(Exception I to section 43) Many bills are drawn and accepted without any consideration; the various parties sign the bills for the purpose of lending their names to oblige their friends. Such bills are called accommodation bills. An accommodation bill is one for which no consideration has been given by the drawer to the acceptor for the purpose of accommodating some other party who is to use it and is expected to pay it when due. The party accommodating is called the “accommodation party”. The party accommodated is called the “accommodated party”. When a person endorses a bill without consideration, he is called a “backer” and the operation is called “backing the bill.”
Example:
P is in need of Rs. 2000. He approaches Q for this purpose. Q agrees to help him and proposes P to draw a bill on him. Which he would accept. P can get the bill discounted with his banker? On or before the due date P will have to provide Q with the necessary funds to enable him to meet his acceptance. Thus P is in a position to raise money for the term of the bill. Such a bill which has been drawn and accepted without consideration is called an accommodation bill.
Rules regarding accommodation bills
1. The accommodation party is liable on the bill to a holder for value. Thus, in the above example, if P endorses the bill to C, his creditor, C can recover the amount of the bill from Q.
ADVERTISEMENTS:
2. An accommodation bill may be negotiated after maturity and the holder of such a bill can recover thereon, provided he takes it in good faith and for value. (Sec. 59).
3. The drawer is not discharged on account of the non-presentment of accommodation bill to the acceptor (Sec. 76).
4. In the case of an accommodation bill, the failure to give notice of dishonor will not discharge the prior parties from liability (Sec.98).