Factoring Regulation Act, 2011- Sections 3 to 20

Chapter II

REGISTRATION OF FACTORS

3. Registration of factors.

3. Registration of factors.—(1) No factor shall commence or carry on the factoring business unless it obtains a certificate of registration from the Reserve Bank to commence or carry on the factoring business under this Act.

(2) Every factor shall make an application for registration to the Reserve Bank in such form and manner as it may specify;

Provided that a company registered as a non-banking financial company 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 Reserve Bank before the expiry of the period of six months from such commencement and, notwithstanding anything contained in sub-section (1), 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.

Explanation.—For the removal of doubts it is hereby clarified that a non-banking financial company engaged in factoring business shall be treated as engaged in factoring business as its “principal business” if it fulfils the following conditions, namely—

(a) if its financial assets in the factoring business are more than fifty per cent of its total assets or such per cent as may be stipulated by the Reserve Bank; and

(b) if its income from factoring business is more than fifty per cent of the gross income or such per cent as may be stipulated by the Reserve Bank.

(3) Every applicant for grant of a certificate of a registration as a factor shall comply, for the purpose of registration, with all the requirements to be fulfilled by an applicant for grant of certificate of registration as non-banking financial company under the Reserve Bank of India Act, 1934 (2 of 1934) and all the provisions of that Act, so far as they relate to the registration of non-banking financial companies, shall (except those provided for under this Act) mutatis mutandis apply.

(4) In the case of existing non-banking financial company the Reserve Bank may issue a fresh certificate of registration as a factor, if the principal business of the non-banking financial company is the factoring business.

(5) Save as otherwise provided in this Act, every factor including factors not subject to requirement of registration under Section 5, shall be governed by the Reserve Bank of India Act, 1934 (2 of 1934), the rules and regulations made thereunder and the directions or guidelines issued by the Reserve Bank, from time to time.

4. Provisions of non-banking financial companies apply to factor.

4. Provisions of non-banking financial companies apply to factor.—All provisions of Chapter III-B of the Reserve Bank of India Act, 1934 (2 of 1934) relating to non-banking financial companies which have been granted a certificate of registration under sub-section (5) of Section 45-IA of the Reserve Bank of India Act, 1934 shall (except those specifically provided for under this Act) mutatis mutandis apply to a factor which has been granted a certificate of registration under Section 3.

5. Requirement for registration as a factor not to apply to bank or Statutory corporation or Government company.

5. Requirement for registration as a factor not to apply to bank or Statutory corporation or Government company.—Nothing contained in Section 3 shall apply to a bank or any corporation established under an Act of Parliament or State Legislature, or a Government Company as defined under Section 617 of the Companies Act, 1956 (1 of 1956).

6. Powers of Reserve Bank to give directions and to collect information from factors.

6. Powers of Reserve Bank to give directions and to collect information from factors.—(1) The Reserve Bank may, at any time by general or special order, direct that every factor shall furnish to it, in such form, at such intervals and within such time, such statements, information or particulars relating to factoring business undertaken by the factor, as may be specified by the Reserve Bank from time to time.

(2) The Reserve Bank may, if it considers necessary in the interest of business enterprises availing factoring services or in the interest of factors or interest of other stake holders give directions to the factors either generally or to any factor in particular or group of factors in respect of any matters relating to or connected with the factoring business undertaken by such factors.

(3) If any factor fails to comply with any direction given by the Reserve Bank under sub-section (2), the Reserve Bank may prohibit such factor from undertaking the factoring business:

Provided that before prohibiting any factor from undertaking the factoring business, the factor shall be given a reasonable opportunity of being heard.

Chapter III

ASSIGNMENT OF RECEIVABLES

7. Assignment of receivables.

7. Assignment of receivables.—(1) 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:

Provided that if the debtor liable to pay the receivable or the business of factor is situated or established outside India, any assignment of receivable shall be subject to the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999).

(2) On execution of agreement in writing for assignment of receivables, 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 as provided in Section 8 is given or not.

(3) Any assignment of receivables which constitute security for repayment of any loan advanced by any Bank or other creditor and if the assignor has given notice of such encumbrance to the assignee, then on accepting assignment of such receivable, the assignee shall pay the consideration for such assignment to the Bank or the creditor, as the case may be.

8. Notice to debtor and discharge of obligation of such debtor.

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

9. Discharge of liability of debtor on payment to assignee.

9. Discharge of liability of debtor on payment to assignee.—Where a notice of assignment of receivable is given by the assignor or the assignee, as the case may be, under Section 8 the debtor on receipt of such notice, shall make payment to the assignee and payment made to such assignee in discharge of any obligation in relation to the receivables specified in the notice shall fully discharge the debtor making the payment, from corresponding liability in respect of such payment.

10. Payment made by debtor to assignor to be held in trust for benefit of assignee in certain cases.

10. Payment made by debtor to assignor to be held in trust for benefit of assignee in certain cases.— Where no notice of assignment of receivables is given by the assignor or under his authority by the assignee, any payment made by the debtor in respect of such receivables to the assignor shall be held in trust for the benefit of the assignee which shall be forthwith be paid over to such assignee, as the case may be, or its agent duly authorised in this behalf.

