When a company issues or receives a bill of exchangeThe question of payment security inevitably arises. Unlike a simple invoice, a bill of exchange incorporates specific legal mechanisms designed to strengthen the confidence of the beneficiary and successive bearers. Understanding these mechanisms is fundamental to assessing risk and using this instrument effectively.
Two concepts are at the heart of these guarantees: the provision and theacceptance. The advance represents the claim that justifies the payment order, while the acceptance is the firm undertaking by the debtor (the drawee) to pay the sum indicated on the due date. This article explores in detail the operation of these two pillars of the bill of exchange and their vital importance for the security of your commercial transactions.
The provision: the basis for payment
The provision is a central concept, albeit one that is sometimes misunderstood. It forms the economic basis of the payment order given by the drawer.
What is a provision?
Article L. 511-7, paragraph 2, of the French Commercial Code gives a precise definition of a provision: "There is a provision if, on the maturity date of the bill of exchange, the person on whom it is provided [the drawee] owes the drawer, or the person on whose behalf it is drawn, a sum at least equal to the amount of the bill of exchange"..
In simple terms, the provision is receivable that the drawer holds over the drawee. It is because the drawee owes money to the drawer that the latter can order the drawee to pay the beneficiary of the bill of exchange. It is important to distinguish the provision from the "value supplied", which is the reason why the drawee issues the bill to the beneficiary (often a debt owed by the drawee to the beneficiary).
When must the provision exist?
Unlike cheques, where the funds must be available on issue, bills of exchange are credit instruments. The law therefore only requires that the provision exists on the maturity date of the bill. The drawer is not obliged to be the drawee's creditor when he creates the draft, but he must ensure that he will be when payment is due.
Characteristics of the provision claim
For the provision to be considered valid at maturity, the drawer's claim on the drawee must meet several conditions:
- It must be some Its existence must not be disputed or depend on an uncertain future event.
- It must be liquid the amount must be fixed or easily determinable.
- It must be due the drawer must be able to claim payment from the drawee on the due date of the bill of exchange.
- It must be available at the drawer must be able to dispose of it freely (it must not already be allocated to another payment or seizure).
In addition, the amount of this claim must be at least equal to the bill of exchange. If the claim is lower, the provision is only partial. Although article L. 511-7 requires at least an equal provision, practice and the law recognise certain effects of a partial provision, in particular the possibility for the drawee to give a partial acceptance (article L. 511-17) or for the bearer to accept a partial payment (article L. 511-27).
Where does the provision come from? Possible sources
The drawer's claim on the drawee can have a wide variety of origins. The most common are :
- Sale of goods : The drawer (seller) has delivered goods to the drawee (buyer) and draws a bill of exchange for payment of the price. The provision is the receivable for the sale price.
- A credit facility : The drawee (often a bank) has undertaken to pay the drafts drawn on it by the drawer up to a certain amount.
- A loan : The shooter lent money to the victim.
- A surety bond : The drawee has agreed to guarantee a debt owed by the drawer to a third party and accepts a bill of exchange as evidence of its commitment.
- The credit balance on a current account between the shooter and the target.
- Delivery of commercial paper by the drawer to the drawee for collection or as security.
Who must provide the advance?
In principle, this is the shooter who has the obligation to ensure that the provision will exist on the due date. If the bill of exchange is drawn "on account", it is the client (the person for whom the drawer is acting) who is required to provide the advance.
Transfer of the provision to the bearer
One of the most protective mechanisms of the bill of exchange is the transfer of the provision.
The key principle: ownership of the provision is transferred
Article L. 511-7, paragraph 3, of the French Commercial Code sets out a fundamental principle: "ownership of the provision is transferred by operation of law to the successive bearers of the bill of exchange".. This means that when the bearer receives the bill of exchange (by direct delivery from the drawer or by endorsement), the bearer automatically becomes the owner of the claim that the drawer had on the drawee.
This transmission gives it a exclusive right on this claim. This is a very strong guarantee, because it allows the guarantor, under certain conditions, to claim payment directly from the drawee, even if the drawee has not accepted the bill, and it protects the guarantor against the drawee's other creditors in the event of insolvency proceedings.
Conditions and timing of transfer
For the transfer of the provision to be effective and enforceable, several conditions must be met:
- La bill of exchange must be valid (comply with the formal requirements).
- La provision must be made on a regular basis (in particular, it must not have been fraudulently created during a suspect period if the drawer is the subject of insolvency proceedings).
Important point: acceptance by the drawee is not a condition for the transfer of the provision. This is transferred to the bearer as soon as the draft is handed over, whether or not the drawee has accepted it. Acceptance will, however, considerably strengthen the bearer's rights.
The transmission takes place as soon as the draft is delivered bearer. For a banker who discounts a bill of exchange, he becomes the owner of the provision as soon as he physically receives the document, and not only when he credits his customer's account.
Acceptance: the drawee's direct commitment
While the provision is the economic basis, the acceptance is the drawee's formal legal commitment.
What is acceptance?
Acceptance is the act by which the drawee undertakes personally and directly to pay the amount of the bill of exchange when it falls due. It then becomes the principal debtor of the bill of exchange. His commitment is of an exchange nature, subject to the strict rules of bill of exchange law. Article L. 511-19 of the French Commercial Code makes this clear: "By acceptance, the drawee undertakes to pay the bill of exchange on the due date..
