Bank discounting: the legal guide

Discounting is probably the oldest credit operation practised by French banks. It existed long before the Monetary and Financial Code, even before the Commercial Code, and today it remains a discreet but essential part of business financing. Discreet, because no company director brags about it the way they would about raising funds. Essential, because it solves a universal problem: the gap between the time an invoice is issued and the time it is paid.

Before getting into the mechanics, a word of clarification. The word «escompte» is polysemous, and this is a source of confusion both in law firms and on popularisation sites. Three meanings coexist. The first - the one we are interested in here - is the’bank discount The first is a credit operation whereby a bank advances to its customer the amount of a bill of exchange, less interest and charges. The second is the’commercial discount or cash discount Cash discount: a price reduction granted by a supplier to its customer in return for an advance or cash payment. No bank is involved and no bills of exchange are issued. This is a purely commercial practice that is reflected in the company's accounts. The third is the discount rate of a central bank, a concept of monetary policy that has disappeared from common parlance since the advent of the ECB and key interest rates.

This guide does not deal with the second or third meanings. It deals exclusively with bank discounting, a contract governed by banking law and rooted both in the law governing bills of exchange and promissory notes and in the current account agreement between the bank and its customer. It is a contract qualified as a sui generis by the doctrine, which combines an advance of funds and an assignment of full ownership of a claim. Each of these two aspects produces distinct legal effects, and it is precisely in their interplay that the disputes we regularly encounter at our firm come into play.

What is bank discounting?

Discounting is not defined by law. It is banking practice, supported by legal doctrine and case law, that defines its contours. Fascicule 550 of the JurisClasseur Droit bancaire et financier - written by Christine Lassalas and updated by Jean-Denis Pellier - gives the most precise definition: discounting is a credit transaction whereby a customer, holding a term debt, gives a commercial paper to a banker who immediately pays the amount, after deduction of a sum representing the interest to be accrued until maturity and a commission remunerating the service rendered. This sum is known as the ’discount« - hence the ambiguity of the term, which designates both the operation and its cost.

This definition conceals two legal peculiarities that accounting intuition systematically misses. The first is that discounting is not a simple loan. When a bank lends a thousand euros, it remains a creditor of a thousand euros. When a bank discounts a bill of exchange for one thousand euros, it becomes a debtor of one thousand euros. owner It is no longer the customer who has a claim on the drawee, but the bank. The second particularity is that discounting is not a disguised collection. In a collection, the bank acts as an agent: it collects the debt on behalf of its customer and pays him the proceeds. In discounting, the bank advances the funds immediately, without waiting for collection. This immediate availability is precisely the criterion that legally qualifies the transaction, as the Court of Cassation has pointed out.

The practical implications of this distinction are not academic. If the transaction is classified as a discount, the bank becomes the owner of the claim as soon as the bill is handed over, and this ownership gives it very extensive rights, including against the bodies of the collective proceedings in the event of default by the remitter. If the transaction is reclassified as a collection, the bank is merely an agent: the funds it has advanced become a restitution claim subject to declaration as a liability, and the claim represented by the bill returns to the debtor's assets. All the case law on discounting revolves around this boundary.

The mechanism: three players, one agreement, one endorsement

A discounting operation involves three people. The shooter, This is the supplier who holds the claim on his customer and who will remit the bill to the bank. The drawn, who is the debtor of the debt - typically the supplier's customer - and who will pay the bill on the due date. And the discounting banker, This is the case when the banker's customer is not the drawer but the drawee. The term «indirect» discounting is sometimes used when the banker's customer is not the drawer but the drawee: this is a rarer but accepted configuration.

The relationship between the bank and its customer is governed by a discount agreement, This agreement is signed when a discounting line is opened or as part of the general terms and conditions of the business account. This agreement sets out the maximum amount the bank agrees to draw down, the terms of remuneration (rate, commission, minimum per bill), the acceptable bills (certain commercial papers may be excluded), and the conditions under which the bank reserves the right to refuse any particular bill presented to it. Case law has clearly established that, even in the context of a discount credit agreement, the banker is not obliged to discount all the bills presented to him by his customer - he retains the right to refuse them on a case-by-case basis, provided that he promptly informs the remitter of his decision (Paris, 14 January 1988, D. 1989, Somm. 89).

