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The Bills Of Exchange Act 1882

In 1881 the Negotiable Instruments Act was enacted and this was swiftly followed by the Bills of Exchange Act 1882.

Cited by some as two of the most important Acts ever brought into being by Parliament, The Bills of Exchange Act 1882, in particular, has featured as the primary subject of commentary by some of our most revered purveyors of law.

The Bills of Exchange Act 1882, continues to attract scrutiny, and most surprisingly perhaps, the vast majority of present day attention appears to be originating on social media.

We felt it would be an extremely useful exercise to take a closer look at the Bills of Exchange, and for that matter, the nature of negotiable instruments, and how they relate to everyday life.

Let us now commence our journey into the world of merchants, and more specifically, the paper they use, and put ‘to use’, by first casting an eye upon ‘Bills of Exchange’.

In simple terms, a ‘Bill of Exchange’ (Bill), provides a method by which credit can be granted, i.e., a short term loan; typically for between one to three months. These periods of time will no doubt resonate with some readers.

During its life, the Bill is negotiable, meaning that the paper Bill itself, can be passed from one person to another, thereby acting as a ‘medium of exchange’ and, in that sense, thereby serving the same purpose as money. The key point to note is that every time a bill changes hands, the Bill is endorsed by the seller, and thus the seller guarantees performance: i.e., the buyer is guaranteed performance where payment of the ‘loan’ is defaulted.

Here’s an example of a Bill of Exchange being used in practice:

Let us pretend that The Merchant Wares Co (‘TMWC’), has sold goods valued at £10,000.00 to D H Brown & Co (‘DHBC’), and let us say that the usual terms of payment are three months hence.

TMWC is not going to maximise profitability if it has to wait three months to receive payment; clearly it would prefer to put the money to work.

Enter the ‘Bill of Exchange’.

TMWC (as Drawer and Payee), may instruct DHBC (Drawee) to accept a Bill for £10,000.00 payable three months hence. Once accepted, TMWC can sell the Bill for cash (typically £10,000.00 less a ‘discount’).

When the Bill matures, (in three months), DHBC pays £10,000.00 to the holder of the Bill.

Thus TMWC is able to grant credit to its customer (DHBC). Meanwhile, TMWC is able to make use of ready cash by selling the Bill, at a discount, typically to a financial institution (in this example let’s say the Bill is sold for £9,700.00). The owner of the Bill is ultimately the lender, and this party may change throughout the life of the Bill. The Acceptor (in our example DHBC) can effectively be viewed as guarantor for the loan.

And thus TMWC has obtained £9,700.00 in return for the Acceptor’s undertaking to pay £10,000.00 at the expiry of three months.

This scenario is played out time and again, each and every day, and this activity supports commercial activity.

In Our example, both DHBC and TMWC have received the benefit of three months credit: TMWC will make profit on the goods sold, a sale that may only have been possible because it offered terms of three months. Meanwhile, the Holder of the Bill (the lender) realises a profit when the Bill matures and the face value is paid.

Nowadays, the delivery of merchandise (goods) is usually accompanied by an ‘invoice’ which has either been stamped ‘paid’ (because it was paid in advance), or (and this is certainly the case in business), the merchant instructs payment to be made on or before a date, usually thirty (30) to ninety (90) days from the date of order, or delivery of the goods.

Whether it’s called a Bill or an Invoice, the mechanism at work appears to be the same. The merchant is directing that payment be made, to itself, on or before a specified day.

Many businesses make use of discounting facilities in order to improve cash flow, which in turn, is “in a sense”, bringing into the present day, that which until now, only exists in the future.

Next time, we will compare the scenario created in our example, to the provisions of the Bills of Exchange Act 1882.

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