Banker's recourse for unpaid discounted bills: focus on reversal

Although bank discounting is an invaluable cash management tool for companies, it also carries a significant risk: the principal debtor (the drawee of the bill or the issuer of the cheque) fails to pay on the due date. When this happens, the bank that advanced the funds is not helpless. The law provides it with several remedies to recover its debt. One of these is the reversal of a current account, a mechanism frequently used by banks, but whose legal nature and practical consequences merit particular attention. Understanding how the bank can act and what your rights are as a remitting company is essential if you are to manage payment incidents effectively. This article details the various remedies available to the discounting banker and provides an in-depth analysis of the reversal mechanism.

The various remedies available to the discounting banker in the event of non-payment

When a discounted bill of exchange is returned unpaid on the due date, the banker has several options, which can often be combined or chosen depending on the circumstances and the status of the signatories to the instrument.  

Cambodian remedies

As the legitimate bearer of the commercial paper (bill of exchange, promissory note), the bank is entitled to the remedies provided by the law on bills of exchange.. It can take action :  

• Against the acceptor shot of a bill of exchange, who is the principal debtor.
• Against the shooter of the bill of exchange (which is often the company that discounted the bill).
• Against endorsers who are jointly and severally liable for payment.
• Against theavalistif there is a surety bond guaranteeing one of the signatories.

These remedies are subject to strict conditions regarding time limits and formalities (presentation for payment, protest in the event of non-payment unless otherwise stipulated). The banker's negligence (e.g. failure to lodge a protest within the required time limit) may result in forfeiture of the banker's recourse against the drawer and endorsers (but not against the accepting drawee)..  

The action arising from the discount contract

In addition to the foreign exchange remedies relating to the instrument itself, the bank has a direct claim against its own customer, the remitting company, under the discounting contract.. This contract is a credit transaction, and unless there is an express "non-recourse" discount clause (very rare in practice), the remitting customer is contractually bound to reimburse the bank if the final debtor fails to pay.. This contractual action is particularly useful if the remedies are time-barred or forfeited.or if the discount was on a security not subject to strict exchange law. It is time-barred only at the end of the period of ordinary law, which is longer than the period of prescription for bills of exchange (generally one year for claims against endorsers and the drawer, in accordance with Article L. 511-78 of the French Commercial Code)..  

Action based on provision (for bills of exchange)

When the bill of exchange has not been accepted by the drawee, the discounting bank, as owner of the instrument, also acquires ownership of the underlying claim (the "provision") that the drawer held against the drawee.. If this provision does exist on the due date, the bank can take action against the drawee on this basis, even without acceptance.. This action shall subsist even in the event of negligence on the part of the bearer resulting in the forfeiture of all rights of recourse under the law of the court..  

The banker must be diligent in exercising his rights of recourse. In particular, he must present the bill for payment on time and, in the event of non-payment, promptly inform his remitting customer (bill of exchange).. Failure to comply with this information obligation may result in liability..  

Current account reversal: mechanism and legal nature

Very often, when the unpaid bill concerns its own customer (the drawer or a remitting endorser), the bank uses a more direct route than legal action: reversal..  

Definition

Reversal means that the bank debits the amount of the unpaid bill (plus any charges such as protest fees) from the current account of the customer submitting the bill.. This debit entry cancels out the advance initially granted, from an accounting point of view, in the same way as the credit entry made at the time of discounting.  

Legal nature

Jurisprudence today analyses reversal not as a simple cancellation of the initial entry, but as a specific way for the bank to exercise its right to cancel the entry. right to reimbursement or its action for payment against his client. On the other hand, the bank exercises the recourse it holds against the remitter, whether this recourse is based on the customer's exchange undertaking (as drawer or endorser) or on the discounting contract itself..  

Optional nature

The bank is under no obligation to reverse the transaction. It retains the option of exercising its recourse by other means (legal action against the remitter or the other signatories). It may choose not to debit the customer's account immediately, for example if it is already heavily in debit, and to leave the unpaid bill in a suspense account or an "unpaid bills" account.. In this case, the bank is deemed not to have been reimbursed and retains all its rights of recourse against the other signatories to the bill of exchange.. If, on the other hand, it reverses the effect on its customer, it can only act against the other signatories as the customer's agent (since it is deemed to have been reimbursed by the customer, subject to the nuances we shall see).. The relevant date for the reversal is the date on which the reversal is actually recorded in the account..  

