Bills of convenience are one of the riskiest practices in the field of payment instruments. These fictitious securities, created without any real economic counterpart, expose their signatories to serious legal consequences. Their use, although tempting for companies in difficulty, constitutes an offence that is severely punished under French law.
What is an effect of complacency?
A bill of convenience is a document of exchange (bill of exchange or promissory note) created to deceive third parties. The document is issued when the parties know full well that, on the due date, the funds required for payment will not be available.
Unlike legitimate commercial paper, which evidences a real claim, bills of convenience are not based on any genuine commercial transaction. They are issued solely to create the appearance of a sound economic activity or to obtain undue credit.
Case law has gradually refined this concept. A ruling by the Commercial Chamber of the Court of Cassation on 17 February 1959 laid the foundations of the modern definition by establishing that complacency lies in the common intention of the parties to create a security without any real economic cause.
The different forms of complacency
Convenience notes come in a variety of forms, the most common of which are :
Cavalry drafts
A trader in financial difficulty asks a complaisant person to accept a draft drawn on him, even though no debt exists between them. The trader then discounts the draft with a bank to obtain cash. As the due date approaches and the merchant is unable to pay, he issues a new draft for a higher amount. This system, similar to a Ponzi pyramid, inevitably leads to bankruptcy.
Cross-drafts
Two companies draw drafts on each other with no underlying commercial relationship. Each discounts the draft received, creating an artificial double cash flow. This more sophisticated mechanism is just as fraudulent and dangerous as the first.
Financial instruments, which are sometimes confused with convenience instruments, are quite different. The latter correspond to legitimate financial transactions, as explained in our article on commercial paper: a complete guide for companies.
Motivations and dangers of the effects of complacency
Motivations
Companies use bills of convenience mainly to :
- Obtain immediate liquidity
- Masking financial difficulties
- Delaying the opening of insolvency proceedings
- Creating the illusion of sustained commercial activity
Dangers
This practice entails major risks for everyone involved:
- For the complacent party: obligation to pay for a title that they thought had no consequences
- For the accomplice: worsening of their financial situation and criminal liability
- For the discounting banker: financial loss in the event of insolvency of the signatories
- For creditors: delay in establishing cessation of payments and reduced chances of recovery
The spiral of debt generated by the constant renewal of bills almost always leads to an irremediably compromised situation.
Legal regime for bills of convenience
Grounds for invalidity
Under French law, bills of convenience presented by a bearer in bad faith are null and void. This penalty is not based on the absence of a provision, which is not a condition for the validity of the instrument, but on the unlawful nature of the cause.
The Court of Cassation confirmed this approach in a ruling of 21 June 1977, stating that the issue of bills of convenience constitutes fraud intended to mislead third parties about the company's true financial position.
Scope of nullity
Nullity applies to the relationship between the accomplice and the accomplice. It authorises the accomplice to refuse acceptance or payment of the instrument, even after having given his initial agreement.
However, this nullity is not enforceable against a holder acting in good faith. Article L. 511-12 of the French Commercial Code protects the latter by allowing it to exercise its recourse against all the signatories, regardless of the defects affecting their personal relationships.
Civil penalties
Invalidity of commitments
The nullity of a bill of indulgence entails the annihilation of the resulting foreign exchange commitments. The compliant party may refuse to pay the bearer in bad faith, as recalled by the Commercial Chamber in a decision of 8 January 1979.
Consequences in collective proceedings
The issue of bills of convenience is often a sign that a company is in a state of suspension of payments. Article L. 631-1 of the French Commercial Code defines this state as the impossibility of meeting current liabilities with available assets.
The courts generally consider that the massive use of these fictitious bills reflects an already compromised financial situation. This practice can therefore lead to the opening of receivership or liquidation proceedings against the accomplice.
In addition, acts carried out during the suspect period, in particular payments made by means of commercial paper, may be cancelled pursuant to article L. 632-1 of the French Commercial Code.
Criminal penalties
Definition of fraud
Issuing bills of convenience may constitute fraud within the meaning of article 313-1 of the French Criminal Code. This offence requires a number of elements to be present:
- The use of fraudulent manoeuvres (circulation of fictitious instruments)
- Cash remittance (obtaining cash by discounting)
- Criminal intent (intention to deceive)
The Criminal Division of the Court of Cassation confirmed this characterisation in a judgment of 20 June 1983, stating that acceptance by the compliant drawee reinforces the lie associated with the drawing of the draft.
Penalties incurred
The penalties laid down in Article 313-1 of the Criminal Code are severe:
- For individuals: 5 years' imprisonment and a €375,000 fine
- In aggravating circumstances: 7 years' imprisonment and a €750,000 fine
- For legal entities: fine of up to €1,875,000
These penalties are in addition to the civil and professional consequences, including a ban on managing a business in the event of personal bankruptcy.
