The Factoring Regulation Act, 2011

The Factoring Regulation Act, 2011 was enacted on 22nd January 2012. The term factoring is a financial transaction wherein a business sells its accounts receivables to the third party at a discount and receives instantaneous payments to its business. All small scale industries use this option more often to fund its business during contingencies. As there is no proper legal structure regulating factoring in India, its role in business is very meager. This Act applies to all domestic and cross border factoring of receivables.

This Act deals with the issues relating to assignment of debt to factor, registration requirements for factoring and exemplifies in relation to debtor protection. The objective of this Act is to endow with regulation to factoring and assignment of receivables by making provisions for its regulation. It also endows the rights and obligations of parties to contract for accounts receivables. This Act also provides special provisions for small and micro enterprises. One of the significant provision brought out by this Act is by making registration of assignment with the help of SARFAESI Act, 2002 and by making assignment of receivables exempt from stamp duty.

The factor should not commence in factoring business without obtaining the Certificate of Registration from the Reserve Bank of India. The Reserve Bank of India can ask for any material particulars on factoring business from the Factor through any Special Order or General order if it deems necessary. This Bank has the capacity to give directions to the factors or group of factors applying for running a factoring business at its own interest in connection with the commencement of factoring business. In case if any factor fails to follow the directions given by the Reserve Bank of India then such factors shall be rejected from doing factoring business after giving reasonable opportunity of being heard. An Assignor by agreement in writing assigns any receivables payable to him by a debtor. The assignor and the assignee will get agreed on terms relating to considerations. The assignor at the time of assignment of receivables discloses about defenses and rights of set off available to the debtor. In case if the factoring business established outside India and if any assignments of receivables are subject to provisions of Foreign Exchange Management Act, 1999.

  The Assignee holds absolute rights on secured property received for assignment of receivables for any damages caused to him. In case of any encumbrances upon Assignment of receivables, the assignor can get consideration for such amount as he assigns receivable upon secured payment. The Assignee has no rights to demand payment from debtor on receivables unless notice served to him with express authority by the assignor. The debtor is bound to pay upon notice either by assignor or assignee in discharge of its obligation on receivables.  The Debtor has every right to notice of assignment without any injustice to any law in force for the time being. The debtor shall make payment to the Assignor on assigned receivables in accordance with the contract. The debtor shall intimate all information regarding deposits or payments made to the Assignee even before the receipt of notice from the Assignor. He is responsible for invalid discharge of payment made to the Assignor without any notice.

In case of assignment of receivables to the Micro or small enterprises, the debtor has to make payment on receivables subject to Micro, Small and Medium Enterprises Development Act, 2006. In case of delayed payment by debtors on receivables, the debtor has to pay interest to the Assignee on the delayed amount paid. In case of any assignment of receivables without any written consent by the debtor, he has no liabilities or obligations. If the Assignee claims against the debtor for payment of assigned receivables, the debtor can defense by right of set off from the original contract between Assignor and debtor. In case of agreement of assignment of receivable between Assignor and Debtor gets modified, the Assignee will hold rights over receivables.

In case of any breach of contract made by the Assignor to the debtor, the debtor has no rights to claim any amount paid to the Assignor or Assignee unless his rights has been affected. All the receivables were registered and are recorded in the central register kept in the central registry formed under SARFAESI Act, 2002. These records are kept open during business hours for public on payment of fees. Information on receivables is also available in electronic form. In case of any default in the information on receivables, such company shall be punished with fine for everyday till the default been rectified.

In case of not following Reserve Bank norms then such failure may lead to fine and has to be paid within two weeks from the Order. Reasonable opportunities are given to the defaulter. Any person who violates or tend to violate the provisions of this Act shall be punished with imprisonment with or without fine. Any person punishable under this Act shall not be punished under any Act unless in writing by the Reserve Bank of India. Only Metropolitan Magistrate, First Class Judicial Magistrate or Higher Courts only can entertain such offence punishable in this Act.

This Act prevails unless it affects any other law in force. This Act is an additional Act rather than being derogative to any other Act in force. The Laws in pursuance of factorization in India is still in embryonic stage. Proper legal structure will assist in its growth which has been initialized through this Act. The Reserve Bank must always be vigilant to move forward with more regulations on this subject matter.

by C.Srivenkatesh Prabhu