of Exchange in NI Act

Holder : As per sec 8, the holder is entitled in his own name to possess the bill and recover the bill amount. Holder in due course : As per sec 9, holder in due course is, who for a consideration, becomes the possessor of the bill. He is the person to whom the bill is transferred. Payment in due course : As per sec 10, is the payment made to the holder in good faith and without negligence as per the apparent tenor of the bill of exchange.

Provisions related to the Bill of Exchange in NI Act

Negotiation : As per sec 14, the transfer of a bill to a person for a consideration such that the person is entitled to claim the bill amount. Endorsement : As per sec 15, is the signing of the bill of exchange by its holder for the purpose of transferring it. Liability of the drawer : As per sec 30, the drawer of the bill exchange has to compensate the holder, if the drawee dishonors the bill. However the notice of the dishonor should be provided to the drawer.

Provisions related to the Bill of Exchange in NI Act

Liability of the acceptor : As per sec 32, the acceptor of the bill has to pay the amount of the bill on maturity and as per the apparent tenor of the acceptance. Liability of the endorser : As per sec 35, a person who endorses and delivers a negotiable instrument without any contract to the contrary is liable to every holder in case of dishonor. Sometimes the endorser s liability is expressly excluded.

Provisions related to the Bill of Exchange in NI Act

Specified interest rate : As per sec 79, if specified , interest must be calculated at the specified rate. Unspecified interest rate : As per sec 80, if not specified, interest on the instrument must be calculated at 18% pa.

Types of Bills
Inland Bills : Drawn and payable in India and is drawn on an resident Indian though it can be payable in a foreign country. Foreign Bills : Drawn outside India and is drawn on person residing outside India payable outside or in India. Demand Bills : As per section 19, a demand or sight bill is payable on demand and does not specify any time for payment.

Types of Bills
Usance Bills : Payable otherwise than on demand is a Usance bill or a bill payable after sight. Normally, it specifies a time for payment. Clean Bill : drawn to discharge a debt or a claim. It is not supported by any document to title to goods. Bill drawn after supply of goods.

Types of Bills
Documentary Bills : A documentary bill is drawn to claim the price of goods supplied. It accompanies the document to title to goods such as lorry receipts , railway receipts, warehouse receipts or bill of lading. The documentary bill can be drawn in the follwing 2 ways.
With instruction to delivery against payment ( DP Bills) With Instruction to delivery against acceptance ( DA Bills )

Types of Bill Finance

Banks generally offer 3 types of Bill Finance Bill Purchase ( BP ), Bill Discount ( BD ), and Advance against Bills for Collection ( ABC ).
Bill Purchase : Banks negotiate clean or documentary bills payable on demand. The holder is paid the face value of the bill immediately. After the purchase of the bill the bank becomes the holder in due course and acquires all the rights of ownership.

Types of Bill Finance

Bill Discount : The bill of exchange is payable after a specific period ( Usance bills ). The bank pays the face value of the bill after deducting the discount. After purchasing the bill the bank becomes the holder in due course and acquires all the rights. Advance against the Bills for Collection : The bank advances against the bills that are in course for collection. The bank provides an amount in consideration of a prescribed margin to the customer. Then the bills are sent for collection. The bank becomes the holder in due course of the bills.

Drawee Bill Acceptance

In this facility the bank pays the drawer the amount of the bills drawn on the borrower on presentation. The bank recovers from the bill amount along with the interest from the drawee / borrower on the due date. The bill amount is debited to the drawee bills discounting account . The bank can sue the drawee / borrower to recover the bill amounts. The bank can also sue the drawer in case of the dishonor of the bills.

Bills Co acceptance
In this facility the bank along with the borrower accepts the bills. The bank accepts joint liability with the borrower for the reimbursement.