Litigation News

[COVID19] Delhi HC restrains banks from taking any coercive action against a corporate entity for default in payment for Factoring Facility

Aditi Singh

While prima facie observing that Factoring Facility offered by banks was at par with loans and advances and would thus be covered by the RBI Circulars for benefit of borrowers during COVID-19, the Delhi High Court has restrained banks from taking any coercive action against a corporate entity for default in payment for the bank's Factoring Facility.

The order was passed by a single Judge Bench of Justice Navin Chawla in a petition preferred by Eastman Auto & Power Limited (Petitioner).

The Petitioner had availed electronic bill discounting facility known as Reverse Factoring Facility through the Trade Receivable Discounting Systems (TReDS) from the various banks including the Bank of Baroda, PNB, Punjab and Sind Bank etc.

The Facility was set up as per the guidelines laid down by the RBI and allowed a party, either MSME or Corporate buyers to avail credit facilities by uploading the invoices on the exchanges.

When a Corporate Entity availed the facility, the process is known as reverse factoring.

On the due date, the Corporate Buyer/MSME was liable to pay the amount to the banker directly.

In the present case, the Petitioner had made full payment till March 31, 2020. However, due to the restrictions declared because of the COVID-19 pandemic, the Petitioner was not able to make payment for servicing of such facility for the period beyond March 31.

The Petitioner thus sought the extension of the facility on conditions as may be stipulated by the banks, keeping in view the mandate of the notifications/circulars issued by the Reserve Bank of India on March 27 and April 17 for the benefit of borrowers during COVID-19 pandemic.

While a few banks agreed to extend the facility, Bank of Baroda and Union Bank of India opposed the petition on the ground that the facility availed by the Petitioner would not be covered by the notifications/office orders issued by RBI on March 27 and April 17.

The two banks susbmitted that the facility was intended to provide working capital to the MSME(s) who had made supplies to the Petitioner and raised invoices on the Petitioner, and it was not intended for the benefit of the Petitioner.

They further submitted that any default in the timely payment by the Petitioner would, in fact, make the Petitioner liable for the penal consequences as provided in the Payment and Settlement Systems Act, 2007.

The counsel for RBI, however, prayed for time to seek instructions on whether the facility availed by the petitioner would be covered by the notifications/office orders.

After hearing the parties, the Court issued notice to all the Respondents and granted them a week's time to seek instructions/file reply.

The Court opined that it was prima facie, unable to agree with the submissions made by Bank of Baroda and Union Bank of India.

It noted that although it was the responsibility of the Petitioner to make the payment for the Facility, the object of the RBI notifications/circulars dated March 27 and April 17 was to provide financial relief to the parties who had availed the term loans and working capital facilities.

The Court perused the earlier orders passed by the High Court in connection with the RBI Circulars and observed that prima facie, RBI's intention was to maintain status quo as on March 1, 2020 with regard to the financial facilities that had been granted to various parties and have now fallen due.

The Court further observed that as per Clause 5 and 8 of the Annexure to an RBI Circular dated July 30, 2015 , prima facie, such Factoring Facility was to be considered at par with loans and advances extended by the banks.

Thus, in view of the above, the Court ordered,

“.. till the next date of hearing, the respondent nos. 2 to 5 and 7 (respondent no. 6 has been deleted today) [the banks] are restrained from taking any coercive action against the petitioner, including declassification of the petitioner, for the default committed by the petitioner in the Reverse Factoring Facility availed by the petitioner from such respondents, subject to the condition that the petitioner shall abide by all such conditions as may be stipulated by this Court by its further orders.”
Delhi High Court

It added that the banks shall, however, be free to consider the representation of the Petitioner for further extension of the Facility, remaining uninfluenced by any observation of the Court.

The Petitioner was represented by Advocates Manmeet Arora, Keshav Sehgal, Gaurav H Sethi.

RBI was represented by Advocate Ramesh Babu MR.

Bank was Baroda was represented by Advocate Suruchi Suri. Vipin Rai represented Bank of India. PNB was represented by Advocate Arti Singh. Advocate Ashish, AR represented Punjab and Sind Bank. Union Bank of India was represented by Advocate OP Gaggar.

The matter would be heard next on May 15.

Read the Order:

EASTMAN AUTO & POWER vs RBI - April 27.pdf
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