The central legal element of the operation is the’endorsement of the bill. In practice, the customer endorses the back of the bill of exchange or promissory note to the order of his bank, with the words «valeur à l'encaissement» if it is a mandate, or without this wording if it is a translational discounting transaction. In accordance with article L. 511-8 of the French Commercial Code, endorsement entails transfer of the bill of exchange to the banker, who thus becomes legitimate holder by an uninterrupted series of endorsements (article L. 511-11 of the same Code). This status of legitimate holder is the key to the system: it gives the holder access to all the remedies available under foreign exchange law and means that the exceptions discussed below cannot be invoked against the holder.

In practice, the endorsement is not even always materialised. Suppliers often draw bills of exchange directly to the order of their banker, or issue drafts without mentioning the beneficiary, which the banker completes after the discount decision. Case law accepts that the name of the beneficiary may be regularised up to the moment of presentation for payment (Cass. com., 10 Oct. 1989, no. 88-11.509). These flexible provisions are a reminder that discounting is first and foremost a routine commercial transaction; the formalities of the cambia are rigorous, but banking practice has largely streamlined them.

Discountable securities

In principle, discounting can be applied to any receivable of a given amount. In reality, it applies to two main types of instrument: commercial paper, which is a negotiable security, and the Dailly slip, which is an assignment of a business debt. The two coexist and meet similar needs, but their legal systems are very different - to the extent that legal doctrine and case law have long hesitated over the classification of the discounting of a Dailly slip.

La bill of exchange is the historical instrument of discounting. It is governed by articles L. 511-1 et seq of the French Commercial Code. It must contain the name of the bill of exchange inserted in the text, the pure and simple mandate to pay a specific sum, the name of the party required to pay (the drawee), the due date and place of payment, the name of the beneficiary, the date and place of creation, and the signature of the drawer, failing which it will be null and void or disqualified as a simple document governed by ordinary law. A bill of exchange that omits any of these particulars may be «regularised» in practice, but it loses the benefit of the exchange regime if the omission remains at maturity.

Le promissory note is the simplified variant: it is a direct undertaking by the subscriber - who acts both as drawer and drawee - to pay a specified sum to a beneficiary. The rules, defined in articles L. 512-1 et seq. of the French Commercial Code, are largely based on those for bills of exchange in terms of endorsement, presentation for payment, protest and recourse. In practice, the promissory note is more flexible for transactions between professionals who wish to secure a forward payment without using a drawn bill of exchange.

Le cheque is theoretically discountable, but in practice it is not, for one simple reason: a cheque is a payment instrument, not a credit instrument. It is due immediately. Discounting only makes sense in very specific situations, for example when a cheque is post-dated or when the bank agrees to credit the account subject to actual collection. In French practice, a post-dated cheque has no binding force for the date entered - the bank is obliged to pay it on presentation - which greatly reduces the interest in circulating it.

Le Dailly slip is the great cousin of discounting. Created by the law of 2 January 1981 and codified in articles L. 313-23 et seq. of the French Monetary and Financial Code, it allows business receivables to be assigned to a bank in a simplified manner and without the formalities of the assignment of a civil claim. When the assignment is made by way of discounting - i.e. the bank advances the funds corresponding to the assigned receivables - the transaction is legally very similar to the discounting of a commercial paper, and is sometimes referred to as ’bordereau Dailly discounting«. There has been a long debate as to whether the rules governing discount contracts apply in their entirety to Dailly (Vasseur, D. 1982, Chron. 273). Today, the answer is pragmatic: many of the rules are transposed, but the bordereau Dailly retains its own regime - in particular because it can be used as a guarantee without any transfer effect, which does not exist in the law governing bills of exchange.

On the other hand excluded from the discount securities that do not represent a specific sum of money: bills of lading and other securities representing goods, as well as securities whose value is likely to vary (shares, founders' shares). Since the 2016 Ordinance, savings bonds are no longer negotiable and are now governed by the civil law system for the assignment of receivables; they are discounted via Dailly.

