Lawyer - Discounting

Discounting is a common financing tool in commercial relationships, but it is not without risks for businesses. A poorly managed operation or a dispute with the bank can quickly turn into financial difficulties or complex litigation.

Solent Avocats assists companies, managers and creditors in all legal aspects of discounting: drafting or auditing agreements, resolving banking disputes, analysing disputed securities, and representing clients in court if necessary.

As a firm specialising in commercial and banking law and enforcement procedures, we are regularly involved in cases relating to discounting, in particular when the bank refuses or reverses a transaction, or when contentious bills of exchange are involved. Our approach is both technical and pragmatic: we always seek the quickest, clearest and most protective solution for our clients.

Legal problems linked to the very nature of discounting

Discounting is sometimes presented as a simple operation: a future receivable is assigned to a bank, which deducts interest and credits the company. In practice, the reality is more nuanced.

The legal classification of the transaction is a source of difficulties: is it a loan contract? A sale of debt? A sui generis transaction? This vagueness is not insignificant: it determines the ownership of the instrument, possible recourse, and the liability of the bearer in the event of a dispute.

Our firm helps companies to clearly assess the nature of their discounting operations and to ensure that they are legally secure. In particular, we analyse agreements, remittance slips and "unless collected" clauses, which are often decisive.

Disputes with the bank: refusal to discount, reversal of discount, defaults

Bankers are not obliged to accept all securities presented to them for discount. They do have the power of selection, but this power must be exercised in good faith, in compliance with the duty to inform.

Certain situations generate tension: bills of exchange accepted and then reversed, late refusal of discounting, failure to notify, or even questioning a transaction when the account had already been credited. These situations can cause significant damage to the company, or even expose it to a cascade of payment incidents.

We act to assess the banker's liability, particularly in the event of a breach of the banker's duty to inform or of carelessness in assessing securities.

What to check if a discount is refused or cancelled :

• The agreement governing the banking relationship

• Deadlines and procedures for notifying refusal

• The content of remittance slips

Risks associated with contentious items or items of convenience

Some bills submitted for discount have no real cause: bills of convenience, pro forma bills of exchange or cavalier bills. Jurisprudence cancels these bills when they have no cause or are the result of fraud.

A banker may be considered to be acting in bad faith if he is aware of the fictitious nature of the instrument or the financial difficulties of the drawer. In this case, the banker may be denied recourse to the exchange.

The firm assists clients in the analysis of suspect securities, in challenging (or defending) the discounting banker, and in assessing the civil or criminal risk associated with disputed bills.

Definition you need to know: effect of convenience

This is a commercial paper issued without a genuine underlying transaction. This type of security is sometimes used to mislead on a company's financial situation or to obtain cash credit abusively.

Banker's recourse and cross liability in the event of non-payment

When a discounted bill is not paid on the due date, the bank has recourse against the signatories: drawer, guarantor, endorser, etc. However, these recourse rights may be limited by the principle of the unenforceability of defences, provided that the banker is acting in good faith.

Our role is to assist clients faced with non-payment, whether they are a creditor company or a bank. We assess the scope for defence or action, depending on the terms of the endorsement and the history of the commercial relationship.

Example: a company discounts a bill of exchange whose supplier is in receivership. The bank then takes recourse against the bill. The lawyer can plead bad faith on the part of the bank if the risk of default was known.

Why call on Solent Avocats?

Our firm has dual expertise in banking law and enforcement litigation, which is essential for dealing effectively with problems relating to discounting. We provide both advice, to audit and prevent risks, and litigation, to assert or contest a claim.

Our method combines :

• A detailed analysis of titles and agreements,

• A critical reading of the banker's behaviour,

• A negotiation or litigation strategy tailored to the client's financial stakes.

Our approach is based on a clear agreement, setting out the fees according to a fixed rate, an hourly rate or a scale adapted to the complexity of the case. The assignments entrusted to us give rise to an engagement letter specifying the legal framework, the deadlines and the terms of payment.

Points to watch in the legal management of commercial paper

The processing of a discount application is based on a number of factors:

• The due date, the amount entered and the terms of payment indicated on the bill of exchange;

• Supplier details, bank details and direct debit or remittance arrangements;

• The duration of the partnership, the articles of the standard contract used, and any signed commitments or model clauses;

• The management of late payment penalties, any indemnities, and the presence of a clause relating to full rights or early termination;

• Obligations relating to the issuing of invoices, the method of calculating interest and the discounts granted.

If deadlines are not met, or if there is an opposing party contesting the transaction, every word used in the title or contract can have a significant legal impact.

By working with an associate lawyer, you can take into account decisions of a normative nature, obligations relating to professional practice, and ethical rules laid down by the Conseil national des barreaux or the Ordre des avocats.

Ethical and administrative references

In application of the present rules of the Bar, and in accordance with article 14 of the Statute of the Lawyer, any collaboration is governed by a collaboration contract setting out the general conditions, the months from the start of the professional activity, as well as the procedure for terminating the contract.

Details are provided in the Bar Bulletin, the Council meeting of 9 July, the articles amended during the meeting, and the decisions of a normative nature taken by the Deputy President of the Bar or the designated member of the Council.

Official notifications are made by registered letter with acknowledgement of receipt or by e-mail, in accordance with the provisions applicable to the website of the National Council or the European Union of Registered Lawyers.

Practical details of the firm's involvement

Procedure, fees and administrative operation

Any assignment entrusted to our firm is subject to a written contract that complies with the requirements of the internal regulations applicable to lawyers registered with the Marseille Bar. This contract specifies in particular:

• The type of assignment (advisory, litigation, negotiation) ;

• How fees are set: flat rate, hourly rate, or performance fee;

• The terms and conditions for invoicing, provision and payment, as well as the provisional timetable for processing the file.

In accordance with regulations, payments are made via the firm's Carpa account. In all circumstances, the client retains the right to information, confidentiality (respect for professional secrecy) and consultation of documents relating to his case.

In certain situations, our firm accepts legal aid or can offer a flat-rate partnership for companies experiencing cash-flow difficulties. Time limits, amounts and general terms and conditions are discussed at the first meeting, on presentation of the standard contract or a model adapted to your situation.

Regulatory timetable

Key legal points :

• Decree of 27 November This document sets out the rules applicable to commercial paper in short-term financing transactions.

• October 2007 Adoption of rules for implementing commercial discounting in line with the Commercial Code and the rules of the Code of Civil Procedure.

• Two-month period This is the classic time limit for opposability or prescription of contested payments, depending on the case.

Regulatory foundations of commercial discounting

Commercial discounting is governed by the provisions of the French Commercial Code, in particular the articles relating to bills of exchange and assignment of receivables. The Civil Code and the Code of Civil Procedure may also apply in the event of a dispute. Certain practices are set out in the internal rules of the Bars and Law Societies concerning invoicing and general conditions of collaboration.