Accommodation Bills

Bills are accepted and endorsed for the benefit received. Generally, an acceptance is made to settle a trade debt, which is due to the Drawer by the Drawee and such a Bill is called Trade Bill. Moreover, in such a Bill, we come across the words “for value received”.

Accommodation bill is That which is drawn and accepted without any consideration. In fact, these bills are drawn for the financial assistance of one or both the parties in bill of exchange.

This means, Bills are accepted and endorsed for value (benefit) received. Thus, it is clear that bill of exchange is usually used in the businesses for discharging of mutual indebtedness arising from genuine trading activities.

As contrasted with the Trade Bill, Accommodation Bills are drawn and accepted with no consideration passed or received. The Bill, which is drawn just to oblige a friend, who is in need of money, of course without any trading activities, with sole intention of raising funds required for ready cash is known as Accommodation Bill.

The accommodating party, i.e., the drawee accepts the Bill drawn by the accommodated party (drawer). That is the Drawer of the accommodation bill can be called accommodated party and drawee can be called accommodating party. After the Bill is accepted, the drawer discounts it with a bank and obtains the cash.

Before the due date of the Bill, Drawer provides funds to the Acceptor, who honours the Bill. Since the acceptance is given without consideration and to help the accommodated party to raise the funds, the accommodated party has to discharge the Bill by himself or provide funds to accommodating party.

Thus, there is always a mutual understanding between the parties and hence, these bills are called Accommodation Bills. The language of an Accommodation Bill is the same as that of an ordinary Trade Bill. The modes of drawing, accepting, discounting, honoring etc. are similar to that of any Trade Bills. A banker cannot make distinction between a genuine Trade Bill and Accommodation bill. These Bills are also called “Kites” or “Finance Bills”.

Different ways of using accommodation Bill

i) For the Accommodation of Drawer Only:

If a person is in need of money, he draws a bill on his friend and gets it discounted from the bank. The whole proceeds of the bill are utilized by the drawer only. Before the due date of the bill drawer sends the amount of the bill to the drawee who honors the bill.

ii) For Mutual Accommodation of Drawer and Drawee; Bill Drawn by One Party:

Sometimes two parties are in need of money. They are not in a position to get money from any other source. To fulfill their need for money, one of the parties draws a bill on the other. Eventually, the bill is got discounted and proceed are shared in an agreed proportion. Amount of discount is also shared in the same proportion. On the due date, the drawer remits his share of proceeds to drawee. Drawee arranges his share of proceeds and meets the bills.

iii) For mutual accommodation of Drawer and drawee, Bill drawn by both parties on Each other:

It is another way of using bills by drawing bills on each other and getting them discounted from their respective bankers. The proceeds of the bills and discounting charges are shared in agreed proportion. On the due date, each party remits the required amount to other party for enabling each other to meet the bill.

Bill of same amount and term

Sometimes accommodation bills of same amount and term are drawn and accepted by the parties, so that there would be no need of sharing proceeds and remitting the balance. Each party gets his bills discounted and pays his acceptance.

Example:

For example, let us suppose A is in need of money, he approaches his friend B and asks him to give him a loan for $5,000. B also shows his inability but agrees that he will accept a bill of exchange. A draws a bill on B which he accepts at three months. A discount the bill with his bank and gets the money. After three months but before the due date, A sends $5,000 to B in order to meet his acceptance. B receives amount and pays his acceptance.