Calculating the cost of discounting

The cost of a discounting transaction is made up of three elements: the interest itself (known as the «discount»), commission and charges. Interest is calculated on the nominal amount of the bill, prorated between the date of discounting and the due date, at a rate agreed with the bank. The usual formula is as follows:

Note the division by 360 rather than 365: this is the so-called «Lombard» banking convention, inherited from the days when calculations were done by hand. It increases the real cost very slightly compared with a calculation based on a calendar year of 365 days, but case law and practice accept it for business credit transactions - on the other hand, it is prohibited for consumer credit. The number of days used generally runs from the date of remittance to the due date; some banks add one or two «bank» days to compensate for the actual collection period.

In addition to interest commissions. The endorsement fee, which may be flat-rate or proportional, covers the cost of the discounting operation itself. The handling fee covers the administrative cost. Some banks also charge a non-use fee on unused discounting lines and an administration fee when the line is opened. To find out the real cost of a transaction, you need to reduce the total cost to a fixed amount. overall effective rate which includes interest, commissions and charges. Article R. 313-1 of the French Monetary and Financial Code sets out the specific calculation method for discounting: the period rate is the ratio between the interest and miscellaneous charges payable by the borrower and the amount of the bill, less interest and charges. This particular method takes into account the mechanics of the advance.

The question of capping by the’wear and tear requires clarification. The usury rate no longer applies to credit transactions granted to professionals since the law of 1 January 2004.^er August 2003 for economic initiative. In theory, therefore, a banker can charge a company a discount rate that exceeds the usury threshold without committing the offence of usury. This absence of a ceiling is not a blank cheque: the Criminal Division has recalled on several occasions that the fixing of a manifestly excessive rate may, in certain circumstances, constitute an anti-competitive practice or an abuse of dependence. Above all, usury litigation is still alive and kicking in the case of discount transactions granted to non-professional individuals, where the ban remains in place.

The position of the discounting banker: owner of the claim, legitimate holder of the security

This is the legal core of discounting: by discounting the bill, the bank becomes owner of the provision - i.e. of the receivable that the bill incorporates - and it becomes legitimate holder cambial title. These two qualities combine to give discounting an exceptionally strong position, which fundamentally distinguishes it from a simple current account advance.

Ownership of the provision results from the mechanism of translative endorsement. The Court of Cassation has stated this explicitly: «As soon as a bill of exchange is given, the discounting banker, having become the owner of the provision, acquires the right to reverse it in the event of non-payment of the bill, even after the account of the remitter has been seized» (Cass. com., 3 Nov. 1988, no. 86-17.715, Bull.). Practical consequence: if a third-party creditor has an attachment levied on the remitter's current account, that attachment cannot absorb the discounted bills already endorsed to the bank, because they no longer belong to the remitter. The bank is not just another creditor: it is the owner of a security that has left its customer's assets.

The status of legitimate bearer results from article L. 511-11 of the French Commercial Code: «The holder of a bill of exchange is considered to be a legitimate bearer if he proves his right by an uninterrupted series of endorsements». This status triggers two cardinal effects. On the one hand, it enables the bank to exercise recourse against all the signatories to the bill - drawer, accepting drawees, previous endorsers, endorsers - who are jointly and severally liable. Secondly, it confers on the bank the benefit of the principle of ’joint and several liability".’non-invocability of exceptions.

The unenforceability of defences is the most powerful rule of the law governing bills of exchange. In practical terms, if the accepted drawee refuses to pay the bill on the due date, citing a dispute over the goods delivered to him by the supplier, he cannot raise this objection against the bank as bearer. The dispute between the drawee and the supplier is of no concern to the bank, which has accepted the bill on the strength of the document itself. This rule allows bills of exchange to circulate and be discounted with a relatively controlled legal risk - the bank does not have to investigate the cause of the debt.

There is a clear limit to this rule, set out in the text itself: it disappears if the bank has «acted knowingly to the detriment of the debtor». Case law interprets this exception restrictively, but it applies in particular where the bank acquired the bill in the full knowledge that the drawer would not provide any advance or that the instrument was fraudulent (Cass. com., 18 Jan. 2011, no. 10-30.027). We return to this point in the section entitled «Pitfalls».

Settlement: payment on the due date or unpaid

On the due date, the bank presents the bill to the drawee to obtain payment, in accordance with article L. 511-38 of the French Commercial Code. Two scenarios then emerge - one harmless, the other conflictual.

