THE FACTORING REGULATION ACT, 2011 – AN OVERVIEW

[DR.MARIAPPAN GOVINDARAJAN]

Introduction

The Factoring Regulation Act,2011 (‘Act’ for short) was enacted to provide for and regulate assignment of receivables by making provisions for registration therefore and rights and obligations of parties to contract for assignment of receivables and for matters connected therewith or incidental thereto.  This act extends to whole of India.  The provisions of this Act shall have effect, notwithstanding any thing inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

Definitions for important terms

Section 2(i) defines the term ‘factor’ as a non banking financial company as defined in Section 45-I (f) of the Reserve Bank of India Act, 1934 which has been granted a certificate of registration under Section 3(1) or any body corporate established under an Act of Parliament or any State Legislature or any bank or any company registered under the Companies Act, 1956 engaged in the factoring business.

Section 2(j) of the Act defines the term ‘factoring business’ as the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include-

• Credit facilities provided by a bank in its ordinary course of business against security of receivables;
• Any activity as commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever or any activity relating to the production, storage, supply, distribution, acquisition or control of such produce or goods or provision of any services.

Section 2(p) defines the term ‘receivables’ as all or part of or undivided interest in any right of any person under a contract including an international contract where either the assignor or the debtor or the assignee is situated or established in a State outside India; to payment of a monetary sum whether such right is existing, future, accruing, conditional or contingent arising from and includes, any arrangement requiring payment of toll or any other sum, by whatever name called, for the use of any infrastructure facility or services.

Registration of Factors

Every factor shall make an application for registration to RBI in the prescribed form and in the manner prescribed.  A company registered as a NBFC and existing on the commencement of this Act and engaged in factoring business as its principal business before such commencement shall make an application for registration as a factor to the RBI before the expiry of the period of six months from such commencement and, notwithstanding anything contained may continue to carry on the factoring business until a certificate of registration is issued to it or rejection of application for registration is communicated to it.

Every applicant for grant of a certificate of registration as a factor shall comply for the purpose of registration, with all requirements to be fulfilled by an applicant for grant of certificate of registration as NBFC under RBI Act, 1934 and all the provisions of that Act so far as they relate to registration of NBFC, shall mutatis mutandis apply.

Assignment of receivables

Any assignor may, by an agreement in writing assign any receivable due and payable to him by any debtor, to any factor, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such assignment, disclose to the assignee any defences and right of set off that may be available to the debtor. 

On execution of assignment in writing all the rights, remedies and any security interest created over any property exclusively to secure the due payment of receivable shall vest in the assignee and the assignee shall have an absolute right to recover such receivable and exercise all the rights and remedies of the assignor whether by way of damages or otherwise or whether notice of assignment is given or not.

Non applicability

Section 31 of the Act provides that the provisions of this Act shall not apply to any assignment of receivables arising under or from the following transactions:

• any merger, acquisition or arrangements of business activities or sale or change in the ownership of legal status of the business;
• transaction on any stock exchange or commodities exchange;
• financial contracts governed by netting agreements, except a receivable owned on the termination of all outstanding transactions;
• foreign exchange transactions except receivables in any foreign currency;
• inter-bank payment systems, inter-bank payment agreements or clearance and settlement systems relating to securities or other financial assets or instruments;
• bank deposits;
• a letter of credit or independent guarantee;
• rights and obligations of any person under the law governing negotiable instruments, negotiable warehouse receipts or to instruments which are for the time being, by law or custom negotiable or any mercantile document of title to goods;
• sale of goods or services for any personal, family or household use;
• any assignment of loan receivable by a bank or non banking financial company to another bank or non-banking financial company;
• securitization transactions.

Notice mandatory

Any assignee of a receivable shall not be entitled to demand payment of the receivable from the debtor in respect of receivables unless notice of such assignment is given to the debtor by the assignor or the assignee along with express authority in its favor granted by the assignor.

Rights and obligations

Chapter IV of the Act deals with the rights and obligations of the parties to contract for assignment of receivables.  The debtor is having the right to notice of assignment before any demand is made on it by the assignee and until notice is served on the debtor, the debtor shall be entitled to make payments to the assignor in respect of the assigned receivable in accordance with the original contract and such payment shall fully discharge the debtor from corresponding liability under the original contract.

