Your commercial paper returns unpaid

You have discounted a bill of exchange or promissory note. The bank credited your account. Then the bill was returned unpaid on the due date, and the credit institution reversed the transaction: the amount was debited again from your current account, sometimes without notice.

This situation, which is common among companies that use bank discounting as a short-term financing tool, can lead to a cascade of cash flow problems. The account balance falls into debit, other transactions are rejected, and the banking relationship deteriorates.

Bank discounting in law

Discounting is a «credit operation whereby the banker makes the amount of the bill of exchange less interest and commission available to the company in return for the presentation of an unmatured bill of exchange». The bank that discounts a bill becomes its owner. In the event of non-payment, it has recourse against the remitter, in particular by way of reversal in the current account (Cass. com., 11 March 1970, no. 68-10.808).

Our firm handles

  • Analysis of the regularity of the reversal carried out by the bank
  • Challenging a wrongful or late reversal
  • Defence against foreign exchange recourse by the discounting banker
  • Assessing liability in the event of abrupt termination of the discount credit (article L. 313-12 of the French Monetary and Financial Code: 60 days' notice)
  • Negotiating a repayment schedule or moratorium with the bank
  • Representation before the Commercial Court or the Court of First Instance

Banking law distinguishes between reverse discounting - which reserves the bank's right to debit the account if the bill is not paid - and firm discounting, where the bank assumes the risk of non-payment. The clause in your discount agreement determines the extent of your obligations.

Depending on the configuration of your file, you can also consult our pages dedicated to factoring, bank liability and our hub banking and finance law.

The bank exercises its remedies

A banker who has discounted an unpaid bill has two remedies. On the one hand, the banker may take action against the drawer, endorsers and their guarantors under the law governing bills of exchange (articles L. 511-38 et seq. of the French Commercial Code). Secondly, a contractual remedy based on the discounting agreement itself.

These remedies are not without limits. A bearer who has not drawn up a protest within the legal time limit loses his rights against the endorsers and the drawer (article L. 511-49 of the French Commercial Code). The nature of the expected effect - accepted bill of exchange, promissory note, cheque - determines the remedies available.

Our areas of expertise

  • Exercise of exchange remedies against the signatories of the unpaid bill of exchange
  • Raising defences in favour of a holder acting in good faith
  • The liability of the discounting banker in the event of imprudence in the assessment of the risk effects of convenience or cavalry
  • The defence of the remitter faced with an action under the bill of exchange: contesting the banker's good faith, personal defences, defects in the form of the bill of exchange, etc.
  • Coordination with collective proceedings when the drawee is placed in receivership or compulsory liquidation

The Court of Cassation has reiterated that the bank is entitled to bring an action against its customer by way of reversal, without first having to bring an action against the drawer of the cheque or bill of exchange (Cass. com., 13 November 2012, no. 02-10.220). This case law weighs heavily in the remitter's defence strategy.

Securing your discounting operations

The discounting agreement is the contract that organises the relationship between the company and its credit institution for receivables financing transactions. Its content determines the rights and obligations of each party in the event of non-payment.

We audit discounting agreements to identify high-risk clauses: the scope of the «unless otherwise agreed» clause, reversal conditions, credit termination procedures, calculation of agios and commissions. A poorly drafted contract exposes the company to unanticipated claims.

What we check

  • The legal status of the transaction: genuine discount or simple collection mandate - the distinction is decisive in the event of the remitter filing for bankruptcy.
  • Agios and commissions comply with usury rules and the overall effective rate
  • Termination conditions: the bank must give 60 days' notice before terminating an open-ended loan.
  • The validity of commercial paper delivered: mandatory information, advance payment, acceptance
  • Links with other securities and guarantees (surety bonds, pledges, Dailly assignments)

Our firm is involved both upstream - drafting, auditing and negotiating agreements - and downstream, once litigation has begun. In banking and finance law, preventing disputes always costs less than resolving them.