Chapter IV

RIGHTS AND OBLIGATIONS OF PARTIES TO CONTRACT FOR ASSIGNMENT OF RECEIVABLES

11. Rights and obligations of parties to contract for assignment of receivables.

11. Rights and obligations of parties to contract for assignment of receivables.—Without prejudice to the provisions contained in any other law for the time being in force, the debtor shall have the right to notice of assignment under Section 8 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 assigned receivables in accordance with the original contract and such payment shall fully discharge the debtor from corresponding liability under the original contract.

Explanation.—For the removal of doubts, it is hereby clarified that nothing contained in this section shall affect the rights of debtor to make payment to the assignee under Section 9.

12. Liability of debtor.

12. Liability of debtor.—Where a notice of assignment as referred to in Section 8 is served, the debtor shall,—

(a) 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;

(b) 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 assignee.

13. Assignor to be trustee of assignee.

13. Assignor to be trustee of assignee.—Notwithstanding anything to the contrary contained in any other law for the time being in force, where a debtor makes any payment to an assignor which represents payment 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.

14. Liability of debtor in case of an assignor being micro or small enterprises.

14. Liability of debtor in case of an assignor being micro or small enterprises.—(1) If the assignor of receivables 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 (27 of 2006) with regards to the delayed payments of the receivables.

(2) In the event of delay in payment on the part of the debtor to pay the receivable of any micro or small enterprise, the assignee shall be entitled to receive interest for the delayed period and shall take steps under the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) for the purpose of the recovery of the interest and shall pay such interest to the micro or small enterprise.

15. Principle of debtor protection.

15. Principle of debtor protection.—(1) Save as otherwise provided in this Act, any assignment of the receivable shall not, without the express consent of the debtor in writing, affect the rights and obligations of the debtor (including the terms and conditions of the contract).

(2) 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 instructions shall not modify—

(a) the amount of debt specified in the original contract; or

(b) 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

(c) the date on which payment is to be made or other terms of the original contract relating to payment.

16. Defences and right of sect off of debtor.

16. Defences and right of sect off of debtor.—In a claim by the assignee against the debtor for payment of the assigned receivable, the debtor may raise against the assignee,—

(a) all defences and right of set off arising from the original contract, entered into between the assignor and debtor 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 assignee:

Provided that the assignee shall, unless otherwise agreed between the parties, 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;

(b) any other right of set off if it was available to the debtor at the time notice, under Section 8, of the assignment was received by the debtor.

17. Modification of original contract.

17. Modification of original contract.—(1) Any agreement made before service of notice, under Section 8, of the assignment of a receivable between the assignor and the debtor 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.

(2) Any agreement made, after notice of the assignment between the assignor and the debtor that affects the assignee’s rights, shall be ineffective as against the assignee unless,—

(a) the assignee consents to it; or

(b) 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 modification.

(3) Nothing contained in sub-sections (1) and (2) shall affect any right of the assignor or the assignee arising from breach of an agreement between them.

18. Breach of contract.

18. Breach of contract.—If the assignor 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 assignor or the assignee pursuant to the factoring transactions:

Provided that nothing contained in this section shall affect the rights of the debtor to claim from the assignor any loss or damages caused to him by reason of breach of the original contract.

Chapter V

REGISTRATION OF ASSIGNMENTS

19. Registration of certain assignments of receivables transactions.

19. Registration of certain assignments of receivables transactions.—(1) Every factor shall file, for the purposes of registration, the particulars of every transaction of assignment of receivables in his favour with the Central Registry to be set-up under Section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), within a period of thirty days from the date of such assignment or from the date of establishment of such registry, as the case may be, in the manner and subject to payment of such fee as may be prescribed in this behalf.

Explanation.—For the purpose of filing of particulars of every transaction of assignment of receivables with the Central Registry, the receivables may be described specifically or generally with reference to the debtor, or the period to which they relate or by any other general description by which such receivables can be identified.

(2) For the purposes of this Act, a record called the Central Register shall be kept at the head office of the Central Registry for entering the particulars of the transactions relating to assignment of receivables in favour of a factor.

(3) On realisation of the assigned receivables or settlement of the claim against the debtors, the factor shall file satisfaction of the assignment of receivables in its favour, in such manner and subject to payment of such fees as may be prescribed in this behalf.

(4) The provisions for registration of transactions contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) and the rules made thereunder shall, mutatis mutandis, apply to the record of assignment of receivables in favour of a factor in the Central Register with the Central Registry.

20. Public inspection.

20. Public inspection.—(1) The particulars of transactions of assignment of receivables entered in the Central Register of such transactions under Section 19 shall be open during business hours for inspection by any person on payment of such fee as may be prescribed.

(2) The Central Register referred to in sub-section (2) of Section 19 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 such fee as may be prescribed.

(3) The provisions for maintenance of Central Register and public inspection thereof contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) and the rules made thereunder shall, mutatis mutandis, apply.

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