Transfer of Provision in Bills of Exchange: Concepts, Process & Effects

Posted on Oct 13, 2024 in Law & Jurisprudence

Transfer of Provision

1. Concepts and Economic Role

The transfer of provision on a bill of exchange arises from the relationship between the drawer (who provides the funds) and the drawee (who owes the funds). This relationship indirectly impacts the holder’s interests:

  • The drawee’s willingness to pay depends on the presence or absence of provided funds.
  • If the drawee defaults, the holder may claim through subrogation, seeking compensation from the drawer’s assets.

The drawee, unbound until acceptance, can disregard the provision. To link the bill to its economic basis, the transfer of provision transmits ownership of the underlying legal position to the holder.

2. How It Works

Conventional assignment of provision can be complex. Transferring provision via a clause within the bill of exchange simplifies the process:

  • Rights are transferred to the holder, not just the first assignee.
  • Notification to the drawee is only required for the initial assignment.
  • No specific formalities are needed for the assignment to be effective against third parties.

The clause, signed by the drawer, states the transfer of rights. Notification to the drawee prevents illegitimate payment to anyone other than the holder.

3. Effects of Transfer

The primary effect is the holder’s acquisition of rights related to the provision. The drawer loses creditor status and control over the receivable. The holder gains ownership of an extra-exchange relationship, governed by its own regulations. The drawee becomes liable to the holder. Upon notification:

  • If the bill is accepted, the drawee cannot claim compensation against the holder.
  • If unaccepted, the drawee can only claim compensation that predates the notification.

Transferred rights pertain to the provision, including the credit relationship between drawer and drawee or credit from the underlying causal relationship.

Endorsement Types

a) Endorsement for Collection (Art. 21 LC)

This authorizes someone to manage collection on behalf of the holder. The endorsee gains the right to payment but not ownership. This mandate, unlike standard representation, does not end with the endorser’s death or disability.

b) Endorsement for Guarantee (Art. 22 LC)

This secures a debt outside the exchange relationship. The endorsee does not receive ownership but holds the bill as collateral.