Definition
An accommodation party is a person who signs a financial instrument such as an accommodation bill as the drawer, acceptor, or endorser. By doing so, the accommodation party takes on the role of a guarantor, making a promise to honor the payment should the primary obligor default. This assurance provides a level of security for lenders or payees and can facilitate the process of securing credit or negotiating transactions.
Examples
Example 1: Person as an Endorser
John is a small business owner who needs to secure a loan for expansion. His friend, Sarah, agrees to act as an accommodation party by endorsing the promissory note. By signing as an endorser, Sarah promises to cover the payment if John defaults.
Example 2: Acting as a Drawer
Emily, an entrepreneur, needs to access credit for her startup but lacks sufficient credit history. To help her, her father signs an accommodation bill as the drawer, thus assuring Emily’s lender that he will pay if Emily fails to do so.
Example 3: Acceptor Role
A market vendor, David, seeks to purchase goods on credit from a supplier. Lily, David’s business partner, agrees to act as an acceptor on an accommodation bill. This means that Lily guarantees the payment for the goods, providing additional security to the supplier.
Frequently Asked Questions (FAQs)
1. What legal commitment does an accommodation party undertake?
An accommodation party legally binds themselves to honor the payment of the financial instrument if the primary debtor or obligor fails to do so.
2. Can an accommodation party seek repayment from the original borrower?
Yes, if the accommodation party ends up paying the debt, they have the right to seek repayment from the original debtor.
3. Is an accommodation party considered primarily liable?
Typically, an accommodation party is considered secondarily liable, meaning they only fulfill the payment obligation if the primary obligor defaults.
4. Can any individual act as an accommodation party?
Yes, any individual who legally opts to sign and guarantees the payment of a financial instrument can act as an accommodation party.
5. Does an accommodation party benefit directly from the proceeds of the financial instrument?
Usually, the accommodation party does not receive the proceeds directly; rather, they provide the guarantee to support the primary obligor’s credit.
Related Terms
Accommodation Bill
A negotiable instrument where one party signs as a drawer, acceptor, or endorser to guarantee the payment.
Drawer
The person who writes and signs a bill of exchange, instructing the drawee to pay a specific sum of money to a payee.
Acceptor
The party who accepts the terms of a bill of exchange and commits to making the payment.
Endorser
A person who signs the back of a negotiable instrument, transferring the rights or ensuring payment to a third party.
Online References
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers
- “The Law of Obligations” by Geoffrey Samuel
- “Negotiable Instruments and Payment Systems” by Wayne K. Lewis
Accounting Basics: “Accommodation Party” Fundamentals Quiz
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