Responsibilities of the various players
The complacent
The complacent signatory incurs civil and criminal liability. His signature exposes him to having to pay the bearer in good faith, without the possibility of opposing the absence of real cause of the bill.
Contrary to popular belief, his complacency is not without consequences, even if he made no profit from the transaction. Case law does, however, recognise that he has a remedy based on unjust enrichment against the accomplice, as was recognised by the Nancy Court of Appeal in a ruling dated 14 March 1952.
The accomplice
The beneficiary of the arrangement bears the main responsibility for the fraudulent scheme. In addition to criminal penalties, they are liable to personal bankruptcy under article L. 653-5, 2° of the French Commercial Code, which refers to "the use of ruinous means to obtain funds".
The discounting banker
The banker's liability varies according to his knowledge of the fictitious nature of the instruments:
- Proven bad faith: complicity in fraud (Paris Court of Appeal, 30 June 1983)
- In the event of negligence: civil liability for improper support or reckless granting of credit
A ruling by the Commercial Chamber on 28 November 1960 established the principle of a banker's liability for negligence and imprudence in discounting manifestly doubtful bills.
The responsibilities associated with legitimate commercial paper are detailed in our articles on bill of exchange and the promissory note.
How to detect an effect of complacency
There are a number of indicators that can be used to detect the effects of complacency:
Part-related indices
- Issue of a draft on a relative, friend or company in the same group
- No customary commercial relationship between shooter and drawee
- Inscription of the same names on several items, alternately as the drawer and the drawee
Securities-linked indices
- Disproportion between the amount of the bill and the policyholder's normal activity
- Multiplication of effects with short deadlines
- Gradual increase in the amount of bills renewed
Accounting indices
- No accounting record of transactions allegedly financed by notes
- Discrepancy between declared turnover and volume of bills issued
- Systematic renewal of bills on maturity
The courts pay particular attention to these elements in order to establish fraudulent complacency. Proof can be provided by any means, as this is a legal fact.
Consequences in collective proceedings
Classification of cessation of payments
The mass issuance of bills of convenience is often indicative of an already established state of suspension of payments. The courts consider that recourse to these practices reflects the company's inability to meet its payments by normal means.
A ruling by the Commercial Chamber on 28 January 2004 confirmed that payments made by means of commercial paper after the date of cessation of payments are subject to the nullities of the suspect period.
Personal bankruptcy and bankruptcy
Article L. 653-5, 2° of the French Commercial Code provides that personal bankruptcy may be declared against any director who has "used ruinous means to obtain funds with the intention of delaying the company's cessation of payments".
This sanction entails a ban on directing, managing, administering or controlling any commercial undertaking for a period of up to fifteen years.
In the most serious cases, the use of bills of convenience may constitute a case of bankruptcy under article L. 654-2, 1° of the French Commercial Code, exposing the director to increased criminal penalties.
Preventing and securing transactions
A number of precautions can be taken to prevent the risks associated with effects of convenience:
For companies
- Check the reality of the commercial relationship before accepting a draft
- Systematically document the underlying transactions
- Refuse all requests to sign bills of exchange for no real consideration
For banks
- Strengthening pre-discount control procedures
- Analyse the consistency between the effects presented and the customer's activity
- Check the creditworthiness of signatories
For creditors
- Find out about debtors' financial situation
- Identifying the warning signs of difficulties
- Diversifying payment guarantees
The dematerialisation of commercial paper, encouraged by Law No. 2024-537 of 13 June 2024, is also helping to make transactions more secure, as explained in our article on the dematerialisation of commercial paper. dematerialisation of commercial paper.
There are also questions about the application of the rules in international matters, a subject covered in our guide on conflict of laws regarding commercial paper.
In view of the legal complexity of commercial paper and the risks associated with its fraudulent use, support from a lawyer in commercial paper law is essential. Our firm can advise you on how to secure your transactions and defend you in the event of a dispute. Do not hesitate to contact us for a personalised analysis of your situation.
Sources
- Commercial Code, articles L. 511-1 to L. 511-81, L. 631-1, L. 632-1, L. 653-5, L. 654-2
- Criminal Code, article 313-1
- Court of Cassation, Commercial Division, 17 February 1959
- Court of Cassation, Commercial Division, 21 June 1977
- Court of Cassation, Commercial Division, 8 January 1979
- Court of Cassation, Criminal Division, 20 June 1983
- Court of Cassation, Commercial Division, 28 January 2004, No. 01-00.741
- GIBIRILA D., Effet de commerce, Répertoire de droit commercial, Dalloz, January 2023
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