Where a notice of assignment is served the debtor shall-

• intimate the assignee the details of the deposits or advance or payment on account made to the assignor before the receipt of notice of assignment and also provide any other information to the assignee relating to the receivable as and when called upon by the assignee to do so;
• not be entitled to a valid discharge of his liability in respect of assigned receivables, unless he makes the payment due on an assigned receivables to the assigner.

Where a debtor makes any payment to an assignor which represents payments due on an assigned receivable, such payment shall be deemed to be for the benefit of the assignee and the assignor shall be deemed to have received the amount of such payment as a trustee of the assignee and the assignor shall make payment of such amount to the assignee.

If the assignor of receivable is a micro or small enterprise, the liability of the debtor to make payment due on assigned receivables shall be subject to the provisions contained in Sections 15 to 17 of the Micro, Small and Medium Enterprises Development Act, 2006 with regards to the delayed payments of the receivables.  In case of delay of payment, the assignee shall be entitled to receive interest for the delayed period and shall take steps under the provisions of Micro and Medium Enterprises Development Limited Act, 2006 for the purpose of recovery of the interest and shall pay such interest to the micro or small enterprise.

Except as provided in the Act any assignment of the receivables shall not without the express consent of the debtor in writing, affect the rights and obligations of the debtor.

Consequent upon the assignment of receivables, the payment instruction under the contract entered into between assignor and debtor may modify the name of person, address or account to which the debtor is required to make payment, but such instruction shall not modify-

• the amount of debt specified in the original contract; or
• the place specified in the original contract at which payment is to be made or in case no such place is mentioned in the contract, the place of payment to a place other than where the debtor is situated; or
• the date on which payment is to be made or other terms of the original contract relating to payment;

In a claim by the assignee against the debtor for payment of the assigned receivable, the debtor may raise against the assignee-

• all defences and right of set off arising from the original contract or any other contract that was part of the same transaction, of which the debtor could avail himself as if the assignment had not been made and such claim were made by the assignor instead of the assignee;
• the assignee shall be entitled to recover from the assignor any loss suffered by it as a result of any such defences and right of set off being exercised by the debtor;
• any other right of set off it was available to the debtor at the time of notice of the assignment was received by the debtor.

Any agreement made before service of the notice of the assignment of a receivable that affects the assignee’s rights in respect of that receivable shall be effective as against the assignee and the assignee shall acquire rights in the assigned receivables, as modified by such agreement.   Any agreement made, after the notice that affects the assignee’s rights shall be ineffective as against the assignee unless-

• the assignee consents to it; or
• the receivable is not fully earned by performance and either the modification is provided for in the original contract or, in the context of the original contract, a reasonable assignee would consent to the notification.

If the assignee commits any breach of the original contract with the debtor, such breach shall not entitle the debtor to recover from the assignee any sum paid by the debtor to the assignee or the assignee pursuant to the factoring transactions.

Registration of assignments

Chapter V of the Act deals with the registration of assignments.  The following is the procedure for registration of assignments and the matters incidental thereto:

• The factor shall file the particulars of every transaction in his favor with the Central Registry set up under SARFAESI Act within a period of 30 days from the date of such assignment in Form I  on payment of ₹ 500/- as fee;
• A record called the Central Register shall be kept at the head office of the Central Registry for entering the particulars of the transaction relating to assignment or receivables in favor of a factor;
• On realization of the assigned receivables against the debtor the factor shall file the satisfaction  in Form II along with a fee of ₹ 250/-;
• The provisions for registration of transactions contained in SARFAESI Act will be applicable for this also;

Public inspection

The particulars of transactions entered in the Central Register shall be open during business hours for inspection by any person on payment of prescribed fee,  The Central Register maintained in electronic form shall also be open during the business hours or such extended hours as may be specified by the Central Registry for inspection by any person through electronic media on payment of prescribed fee.

Offences and penalties

If there is any default in registration of assignments such company and every officer of the company who is in default shall be punishable with fine which may extend to ₹ 5,000/- for every day during which the default continues.

If any factor fails to comply with any direction of RBI the RBI may impose a penalty which may extend to ₹ 5 lakhs and in the case of a continuing offence, with an additional fine which may extend to ₹ 10,000/- for every day during which the default continues.

If any person contravenes or attempts to contravene or abets the contravention of the provisions of the Act or of any rules made there under, for which no specific penalty has been provided for, he shall be punishable with imprisonment for a term which may extend to one year or with fine or with both.