A bill of exchange is a bill whereby a creditor asks his/her/its debtor to pay a specific sum to a designated person by a specific due date. There are 3 parties involved in a payment by bill of exchange:
- the drawer is the party that issues a bill of exchange – the 'creditor';
- the beneficiary or payee is the party to which the bill of exchange is payable;
- the drawee is the party to which the order to pay is sent - 'the debtor'. The drawee becomes the acceptor when he/she/it has written the acceptance on the bill of exchange.
Often, the drawer names himself/herself/itself as beneficiary and presents the bill of exchange for payment. However, in this case, the beneficiary is deprived of one of the advantages of the bill of exchange via the circulation of the acceptance bill, namely recourse on a bill of exchange, which involves the joint and several liability of the signatories, meaning that the bearer of a bill is entitled to demand payment of the bill from all those who signed said bill.
A bill of exchange constitutes a commercial act, regardless of the transaction for which it is concluded, even if the interested parties are not traders.
Objective: a bill of exchange is used to settle all types of purchases and to pay invoices or contracts regardless of the underlying commercial consideration (purchase of movable assets, delivery of goods, tools, machinery, services, etc.).
Available to the self-employed and any type of business, settlement by bill of exchange applies in particular to the everyday transactions of businesses carried out abroad.
It is also a means of discounting credit. Bills of exchange are therefore widely used by traders as they satisfy:
- the debtor who will pay on credit;
- the creditor who will be paid immediately via discounting;
- the banking institution which earns interest.
- the drawer of a bill of exchange must have a bank account;
- the beneficiary may accept the bill of exchange as a means of settling a debt, but is not obliged to do so;
- 9 compulsory pieces of information (see below) must appear on the bill of exchange for it to be valid: in the event of omission, it is called a 'blank bill of exchange' which is in principle null and void and is not valid as a bill of exchange. It can, however, be covered by adjusting the blank bill of exchange;
- the drawer’s bank account must have sufficient funds or have a sufficient credit line on the due date of the bill of exchange, but not necessarily when it is issued.
Information that must appear on the cheque
- the words 'bill of exchange', inserted in the text of the bill;
the simple authorisation to pay a specific sum;
- the amount to be paid, stated both in figures and written out in full. In the event of a discrepancy, the sum written out in full is the amount payable;
- where the amount is written more than once, either in full or in figures, the lowest sum is the sum payable in the event of a discrepancy;
- where the bill of exchange is for a currency with the same denomination (dollar, for example) but a different value in the country of issue and the country of payment, the currency of the place of payment is supposed to be chosen.
- the name of the drawee (the party that has to pay);
- the name of the beneficiary or payee;
- the place of issue;
- the date of issue;
- the place of payment;
- the due date;
- the signature of the drawer (issuer of the bill of exchange).
The bill of exchange can be transferred by:
handing it over:
- it is a bearer bill;
- it is made out to a named person and also contains the words 'or bearer' or an equivalent term (ou au porteur in French);
- it does not specify a beneficiary.
ordinary transfer, if the bill is stipulated as payable to a named person with the words 'not to order' (non à ordre in French) or an equivalent term;
endorsement, if the bill is issued to a named person, with or without the words 'to order' (à ordre in French). Endorsement means the transfer of all rights associated with the bill and must be a simple endorsement, i.e. without conditions or reservations.
It is carried out by writing on the back of the bill or on an attached slip (called an allonge in French) signed by the endorser.
Acceptance and aval
- acceptance is the undertaking made by the drawee to pay the bill of exchange. The drawee has no legal obligation to accept the bill of exchange, but if they accept, they become the principal debtor and it is the drawee that the bearer must first ask for payment. The acceptance is written on the bill and signed by the drawee. It can be expressed by the word 'Accepted' but is more often expressed by the drawee’s signature;
- through aval, a third party undertakes to guarantee the obligations of the signatory of the bill of exchange. The aval will be recorded in writing, either on the bill of exchange or in a separate document. If the aval is given on the back of the bill, the words 'good per aval' or 'per aval' (bon pour aval in French) should appear before the signature, whereas, on the front, only the signature is required.
Deadline for presentation and payment
The bearer of a bill of exchange must present it on its due date. It shall be presented for payment at the place designated on the bill:
- in the case of payment by the drawee, the bearer shall acknowledge receipt of payment by signing the bill and handing it to the drawee;
- in the case of non-payment by the drawee, the bearer must lodge a protest via notarial deed in order to be able to exercise its right of recourse against the other signatories of the bill of exchange (who are jointly and severally liable).
However, the protest, which must be lodged within 2 working days after the date on which the bill of exchange is payable, is not required when the bill of exchange has a clause exempting from lodging a protest ('bill without charges' or 'non-protestable bill' clause - in French, retour sans frais, sans frais or sans protêt).
Protection of the bearer
Vis-à-vis the drawer’s creditors, the bearer of the bill has a preferential claim on the funds for which the drawee becomes the debtor when the bill becomes payable.
The bearer of a bill of exchange has a right of recourse against the endorsers and the drawer:
- on the due date, if the payment was not made;
before the due date:
- if there has been a (total or partial) refusal of acceptance;
- in the event of the bankruptcy or insolvency of the drawee or the unsuccessful confiscation of the drawee's assets;
- in the event of the bankruptcy of the drawer of an unaccepted bill.
If no due date is mentioned, the bill of exchange is payable at sight. The due date can only be indicated in 4 ways:
- payable at sight, i.e. on its presentation to the drawee (maximum one year from issue);
- payable after sight, i.e. on expiry of a certain period following the date of presentation for acceptance;
- payable after date, i.e. on expiry of a certain period from issue;
- payable on a fixed day.
Advantages, disadvantages and risks
- guarantee for the beneficiary to be paid by the bank, except in the event of defect or non-delivery;
- endorsable by a third party;
- possibility for the drawee to use it as a credit instrument.
- administrative burden involving additional operating expenses for the drawer and the payee;
- difficult for the beneficiary to plan cash flow because the actual credit date is not foreseeable.
- loss or theft of bills of exchange;
- risk of fraud.