Scenario 1: the effect is paid for

In practice, this is the vast majority of cases. The drawee pays on the due date, the bank collects, and the transaction is settled without friction. Nothing is returned to the remitter: the funds were advanced on the day of discounting and now belong to the bank, since it is the owner of the debt it has just collected. The only remaining entry is in the accounts, to balance the «bills of exchange for collection» order account.

Scenario 2: the bill is unpaid

This is where the legal system of discounting comes into its own. When the drawee fails to pay on the due date, the bank has the right to three possible avenues of appeal, which correspond to three distinct legal bases.

La first track is the recours cambiaire, based on the rights of the securities delivered. The bank, as the rightful bearer, may have a protest drawn up in the absence of payment within the stipulated period (article L. 511-42 of the French Commercial Code), unless the letter bears the words «sans frais» or «sans protêt». Once the protest has been drawn up, the debtor then brings an action against any of the co-signatories to the letter - drawer, accepting drawees, previous endorsers, avalistes - who are jointly and severally liable for payment (article L. 511-45 of the French Commercial Code). This action is subject to short limitation rules: three years against the accepting drawee from the due date, one year against the drawer and endorsers. The advantage of an action under the law of exchange is its solidity - the law of exchange is rigid and favourable to the bearer - and its ability to enforce joint and several liability. The disadvantage is the need to comply strictly with the formalities (protest, notifications) and time limits.

La second track is the recourse based on the discount agreement itself. When the bank and the customer have entered into a discounting agreement, it generally contains a «safe harbour» or equivalent clause stipulating that the advance granted by the bank remains repayable if the bill is not paid on the due date. This is a contractual remedy under ordinary law, which is not subject to the short time limits of the law governing bills of exchange, but which does not apply to the drawee or to previous endorsers - it applies only between the bank and its remitting customer.

La third way, is the most widely used because of its operational simplicity. current account reversal. When the unpaid bill is returned to the bank, it debits the amount of the bill from the remitter's current account. The entry is quasi-mechanical: it is made at the bank's initiative, with no formalities other than informing the customer. This is the route that has generated the most case law, because it interferes with all the others.

This distinction is perfectly logical in relation to the principle set out in the previous section: the bank, as the owner of the claim by virtue of the endorsement, disposes of it as an owner. As long as the remitter is solvent, reversal is a way of obtaining payment; and to receive payment is to be extinguished on the instrument. But in the event of insolvency proceedings, reversal cannot have this effect, because it does not result in a real payment - the current account is frozen or liquidated, and the accounting entry does not correspond to any transfer of value. The bank therefore retains the security and its foreign exchange recourse.

Another judgment is worth mentioning because it frames the opposite debate: when the bank has not reversed. In 1978, the Court of Cassation ruled that a discounting banker who has not reversed the unpaid bills to the debit of the remitter's current account but has credited the amount to an order account can only demand payment from the drawer on the basis of the law of exchange, without being able to rely on the current account agreement (Cass. com., 3 Apr. 1978, no. 76-14.717, Bull.). In other words, no choice is a choice: if the bank prefers to leave the bill aside, it can no longer invoke the mechanics of the current account and must fall back on the sole recourse of the bill of exchange.

Finally, it is possible to waive the reversal, but it must be express. The Court of Cassation has ruled that tacit waiver cannot be presumed and that a distinction must be made between waiver of the drawer's guarantee as to the existence of the provision - which extinguishes the recourse under the bill of exchange - and waiver of the right to claim the amount of the bills in the event of default by the drawee - which only affects the recourse for payment (Cass. com., 8 July 1997, no. 95-10.702, Bull.). It is almost never in a bank's interest to waive; in practice, this situation arises mainly in ’fixed price discounting« transactions where the bank consciously assumes the risk of signing a particular debtor.

Pitfalls to be aware of

Discounting is a seemingly straightforward operation, but there are a number of situations in which a benign regime can give way to a much less comfortable one. We see three of them regularly in our practice.