Conditions for the validity of the reversal

To be valid, the reversal must meet certain conditions:  

• Debt that is certain and due : The bank may only reverse a bill once it has reached maturity and non-payment has been established. Reversal before maturity is only possible in exceptional cases provided for by law, for example in the event of the drawee's receivership or liquidation or refusal of acceptance (article L. 511-38 of the French Commercial Code).  
• No forfeiture or limitation period : If the purpose of the reversal is to exercise a recourse against the bank, the bank must not have forfeited that recourse (through negligence) and the action must not be time-barred. However, this condition is less strict if the reversal is based on the contractual action arising from the discount or on the provisional action, which have longer limitation periods or different conditions for forfeiture.  
• Possibility after account closure : The closure of a current account (for example, following a decision by the bank or the opening of insolvency proceedings against the customer) does not preclude reversal. Reversals can take place while the account is being wound up, so that receivables that have fallen due, such as those resulting from unpaid bills of exchange, can be included in the final balance. It may even be carried out after a levy of execution on the account, within the one-month period provided for in article L. 162-1 of the Code of Civil Enforcement Procedures.  

Amount of reversal

In principle, the bank reverses the full nominal amount of the unpaid bill, plus the costs of protest, notice and statutory interest since the due date..  

However, if the bank has received a deposit before reversing the transaction, the situation becomes more complex:

• If the deposit was paid by the remitting customer, it must be deducted from the amount reversed.  
• If it has been paid by a third party who is not jointly and severally liable (e.g. non-acceptor drawee), it must also be deducted.  
• If it has been paid by another signatory who is jointly and severally liable (e.g. a guarantor, another endorser), the bank may, by virtue of the joint and several liability for bills of exchange, reverse the payment to its remitting customer for the total amount outstanding, without deducting the deposit received from the co-obligor.  

Specific rules also apply in the event of insolvency proceedings affecting one of the co-debtors, particularly with regard to the declaration of the claim and the allocation of advance payments received (Articles L. 622-31 and L. 622-33 of the French Commercial Code). If the reversal is based on the action de provision (where there is no joint and several liability), all advance payments received must be deducted..  

Consequences of reversal

The debiting of the customer's account raises two major questions: does the reversal constitute payment? Does the bank have to return the bill?  

The question of payment

The answer depends on the timing of the reversal and the status of the account:

• Reversal during normal account operation (customer in bonis) : If the entry is made on the debit side of the available account, case law traditionally considers that the reversal of the entry must be made on the credit side of the available account. is equivalent to payment for the bank. It is deemed to have been repaid by its customer, even if the account balance becomes or remains in debit. This solution, which is well established, has the major consequence of paying off the bank and therefore extinguishing its recourse against the other signatories to the bill.  
• Reversal after closure of the account or commencement of insolvency proceedings against the customer : In this case, the reversal does not constitute paymentIf the balance is insufficient or in debit, the bank is not considered to be disinterested. If the balance is insufficient or in debit, the bank is not considered to be disinterested.  
• Registration in a suspense account : If the bank does not debit the outstanding amount to the main current account but to a suspense account or a special "unpaid bills" account, there is no payment.  

Restoring the effect

The question of whether the bank must return the unpaid bill to its customer after reversal is directly linked to the question of payment.:  

• If the reversal is equivalent to payment (case of the in bonis), the bank being disinterested, must restore the effect to its customer. The customer may then try to exercise his own remedies against the original debtor or the other guarantors. The bank that fails to return the bill in this case may incur liability if it deprives its customer of recourse.  
• If the reversal does not constitute payment (closed account with debit balance, insolvency proceedings, suspense account), the bank can retain the effect to exercise its rights of recourse against the other co-obligated parties in its own name.  

To compensate for the disadvantage of losing their recourse in the event of reversal as payment, banks have developed contractual clauses inserted in account or discounting agreements.. These clauses often stipulate that even in the event of a reversal, the bank will retain the title, either as an agent of its customer to pursue recoveryor as a pledge to guarantee payment of the debit balance of the account. The validity of these clauses is generally accepted by case law, provided that they are clear and do not reserve pure and simple ownership of the security to the bank after payment.  

In conclusion, reversal is an effective tool for the bank to obtain rapid repayment of an unpaid discounted bill by debiting the account of its remitting customer. However, this mechanism is not trivial. Its conditions of validity must be respected, and its consequences, particularly on the question of actual payment and the return of the bill, are decisive for subsequent rights and remedies, both for the bank and for the company. Careful analysis of account entries and signed agreements is essential in the event of an incident. To navigate these complexities, you can consult our practical guide to discounting or refer to our article on fundamentals of bank discounting. The types of discountable securities can also influence appeals.

Reversal is a common banking practice, but it has specific legal consequences. If your account has been debited following the non-payment of a discounted bill of exchange, contact our firm to check the legality of the transaction and protect your rights. Our expert discount lawyers are at your disposal.

Sources

• Commercial Code (in particular art. L. 511-38, L. 511-42, L. 511-43, L. 511-78, L. 622-31, L. 622-33)
• Monetary and Financial Code
• Code of Civil Enforcement Procedures (in particular art. L. 162-1)