In the landscape of financial instruments and means of payment, certain tools, although less common today, still have a legal existence of their own. Alongside the well-known cheques, transfers and bills of exchange, the bearer note is a curiosity. However, its apparent simplicity conceals a specific legal regime that it is useful to understand, if only to know how to react if one day you find yourself in its presence, as issuer or holder. This article aims to demystify the bearer note: what exactly is it? How is it validly created? How does it circulate and what are the rules governing its payment? What risks and protections does it offer? Even if it is now rarely used, a knowledge of its mechanisms is still relevant.
Defining the bearer note: a seemingly simple commitment
At the heart of the bearer note is a fundamental promise: a person, the subscriber, undertakes in writing to pay a specified sum of money, not to a named person, but to whoever presents the document to him or her on the due date. Bearer bonds are characterised by the fact that the beneficiary is not named. The transfer is very simple, involving the physical delivery of the document.
It should be distinguished from its close cousin, the blank note. The latter is a note in which the name of the beneficiary is not initially written by the subscriber, leaving a blank space. As long as this space is not filled with a name, the blank note circulates and functions almost like a bearer note. Once the name has been entered, it takes on the nature of a nominee note or promissory note, depending on how it is drafted.
In legal terms, bearer notes occupy a special position. Unlike a bill of exchange or promissory note, it is not considered to be a commercial paper. strictly speaking governed by the specific provisions of the French Commercial Code relating to these instruments. It is mainly governed by the ordinary law of obligations (found in the Civil Code), even though case law has applied certain rules specific to bills of exchange, as we shall see.
Another important characteristic concerns its commercial or civil nature. A bearer note is not automatically a commercial document. Its nature depends entirely on the cause, the reason for which it was created. If the underlying commitment is linked to a commercial activity (for example, the payment of a supply between merchants), the note will be commercial. If the cause is civil (for example, an IOU between individuals), the note will remain civil. This distinction has practical consequences, notably on the jurisdiction of the courts in the event of a dispute or on certain rules of prescription.
Creating a bearer note: validity and conditions
The very existence of bearer notes has not always been self-evident in French law. Its historical background helps to understand its current status.
An eventful past, a recognised validity today
Historically, bearer or blank notes have been viewed with suspicion. As far back as the 17th century, it was feared that they could be used to conceal usurious transactions or to favour creditors in the event of bankruptcy. Later, with the emergence of the first banknote systems (such as Law's in the 18th century), the private issue of bearer notes was prohibited in order to protect the monopoly of currency issue.
However, despite this past reticence and the absence of specific regulations in the major codes, the validity of bearer notes is now accepted. Legal doctrine and case law, including old case law, have recognised its lawfulness. This recognition is based on several foundations. Firstly, the principle of contractual freedom makes it possible to create such commitments. Secondly, the technique of stipulation pour autrui, which allows a commitment to be made for the benefit of a third party, can accommodate a beneficiary who is not immediately identified, provided that he can be identified later (in this case, by presentation of the instrument).
The bearer note also makes it possible to bypass the formal requirements for the ordinary assignment of a claim set out in article 1690 of the Civil Code (service on the debtor or acceptance by authentic instrument), formal requirements that are considered to be non-mandatory and which the parties may waive by virtue of the form of the instrument itself. Presentation of the note to the debtor is sufficient to inform him of the change of creditor. Finally, other texts allow the existence of bearer securities in various fields, such as securities (shares, bonds) or cheques, which reinforces the general validity of the mechanism.
Formal rules to be observed when setting up a business
For a bearer note to be validly created, certain conditions must be met, which are essentially governed by ordinary contract law.
The capacity of the policyholder is essential. They must have the legal capacity to bind themselves. If the commitment is a commercial one, the subscriber must have commercial capacity. In this respect, it should be noted that if an emancipated minor has civil capacity, he or she cannot be a merchant and therefore cannot subscribe to a commercial bearer note unless authorised to do so by a judge (family affairs judge or president of the judicial court, depending on the case), as provided for in article L. 121-2 of the French Commercial Code.
The undertaking must be in writing. And given the way it is transmitted "from hand to hand", this writing must necessarily be on paper. A purely electronic bearer note seems difficult to imagine under the current system. In accordance with article 1376 of the Civil Code for unilateral undertakings to pay a sum of money, this writing must include the signature of the person making the undertaking, as well as a statement, written by that person, of the sum in words and figures.