The first is that of effects of convenience. A bill of convenience is a bill of exchange or promissory note drawn without any real cause, with the sole aim of obtaining credit through discounting. Two merchants draw cross-drafts which they have discounted alternately, without any real commercial transaction supporting the claims. The practice is void under civil law for lack of cause, and exposes the perpetrators to criminal penalties: fraud (Cass. crim., 4 Apr. 2012, no. 11-81.332), and above all bankruptcy through the use of ruinous means when the business is in difficulty (Cass. crim., 8 Jan. 2014, no. 13-80.087). For the bank, the risk is twofold: firstly, it can no longer exercise its recourse against the signatories because the instrument is null and void and can be invoked against a bearer acting in bad faith; secondly, if it has discounted knowingly, it incurs criminal liability.

The second trap is the knowledge of the lack of provision. The principle of the unenforceability of defences under article L. 511-12 is subject to one limitation: it does not apply if the bearer has knowingly acted to the detriment of the debtor. This means that a bank that discounts a bill in the full knowledge that the drawee will not pay - for example, because it has a cash flow situation on the drawee via its network - will be subject to the drawee's defences and will lose the benefit of the exchange regime. The Court of Cassation applied this rule in 2011 in a case where the discounting banker had discounted a bill in the knowledge that his customer would not provide any advance (Cass. com., 18 Jan. 2011, no. 10-30.027). The practical lesson is that the overall account relationship between the bank, the drawer and the drawee - particularly when the latter two are customers of the same institution - creates a duty of care that can be turned against the bank.

The third trap is procedural: the duty to inform of the discounting banker towards his customer. Case law has built up a network of obligations which, individually, may seem secondary but which, taken together, may form the basis of a liability action. The banker is required to promptly inform the remitter of non-payment of the bill by the drawee (Cass. com., 14 May 1991; Cass. com., 8 Dec. 1992). If he refuses to discount a bill of exchange, he must promptly notify his customer so that the latter has a precise idea of the state of his account and can react (Paris, 14 Jan. 1988, D. 1989, Somm. 89). If he reverses and then rediscovers the account with a view to resubmission, he must also give notice (Cass. com., 13 March 1990, no. 88-16.740, Bull. civ. IV, no. 82). The recurrence of these obligations shows that the discounting banker is not simply a passive technician; he must engage in dialogue with his customer at every stage, failing which he may be held liable for failure to provide information.

Discounting, Dailly assignment, factoring: what should you choose?

Discounting is not the only tool for mobilising trade receivables. It coexists with Dailly assignment of trade receivables and factoring. These three techniques have the same objective - to finance the operating cycle by transforming future receivables into immediate cash - but they have different rationales and produce different legal effects.

The choice between these tools depends on several criteria. For a company managing a small number of large-value receivables from clearly identified customers, discounting bills of exchange remains the simplest and most flexible solution. For a company that regularly disposes of a large volume of small receivables, the Dailly slip is more appropriate. For a company that wants to outsource the management of its trade receivables and offload the risk of collection, factoring is the natural solution, albeit at the cost of a higher commission. In practice, many companies combine the three: a discount line for one-off transactions, a Dailly for public contracts, and a factoring contract for general trade receivables.

One final point, often omitted from practical information sheets: discounting and factoring are not interchangeable in terms of recourse. In traditional factoring «with recourse», the factor can take action against the assignor in the event of non-payment, in the same way as a discounting bank. In «non-recourse» factoring - which is more expensive - the factor assumes the risk of non-payment and has no further recourse. Discounting, on the other hand, always gives the bank recourse, unless expressly waived, which is exceptional in practice. This difference in regime is crucial for qualifying accounting entries and for the tax treatment of commissions.

To find out more about mobilising trade receivables, consult our guides on’factoring, the bill of exchange and commercial paper. For information on how this relates to insolvency law - and in particular to the regime for reversing insolvency proceedings - see our guide to insolvency proceedings. To place discounting in the broader family of short-term credit transactions, see our guide to banking law.

When litigation arises - disputed unpaid debts, disputed reversals, bills of exchange reclassified as collections, banker's liability invoked - every piece of the case counts and every legal qualification shifts millions of euros of receivables. Solent Avocats works alongside credit institutions and remitting companies, both as defendants and plaintiffs, in disputes relating to discounting, reversal of payment, chamber remedies and bank liability. For an in-depth analysis of your case, please contact our team.