Can anyone explain to me the part from the alternative arrangement (second parag

Question

Can anyone explain to me the part from the alternative arrangement (second paragraph onwards). It really confused me. Figure 9.2 Example of a bank-accepted commercial bill (face side) Due Date 3/12/2015 ABC Bank Ltd To: On the Pay to the order of The sum of: Accepted 7 June 2015 Third Day of December 2015 fixed Payable at: Borrowing Corporation Ltd ABC Bank Ltd One hundred thousand dollars 290 Martin Place, Sydney $100000 For and on behalf of Dated this Seventh Day of June 2015 ABC Bank Ltd For and on behalf of Borrowing Corporation Ltd Authorised signatories of acceptor Place of payment Authorised signatories of drawer Drawer Payee Date of drawing Acceptor Date of acceptance Maturity date

Explanation / Answer

Hey you probably got confused because the alternative case took up some other example. For easy understanding lets continue the alternative arrangement with the same parties involved.

So in the first arrangement were there were three parties involved that is Borrowing Corporation Ltd. , ABC bank and the Discounter. In total there were three agreements.

First - Between borrowing corporation ltd and ABC bank stating at a maturity date of the bill the amount will be paid by the bank on behalf of corporation ltd to who so ever holds the bill.

Second - Between the corporation ltd and the discounter stating the bill has now being sold and now the discounter is the original holder of the bill.

Third - Between ABC Bank and the discounter stating that the bank has successfully honoured the bill that is it has paid $1,00,000 to the holder of the bill.

So now this third bill will be useful for the bank were it bill present it to corporation ltd showing the proof of payment on his behalf and charge fee for the services provided.

In the other way round that is the alternative arrangement ABC bank becomes the drawer as well as the discounter. Lets say ABC bank draws a bill of $1,00,000 and self discounts(discounter is someone who lends money and becomes the holder of the bill) it for $95,800 and lends the same money to Corporation Ltd. Now Corporation ltd who accepts the money as well as bill that who so ever comes up with the bill on the maturity date it will make the payment to the holder of the bill. Here there will only be an agreement between the Bank and Corporation ltd as ABC bank becomes bothe Drawer and Discounter.

Now the holder of the bill can either be ABC bank only at the maturity date or any third party if it chooses to sell the bill to third party if it is in urgent need of funds and cant wait till maturity period. Third party then becomes the holder of the bill and can claim the money from corporation ltd.

Hope this was helpful :) If you still have any doubts you can clarify by posting me a comment. :)

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