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Reverse Factoring Facility: Banks Can’t Act Against Firms Failing To Make Payments, Says Delhi High Court

The court restrained banks from taking any coercive action against a company for failing to make payments to avail the facility.

 A hammer and a gavel. (Source: <a href="http://www.freepik.com/awesomecontent">Freepik</a>)
A hammer and a gavel. (Source: Freepik)

The Delhi High Court, in an interim order, restrained banks from taking any coercive action against a company for failing to make payments to avail reverse factoring facility—where an intermediary commits to pay a company’s invoices to suppliers.

An apex court bench headed by Justice Navin Chawla said in an order that it prima facie finds the Reserve Bank of India circulars dated March 27 and April 17 will include reverse factoring facility as loans and advances against which bank borrowers will be protected, giving relief to Eastman Auto & Power Ltd.

The RBI, which is respondent number 1 in the case, had in its March 27 circular, allowed lending institutions to grant moratorium on all term loans between March and May 2020.

Eastman Auto approached the Delhi High Court to seek a moratorium on payments it had to make for availing electronic bill discounting facility (reverse factoring facility) from six banks—ICICI Bank Ltd., State Bank of India, IndusInd Bank Ltd., Canbank Factors Ltd., Punjab National Bank, Bank of Baroda and Union Bank of India.

The company told the court that it has made payments due till March 31 but not beyond that on the back of difficulties led by the Covid-19 pandemic. Eastman urged the court to extend the use of the facility for another two months. It informed the court that four banks had agreed to grant an extension to the petitioner for availing of the facility but Bank of Baroda and Union Bank of India opposed it.

These two banks argued in court that the RBI circular doesn’t cover moratorium relief for reverse factoring facility being availed by companies, adding that failure to make payments would make Eastman Auto liable for penal consequences according to law. The RBI asked the court for time to inform of its stand on whether the circular would cover situations such as this.

The court, however, said prima facie it cannot agree with the arguments of the two banks and pointed out that the object of the RBI circulars was to provide financial relief to parties who have availed term loans and working capital facilities.

The banks, the order said, were “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”.

The interim order will stay in effect until the court takes up the case for hearing next.