What is an accommodation Bill?

Generally, a bill of exchange is drawn by a creditor on his debtor to settle a trade debt. A creditor is a person who has sold goods on a credit basis and a debtor is a person who has purchased goods on a credit basis. Thus, a bill that is drawn by a creditor and accepted by a debtor is known as a trade bill of exchange.

An accommodation bill is a bill, draft, or note that is created, accepted, endorsed, or drawn by one person for another without being backed by any trade transactions. The purpose of an accommodation bill drawn is to help the other person get credit or monetary aid in a bill of exchange. In accommodation bills, the person who signs the accommodation bill is known as the accommodation party. The accommodation party is responsible for the bill if the acceptor fails to pay it when it matures.

For example, suppose Ram needs money, he approaches his friend Shyam and asks him to give him a loan for Rupees Ten Lakh. However, Shyam also shows his inability but agrees that he will accept a bill of exchange. So Ram draws a bill on Shyam which Shyam accepts at three months. Ram discounts the bill with his bank and gets the money. After three months but before the due date, Ram sends Rupees Ten Lakh to meet his acceptance. Shyam upon receipt of the amount pays his acceptance.

An accommodation bill can be drawn in different ways:

Bills may be drawn for the accommodation of the drawer only. Bills can be drawn for the benefit of both parties. Mutual accommodation is when bills are drawn on each other.

Accommodation bills are known by many names, such as trade bills, bills of exchange, windmills, wind bills, and kite bills. Accommodation bills are not enforceable by law since they lack consideration and run on the moral understanding of the parties that draw the bill.