Procedures and Definitions

Collection is defined by Perry's Dictionary of Banking as 'the receipt, transmission and presentation for payment of a bill, draft, cheque or other instrument by a collecting banker for a customer, and the subsequent direction of the resulting funds into the customer's account'.

A collection service offered by a bank provides a means by which an exporter in one country can obtain payment from a debtor in another country.

1. With an outward collection, a bank undertakes to obtain the payment of a cheque, bill of exchange, draft or promissory note from someone abroad, eg from a foreign buyer on behalf of an exporter.

2. With an inward collection, a bank assists a bank abroad to obtain payment of a cheque, bill of exchange, draft, or promissory note from someone in the UK, eg assists a bank abroad to obtain payment from an importer on behalf of a foreign supplier.

• A collection involves the collection of paper, not the collection of a debt. It is not a bank's job to ensure that an exporter is properly paid for goods sent to a foreign buyer.

It is the bank's job to make sure that the documents are transmitted and presented, and the paid funds are directed to the exporter's account.

• Banks are therefore responsible for ensuring that the collection of financial documents takes place without regard for the commercial transactions underlying them.

In the UK the collection of a bill of exchange (ie when a UK importer accepts a bill drawn by an overseas supplier) is governed by the Bills of Exchange Act.

When a bank handles a collection on behalf of a customer, two types of document may be handled.

1. Financial documents: these are 'bills of exchange, promissory notes, cheques, payment receipts or other similar instruments for obtaining the payment of money.

2. Commercial documents: these are 'invoices, shipping documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents'. Commercial documents therefore include a bill of lading, or a waybill, which the exporter might give to the bank to handle. They will also, usually, include copies of the invoice, insurance policy or certificate, and perhaps other documents such as a certificate of origin, a certificate of quality, etc. Collections may or may not involve the handling by banks of commercial documents.

Clean collections and documentary collections

There are two types of collection.

1. A clean collection. This is a 'collection of financial documents not accompanied by commercial documents'. In other words with a clean collection, banks handle a bill of exchange, promissory note or cheque etc for payment (by the overseas buyer) but they do not have to handle the invoice, bill of lading or waybill etc.

2. A documentary collection. This is a collection involving commercial documents, ie either,

   1. financial documents and commercial documents together; or

   2. commercial documents only (i.e. not accompanied by financial documents).

The commercial documents in a documentary collection are likely to include not just a bill of lading or waybill, but also an invoice, an insurance document and quite possibly other documents, such as a certificate of origin, or a third party certificate of inspection, etc.

A bank will handle the financial documents and, where required, commercial documents only on the basis of instructions received. As two or more banks will be involved in a single collection (one 'at home¹ and at least one overseas) the instructions given to a bank might come from:

1. the exporter himself;

2. another bank, acting on behalf of the exporter.

These instructions to act are known as a collection order. It is the collection order which instructs a bank whether a clean collection or a documentary collection is required.

A significant feature of a documentary collection is that if a bank is instructed to handle commercial documents which include a bill of lading, the exporter can keep control over the I goods until the foreign buyer has either paid for them or accepted a bill of exchange. This is because:

1. the bill of lading is a document of title; and

2. a full set of the signed originals of this document can be kept by the bank until the foreign buyer

a) pays for the goods which may have arrived at their port of destination but which the buyer cannot take possession of without the bill of lading; or

b) accepts a bill of exchange and gives it to the 'collecting' bank; or

3. issues a promissory note.

The bank therefore has 'constructive control' over title to the goods and must only release this title when the buyer complies with the requirements of the exporter, as set out in the collection order.

Fuller definition of collection

We are now in a position to give a full definition to a ‘collection’.

Collection means the handling by banks on instructions received, of documents* … in order to:

1) obtain acceptance and/or, as the case may be, payment, or

2) deliver commercial documents against acceptance and/or, as the case may be, against payment, or

3. deliver documents on other terms and conditions.

Documents means financial and/or commercial documents as defined above.