CHAPTER 06
BILLS OF EXCHANGE
It is not within the scope of this book to deal with the purely legal aspect "of bills of exchange, promissory notes, and cheques, and reference will be made to the legal side only in so far as is necessary to enable the student to obtain a proper perspective of the subject.
A bill of exchange is defined in the Bills of Exchange Act 1882, as follows:
A bill of exchange is a written, unconditional order directed by one person to another. signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person, or to bearer. (Sect. 3.)
By the same Act a promissory note is defined as follows:
A promissory note is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer, (Sect. 83.)
By the same Act a cheque is defined as follows:
A cheque is a bill of exchange drawn on a banker, payable on demand. (Sect. 73.)
The important distinctive words are put into italics for emphasis. Beyond stating that the law is generally similar for bills of exchange and promissory notes with certain essential differences, the present chapter will not consider the legal incidents of promissory notes, and will be exclusively confined to bills of exchange.
When a bill is drawn up it is known as 'drawing' a bill and the person who draws it is the creditor (or his agent) of the person to whom it is addressed, that is the debtor; they are known respectively as the drawer and drawee, the former being the creditor, the latter the debtor. When the drawee signifies his assent to the order in writing he becomes the acceptor, and as such is liable to a holder of the bill according to the tenor thereof. The creditor or drawer may make the bill payable either to himself or to another person. Under the Bills of Exchange Act, the acceptor is always liable to pay the bill, all other parties being in the position of sureties, so that if the document has already passed through several hands (the parties having endorsed it in the same way as a cheque), the holder in whose possession it is when the bill matures (that is to say, becomes due), must, in order to safeguard and preserve his rights against the parties other than the acceptor (who is always liable on the bill) comply with certain formalities should the bill fail to be paid at maturity.
The custom of drawing bills of exchange dates from the Middle Ages and carried, and still carries, two very important rights, viz.:
1. It enables the holder, who is technically in law an assignce, to sue in his own name, and:
2. It entitles the holder to enforce payment 'free from equities".
These two characteristics are the essentials of a NEGOTIABLE instrument-which term is a term of LAW, not of COMMERCE. Confusion exists, unfortunately, by the common employment of the term NEGOTIA. TION in relation to bill transactions when persons deal with, transfer, buy or sell a bill; but whilst a TRANSFERABLE document is one which may be transferred from one person to another, that is quite a different matter from its being a NEGOTIABLE document. A common example may be cited by reference to a postal order. Such a document is freely transferable, but is not a NEGOTIABLE instrument.
With reference to the first characteristic, the importance of this privilege is not so great as in the past when the Common Law did not recognize assignments of certain things, usually choses in action-rights which depend not on possession, but on the court's willingness to enforce them-so that the assignee had to join the name of the assignor if it became essential to enforce his rights; but the law relating to bills of exchange was gradually moulded and shaped by the law merchant which contained much foreign law through its contact with the ideas and customs of other nations. This fact, together with the practical needs of the mercantile community, led from the very outset to the rule that the assignee of a bill had the right, without being at the mercy of a capricious assignior, to go ahead with his action. In short, whether his assignor objected or not, the assignee's right to sue was, in the absence of nullifying causes, absolute.
The second characteristic is, however, of the greatest importance. The right here, as in the preceding paragraph, owed its origin to the law merchant. Provided that the holder of a bill has become technically a 'Holder in due course', he may sue on the bill despite the lack, or deficiency of, title of his assignor. It is this more than any other charac- teristic that determines whether or not a document is a negotiable instrument. Where the assignor can bestow a better title to his assignee than he himself possesses, the instrument so passing is a negotiable instrument, subject always to the presence of good faith on the part of the assignee.
The use of bills of exchange is not confined to financing exports and imports, but extends to the home trade and the book-keeping entries follow the same principles quite irrespective of the particular purpose of the bill transaction.
