In the earlier posts (Introduction and Types of Factoring), we talked about the basics relating to
factoring, types of factoring and important definitions relating to factoring
under the Indian law. In the present post, we shall discuss the concept of
disclosed factoring and the principle of debtor protection. Additionally,
important amendments in other laws of India that took place because of the
enactment of the Factoring Regulation Act, 2011 shall also be discussed in this
post.
Disclosed Factoring
Factoring as
envisaged under the Factoring Act must be disclosed factoring. Disclosed
factoring means that the debtor, who is liable to make the payment to the
assignor must be informed by way of intimation in writing that receivables from
the customer are being factorized. Prior to the commencement of the Factoring
Act, the assignment of receivables was governed by the Transfer of Property
Act, 1882 which does not make prior notice to the debtor before the assignment
of receivables. Thus, it was open to the parties to decide whether they wanted
to undertake disclosed or undisclosed factoring. However, as per the provisions
of the Factoring Act, prior notice to the debtor is mandatory for the
assignment of receivables to the Factor.[1]
Principle of Debtor Protection
The Factoring
Act embodies the principle of debtor protection under Section 15 and
contains various safeguards in relation to the rights of a debtor in a
factoring transaction. Some of the important ones are:[2]
a. In the event no notice of assignment of receivables is given by the
assignor or under his authority by the assignee to the debtor and any payment
is made by the debtor in respect of such receivables to the assignor, then the
assignor is under a statutory obligation to fold such payments in trust for the
benefit of the Factor which shall immediately be paid to such Factor.
b. The Factoring Act restricts the modification of the contracts entered
between the debtor and the assignor (barring a few exceptions) and states that
any assignment of the receivable shall not affect the rights and obligations of
the debtor (including the terms and conditions of the contract), without the
express consent of the debtor in writing.
c. In the event a claim is made by the assignee against the debtor for
payment of the assigned receivable, the debtor may raise the right of set-off against
the assignee which was available under the original contract entered into
between the assignor and debtor or any other contract that was part of the same
transaction, as if the assignment had not been made.
d. The assignee would, unless otherwise agreed between the parties, be
entitled to recover any loss suffered by it as a result of any such defences
and right of set off being exercised by the debtor from the assignor.
Important Amendments in Other Laws
1. An important
amendment that has been made in accordance with the Factoring Regulation Act is
with respect to the Code of Civil Procedure, 1908. Rule 1(2)(b)(iv) has been
inserted in Order XXXVII of the Code of Civil Procedure, 1908, whereby
suits for recovery of receivables instituted by an assignee shall be subject to
the summary procedure prescribed under the Code. Basically, the provisions
relating to the summary suits are made applicable to claims of Factors to
facilitate speedy recovery of receivables.[3]
2. An
important change is insertion of section 8D in the Indian Stamp Act, 1899,
granting exemption from stamp duty on documents executed for the purpose of
assignment of receivables in favour of Factors notwithstanding anything to the
contrary contained in any other law in force. In view of such exemption,
assignment of receivables in favour of Factors becomes a viable proposition and
is expected to give a boost to factoring.[4]
These amendments
provide an impetus to the factoring business and would aid in speedier disposal
of litigation and reduce the cost of entering and enforcing factoring
transactions. In the next post, we shall conclude the discussion on the Factoring Regulation Act, 2011 by talking about the registration of factors and receivables as envisaged under the scheme of the said Act.
1. The Factoring Regulation Act, 2011 - An Introduction
2. Types of Factoring and Important Definitions under the Factoring Regulation Act, 2011
3. Disclosed Factoring and Principle of Debtor Protection in India
4. Registration of Factors and Receivables in India
2. Types of Factoring and Important Definitions under the Factoring Regulation Act, 2011
3. Disclosed Factoring and Principle of Debtor Protection in India
4. Registration of Factors and Receivables in India
[2]
Ibid.
[3]
Shilpa Mankar Ahluwalia, The Factoring Regulation Act 2011 (India): a
snapshot overview, F.R.I. 2012, Jul, 10-12.
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