Other information is not strictly required for the contract to be valid, but is useful. The date of creation is not compulsory under ordinary law, but it does make it possible to verify the capacity of the subscriber at the time of the commitment. Indication of the "value provided" (the cause of the commitment) is not required either: the cause is presumed to exist. It is up to the subscriber who disputes his obligation to prove the absence or illegality of the cause.
The place of payment is important for the practical circulation of the note. Its absence would not render the note null and void, but would oblige the bearer to claim payment at the domicile of the subscriber (the obligation is said to be "querrable"). Finally, it is not even essential to expressly mention "payable to the bearer" if the wording of the instrument, for example the absence of the name of the beneficiary in a note that could have been a promissory note, clearly shows the intention to commit to any bearer.
The life of the bearer note: transmission and payment
Once created, bearer notes are intended to circulate, sometimes before being presented for payment.
Physical delivery simplifies traffic flow
The striking feature of the bearer note is its ease of transmission. It passes from one person to another simply by physical delivery, known as the "manual tradition". No endorsement or registration formalities are required. The downside of this simplicity is insecurity. The bearer is exposed to the same risks of loss or theft as a banknote.
The person who transfers the note (the assignor) offers only a limited guarantee to the new holder (the assignee). Under article 1326 of the Civil Code on the assignment of claims, the assignor guarantees the existence of the claim at the time of the transfer. However, unless he has undertaken to do so in a specific clause, he does not guarantee that the subscriber will be solvent on maturity. This is a major difference from traditional commercial paper, where the endorsers are generally jointly and severally liable for payment. Here, the intermediary holders disappear without a trace or commitment. The value of the security is essentially based on the credibility of the initial underwriter.
In legal terms, the right to claim is considered to be "incorporated" into the paper document. The document is not only proof of the right, it is also its indispensable vehicle. This brings it into line with the regime for tangible movable property. Possession of a document of title gives rise to a presumption of ownership of the right, by virtue of the famous rule "in the case of movable property, possession is equivalent to title" set out in article 2276 of the Civil Code. This also has consequences for the way in which a bearer note is pledged, which follows the rules for pledging tangible movable property.
The unenforceability of defences: the protection of holders acting in good faith
This is undoubtedly the most technical legal point, but also the most important for the security of anyone receiving a bearer note. The principle is as follows: the underwriter (the debtor) cannot refuse to pay the last bearer who presents him with the note on the due date, by invoking reasons ("exceptions") linked to his personal relations with the previous bearers.
Suppose the policyholder has given the note to a first beneficiary in payment for goods that turn out to be defective. If that first beneficiary passes the note on to a third party in good faith (who is unaware of the dispute over the goods), the subscriber cannot refuse payment to that third party on the grounds that "the original goods were defective". The right of the last holder is considered to be its own, autonomous right, and not simply derived from that of the previous holder.
This principle, known as the "unenforceability of exceptions", is fundamental to commercial paper because it facilitates its circulation. The Court of Cassation has extended it to bearer notes, even though they are not negotiable instruments in the strict sense of the term. This solution ensures consistency, particularly with promissory notes, which can be endorsed "to the bearer" and are then subject to the same principle.
Of course, there are limits to this principle. The debtor can always raise against the bearer defences that are personal to him (for example, set-off if the bearer is also his debtor) or defences arising from the instrument itself (for example, if the note is visibly false or incomplete, or if the obligation is void for an apparent reason). The protection applies only to the bearer in good faith, i.e. the bearer who was legitimately unaware of the defects affecting the previous relationship.
Timing of payment: procedures and potential difficulties
Bearer notes are normally paid on the due date stated on the note (or on demand if there is no due date, but this is rare and potentially illegal if it is intended to compete with currency). Can the debtor obtain a payment extension from the judge? A priori, yes, because no specific rule seems to preclude the application of article 1343-5 of the Civil Code, which allows the court to grant periods of grace.
In accordance with the "possession equals title" rule, the person presenting the note is presumed to be its rightful owner. The debtor who pays him the sum indicated, in good faith (i.e. without knowing that the bearer may have stolen or found it), is fully discharged of his debt. This is an essential protection for the debtor, provided by article 1342-3 of the Civil Code. In principle, the debtor does not have to check the chain of previous transfers. Nor can he take into account any opposition (seizure, for example) made by the creditor of a former bearer.
