Question

A/An .......................... is one which is drawn by one person and accepted by another, without consideration, merely to enable the drawer to raise money on the bill by discounting it.

• A. Bills in sets
• B. Documentary bill
• C. Bearer instrument
• D. Accommodation bill

Hint:

In Negotiable Instruments Law, distinguish between a genuine trade bill (drawn against a real trade debt) and an accommodation bill (drawn without consideration to raise finance). The parties to an accommodation bill are liable to a holder in due course just like in a regular bill.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
The question provides a definition for a specific type of bill of exchange under the law of negotiable instruments. The key features are that it is drawn and accepted without any real debt or consideration between the parties, for the sole purpose of providing financial accommodation to one of them.
Step 2: Detailed Explanation:
The instrument described is an Accommodation Bill. In this arrangement, one person (the accommodation party) signs the bill as a drawer, acceptor, or endorser, without receiving value, to lend their name and creditworthiness to another person (the accommodated party). The accommodated party can then take this bill to a bank and get it discounted (receive cash against it). The parties involved are known as accommodation parties, and their liability is to the holder for value, but they have a right of recourse against the party they accommodated. It is essentially a loan instrument disguised as a trade bill.
- Bills in sets: Used in foreign trade, where a bill is drawn in multiple parts to ensure at least one part reaches the destination.
- Documentary bill: A bill of exchange that is accompanied by documents of title to goods, like a bill of lading.
- Bearer instrument: An instrument that is payable to whoever holds it (the bearer).
Step 3: Final Answer:
The described instrument is an Accommodation bill.

Answer 2

The question describes a bill of exchange drawn and accepted without any real consideration, purely to let the drawer raise money by discounting it. Let's check each type of instrument against this description.

1. Bills in sets: this refers to a practice used mainly in foreign trade, where a single bill of exchange is drawn in multiple identical parts so that if one part is lost in transit, another can still reach its destination and be used, this has nothing to do with the absence of consideration.
2. Documentary bill: this is a bill of exchange that travels together with title documents to goods, such as a bill of lading, used to control delivery of goods against payment, again unrelated to whether consideration was actually exchanged between drawer and acceptor.
3. Bearer instrument: this describes any instrument payable simply to whoever is holding it at the time, a feature about how the instrument is payable, not about whether it was issued without consideration to help someone raise funds.
4. Accommodation bill: this precisely matches the description, here one person accepts a bill purely to lend their credit and name to the drawer, without receiving any real value themselves, so that the drawer can take the bill to a bank or discounter and obtain cash against it. The accommodating party remains liable to any holder for value, but can recover from the person they accommodated.

Since only the accommodation bill is defined by the very feature the question describes, being issued and accepted without consideration purely to enable one party to raise money.

Therefore, the correct answer is Accommodation bill.