What legal remedies are available when a factoring or bill discounting arrangement goes into default?

Question

I discounted my business invoices with an NBFC factor, but the buyer has not paid and the factor is now demanding the full amount from me. What is my liability under a factoring arrangement? What I am unsure about is the procedure — where the application goes, what it costs, and how long factoring regulation act dispute matters usually take. A plain explanation of the steps, in order, would help more than a general answer.

MyVakeel Legal Desk · Accepted Answer

The law that applies to factoring regulation act dispute here is Factoring Regulation Act 2011, Section 3, Factoring Regulation Act 2011, Section 7 and Negotiable Instruments Act 1881, Section 138. The detail below matters, because Factoring Regulation Act 2011, Section 3 draws the line differently depending on what your documents show.

The Factoring Regulation Act 2011 governs assignment of receivables to a factor, and Section 3 requires factoring companies to be registered with the RBI to carry on this business legally.

Section 7 of the Act deals with notice of assignment to the debtor, and once proper notice is given, the debtor is bound to pay the factor directly, discharging the original assignor of that specific receivable.

Whether the transaction is 'with recourse' or 'without recourse' is the key factor determining liability, since a with-recourse arrangement allows the factor to fall back on the assignor if the buyer defaults, while a without-recourse arrangement shifts that credit risk entirely to the factor.

If the factoring agreement is with-recourse and the seller issued a cheque or promissory note as additional security, its dishonour can attract proceedings under Section 138 of the Negotiable Instruments Act 1881 in addition to a civil recovery suit.

Bill discounting, unlike factoring, involves the discounting bank purchasing a negotiable instrument at a discount, and liability of the discounting party depends on the endorsement terms and whether recourse was excluded on the bill.

What to do next: 1) Check whether your factoring agreement is with-recourse or without-recourse to establish your exposure; 2) Verify that proper notice of assignment was given to the buyer as required under Section 7 of the Factoring Regulation Act 2011; 3) If a cheque issued as security has bounced, respond promptly to any Section 138 notice received; 4) Negotiate a repayment plan with the factor while pursuing recovery separately from the defaulting buyer.

If you are unsure whether your facts fall inside Factoring Regulation Act 2011, Section 3, that is worth checking with an advocate before you commit to a route, because switching later costs time. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in banking law.