A tricky situation can arise if, on the due date, no-one turns up to claim payment. The bearer is unknown or has disappeared. How can the debtor free himself? The classic procedure of making real offers and depositing the sum is difficult to implement because it presupposes knowing the creditor in order to send him a summons. Perhaps we could take inspiration from the solutions accepted when the creditor cannot be found or is incapable, by allowing direct deposit with the Caisse des Dépôts, but the question remains open. Otherwise, the debtor might have to wait for the limitation period to expire.
If the debtor refuses to pay on the due date, the bearer is not obliged, as is the case for bills of exchange, to have a bailiff draw up a "protest in default of payment". The absence of this formality does not result in the loss of rights. He can take legal action against the subscriber. Can he take action against a previous bearer? Only if the previous holder explicitly guaranteed payment by means of a note on the security or a separate deed.
As for jurisdiction in the event of a dispute, this will depend, as we saw earlier, on the civil or commercial nature of the initial commitment recorded by the note.
Finally, what about the guarantee by "aval", common for commercial paper? This specific mechanism of the Commercial Code (article L. 511-21) is not applicable to bearer notes. If a person wishes to guarantee payment of a bearer note, they must do so by means of a guarantee mechanism governed by civil law. This has consequences, particularly in the event of the principal debtor's insolvency proceedings: the guarantors could, depending on the circumstances, benefit from the "benefit of division", i.e. only have to pay their share of the debt if there are several of them, whereas the guarantor is liable for the whole.
End of the bearer ticket: prescription and incidents
Like any debt, the right recorded in a bearer note may be extinguished by prescription or affected by incidents such as loss or theft.
The time limit for claiming payment of a bearer note is not the shortened time limit provided for commercial paper (article L. 511-78 of the French Commercial Code). It follows the ordinary law regime. Since the law of 17 June 2008, this period is five years, whether the obligation is civil (article 2224 of the Civil Code) or commercial between traders or between traders and non-traders (article L. 110-4 of the Commercial Code). The five-year period begins to run from the date on which the note falls due.
What happens if the note is lost or stolen? Here again, the specific procedures set out in the French Commercial Code for lost bills of exchange do not apply. The dispossessed owner must rely on the general rules of the Civil Code concerning the reclamation of lost or stolen movable property (articles 2276 and 2277). The situation is complex, however, because the title is in bearer form. The third party who found or received it (even from a thief), if acting in good faith, is protected by the rule that "possession is equivalent to title". It is therefore difficult, if not impossible, to make a claim against a possessor acting in good faith. However, a special feature of debt instruments is that destruction of the paper does not destroy the right itself. If the rightful owner can prove his right (for example, by a copy, a testimony on the circumstances of creation and loss), he could theoretically claim payment from the subscriber, even without being able to present the original title, provided he can prove his capacity and the absence of the title.
Current relevance of the bearer note
It has to be said that bearer notes are now largely neglected in business and civil life. There are several reasons for this decline. Its main drawback is the insecurity associated with its physical transmission: the risk of loss or theft is high, and proof of ownership can be difficult. In addition, the rise of cashless (transfers, cards) and electronic means of payment, which are faster, more secure and offer better traceability, has made it less attractive. Concerns linked to the fight against money laundering and tax fraud have also contributed to the marginalisation of anonymous instruments.
Are bearer notes still around? One might think of the old "bons de caisse" issued by some banks in the past, which were sometimes bearer notes. But even these instruments are now rare and their issue is regulated. Most financial securities (shares, bonds) are now dematerialised or registered.
Despite its rarity, it is useful to understand the bearer note system. You may come across an old document that has been found, or a situation where such a note has been used in a particular context. Knowing the rules governing its creation, transmission and payment, and above all the key principle of the unenforceability of exceptions, will enable you to correctly understand the rights and obligations of each party.
The management of a bearer note can raise specific questions, particularly in the event of transfer, payment or dispute. If you are in possession of such a note or have issued one, our firm can advise you on your rights and obligations. Please do not hesitate to contact us for a personalised analysis of your situation.
Sources
- Civil Code
- Commercial code
- Monetary and Financial Code
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