Acceptance also gives rise to a presumption of existence of the provision in respect of third party bearers (article L. 511-7, para. 4). It is assumed that the drawee would not accept if it did not think it owed the sum to the drawer.
Presentation for acceptance
To obtain acceptance, the bearer (or a simple holder) must present the bill of exchange to the drawee.
- When? Presentation may be made at any time up to the due date (article L. 511-15).
- Is this compulsory? In principle, no. It is simply an option for the bearer. However, it becomes compulsory for bills payable "at a certain sight period" (because acceptance sets the starting point of the period) and if a specific clause requires it. Conversely, an "unacceptable" clause may prohibit it (except in special cases).
- Where? At the drawee's domicile.
- Reflection period : The drawee may request a period of one day to consider whether to accept or refuse (article L. 511-16).
How is acceptance achieved?
Acceptance is subject to conditions of form and substance:
- Background : The drawee must have the capacity to commit itself (as for the issue), its consent must not be vitiated (error, fraud, violence), and if it is acting through an agent, the agent must have the required authority.
- Form : Acceptance must be written on the bill of exchange itself. It is generally expressed by the word "accepted" (or equivalent) followed by the handwritten signature of the drawee affixed to the front of the instrument (article L. 511-17). The simple signature of the drawee on the face of the instrument, without any other mention, constitutes acceptance. An acceptance given by a separate document has no value as a bill of exchange (it may simply constitute a promise to pay under ordinary law).
- Date : The acceptance does not need to be dated, except in the case of bills payable within a certain sight period or if presentation within a specified period is required.
- Terms and conditions : Acceptance must be pure and simple. The drawee may, however, accept it for a part only of the amount (limited acceptance). Any other modification or condition added by the drawee (for example, linking the payment to a delivery) is equivalent to a refusal of acceptance (article L. 511-17, para. 4), even if the drawee remains liable to the bearer under the terms of its conditional acceptance.
The major effects of acceptance
Acceptance radically transforms the legal situation.
The drawee's irrevocable commitment
Once the drawee has accepted and returned the bill of exchange, it can no longer renege on its commitment (article L. 511-20). His acceptance is irrevocable.
The drawee becomes the principal debtor
He is now directly and personally obliged to the rightful bearer to pay the sum on the due date, even if he does not ultimately receive the advance from the drawer.
Consolidation of provision rights
As mentioned above, acceptance makes the bearer's right to the provision definitive and enforceable against all parties. The claim ceases to be part of the drawer's assets and can no longer be seized by his creditors, nor validly paid into the drawer's hands. It takes precedence over a direct action by a subcontractor or a subsequent Dailly assignment.
The unenforceability of defences: key protection for the holder
This is one of the most important effects. Under article L. 511-12 of the French Commercial Code, the accepting drawee must may not raise any defence against a holder acting in good faith (defences) that he could have asserted against the drawer. For example, he cannot refuse to pay the bearer on the grounds that the goods delivered by the drawer were defective or that the initial contract has been cancelled.
This rule protects the circulation of the bill of exchange: each successive bearer can have confidence in the instrument without having to check the initial relationship between drawer and drawee.
The only limit is bad faith on the part of the bearer. If the bearer, in acquiring the draft, knew that he was causing prejudice to the drawee by depriving him of a legitimate defence (for example, if he knew that the debt had no cause or that the drawee's situation was irremediably compromised), then the drawee may raise the defences against him. The burden of proving bad faith lies with the drawee.
And if the drawee refuses to accept?
The drawee has the right to refuse to accept the draft, even if it owes the drawee the sum. This refusal (total, partial or conditional) is not a fault in itself.
Protest for lack of acceptance
To retain his rights, in particular the right to take immediate action against the guarantors, the bearer must have this refusal officially recorded by a protest for lack of acceptance (article L. 511-39). Drawn up by a bailiff or notary, this authenticated deed proves presentation and refusal. Although its preparation is optional if the bearer decides to wait until the due date, it is essential if early recourse is to be exercised.
The consequences of refusal
The main effect of a refusal of acceptance recorded by a protest is the immediate opening of legal proceedings. recourse by the holder against the guarantors (drawer and endorsers), even before the initial maturity date of the draft (article L. 511-38). For the drawee, in the specific case of a bill drawn following the supply of goods between merchants, refusal to accept may result in forfeiture of the term from which he benefited to pay the price (article L. 511-15, paragraph 10).
Acceptance by intervention: a subsidiary guarantee
In rare cases, if the drawee refuses to accept, a third party (or even the drawee himself on behalf of another) may accept the bill of exchange "by intervention" for the honour of one of the signatories (drawee or endorser) in order to avoid early recourse (article L. 511-66). In this case, the acceptor by intervention gives an undertaking to the bearer in respect of the bill of exchange.
Controlling the provision and acceptance of bills of exchange is essential for securing your foreign exchange receivables. The consequences of a bill that is not provisioned or accepted can be significant. Our your commercial law partner to analyse your cover and defend your rights in the event of a dispute.
Sources
- Commercial Code, in particular articles L. 511-7, L. 511-11, L. 511-12, L. 511-15 to L. 511-21, L. 511-38, L. 511-39, L. 511-44, L. 511-66 to L. 511-71, L. 511-77.
- Code of Civil Procedure and Enforcement (CPCE).
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