The nature of a bill may be understood better by considering the following example. Suppose A owes B £1,000, the latter may draw up a bill, address it to A, and make it payable (say in three month's time) to himself (B) or even to a third party (C). After he has signed it B will in the ordinary way obtain A's acceptance. The document, as will be seen, may be transferred (very much like a cheque) or may be kept 'in hand" for the three months; or may be taken to the bank for discounting
It will be seen that should A owe B £1,000 and B owe C £1,000, and all parties agree, the one bill settles the mutual debts; that is when A accepts the bill (i.e. signifies his assent in writing thereon) B will credit A's account in the same way as if a cheque had been received: at the same time B will debit C's account as if he had paid him a cheque. A will debit B's account -
BILLS OF EXCHANGE
when he accepts the bill; the fact that the payee is C is immaterial. So far as C is concerned he will credit B just as if a cheque had passed between them and the fact that the acceptor is A is immaterial. The word 'immaterial' is naturally meant to signify that the nature of the book- keeping entry is the same for C whether the acceptor is A or B. The bill comes (as between B and C) from B, and A is not one of the accounting parties: but in a business sense the standing and reputation of the acceptor of a bill is of prime importance, as C would not take the bill either as payee or as endorsee if there were doubts as to A's capacity and willingness to fulfil his written obligation, notwithstanding C's right against B should the bill be dishonoured by non-payment at its maturity.
Inland Bill. From the legal standpoint an inland bill is defined as one which is, or purports to be, drawn and payable in the British Isles or drawn in the British Isles on a person resident therein. All other bills are considered to be foreign for this purpose.
From the viewpoint of the Stamp Act the conceptions of inland and foreign bills are considerably different. A foreign bill is defined as a bill which is drawn and payable outside the United Kingdom, but paid, endorsed, or negotiated in the United Kingdom. All other bills from the viewpoint of stamp duty are considered as inland bills.
The significance of the above definitions is that for the purposes of determining the legal incidents of a bill of exchange (English law applying to an inland bill and foreign law to a foreign bill), one criterion is employed, and for determining the rate of stamp duty to be paid another criterion is applied.
A good example of this is that bills drawn in the Channel Islands and the Isle of Man are 'legally' inland bills-within the British Isles; yet for the purposes of stamp duty they are foreign bills-outside the United Kingdom.
It is important to note that only one definition (i.e. of an inland bill) occurs in the Bills of Exchange Act 1882; the other (i.e. of a foreign bill) occurring in the Stamp Act 1891, and being applicable for stamp duty purposes alone. However, the stamp duty on bills of exchange, including cheques and promissory notes was abolished as from 1st February 1971 by the Finance Act 1970.
The following is a specimen of an inland bill.
£1,000
LONDON,
THREE MONTpayable at
arranged thousand
To A, MANCHESTER.
14th January, 19...
Judy Bargnedate pay to me (or, if
"Poundeval
King
stay order, the sum of One alue received.
B. It should be noted that B is the drawer, A the drawee (and upon
acceptance, the acceptor), B (or C) is the payee. Here are some examples of international bills:
£342
MANCHESTER,
30th October, 19...
TWO MONTHS after date pay this First of Ex- change (Second and Third same date and tenor unpaid) to Fritz Troppau, or order, the sum of Three hundred and forty-two pounds, at the rate of exchange as per first London endorsement, value
received.
To HERR F. LUDWIG. BERNE.
M. SMITH.
Exchange for £470
LONDON,
29th April, 19..
SIXTY DAYS after sight pay the First of Exchange (Second and Third of the same date and tenor unpaid) to Messrs. Dubois et Cie, or order, Four hundred and seventy pounds, value in account. L. F. THOMSON.
To MM. MARTIN ET CIE, CALAIS.
Both the above bills are inland bills for stamp duty purposes. Here are the main benefits of a bill of exchange:
1. It is a means of settlement of foreign debts and the financing of exports. It bridges, as it were, the gap between the date of shipment and receipt at destination. Naturally, the exporter does not wish to wait for say, three weeks for payment in respect of his sale to a South African importer, nor does the importer feel it incumbent upon him to pay until lading and other documents, the exporter is able to obtain his money from receipt of the gonds. By drawing the bill, accompanied usually by bills of his banker, who, on his part, forwards the documents to his South African agent, who will transfer the documents necessary to enable the South African importer to claim the goods upon his acceptance or payment.
according to circumstances.
2. In all cases it permits a debtor to defer payment until maturity.
3. It is evidence of indebtedness.
BILLS OF EXCHANGE
4. It enables (as has been shown) the holder in due course to sue in his own name and 'free from equities'.'
5. It fulfils to a certain degree, in this country, the function of currency. 6. It enables a person to lend his name and so finance another by means of an accommodation bill. This is not a truly legitimate and normal function of a bill of exchange.
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