IFCI Factors Limited v. Ramsarup Industries Limited & Ors.

8. Defendant No.2 also executed undertakings on behalf of Defendant No.1 whereby cheques for a sum of Rs.10 crores were also issued and an undertaking was given to deposit all receivables in an Escrow account with HDFC Bank.

9. Defendant No.1 defaulted in its obligations and, accordingly, Plaintiff invoked the guarantee against Defendant No.2 vide notice dated 25th May,

2016. Along with the said notice, a complete statement of accounts was also annexed.

10. Defendant No.2 filed his leave to defend raising various pleas, which are as under:

1) That the suit is barred by limitation.

2) That the suit under Order XXXVII CPC not being for a liquidated sum is not maintainable.

3) Defendant No.2 has no liability to pay and is entitled to unconditional leave to defend.

4) The main borrower i.e. Defendant No.1 is facing insolvency proceedings under the IBC and there is a moratorium operating.

5) That a complaint under Section 138 of the Negotiable Instruments Act, 1888 has also been filed.

11. The submission of Mr. Tandon, ld. counsel for Defendant No.2 is that the two earlier judgments of this Court in IFCI Factors Ltd. v. Maven Industries Ltd. & Anr., 2015 (255) DLT 32 and IFCI Factors Ltd. v. Vasudev Rao & Anr., [FAO(OS) 214/2014, Decided on May 2, 2014], clearly cover the present case and the suit under Order XXXVII CPC is not maintainable in the case of a transaction governed by the Factoring Regulation Act, 2011 („hereinafter „FRA, 2011‟). It is further submitted that the suit under Order XXXVII, Rule 1 (2) (b) CPC is only maintainable if the suit is for recovery of a debt or liquidated demand. It is further argued that the liability, if any, is of the debtors and not of the assignors. Various provisions of the Factoring Regulation Act, 2011 (hereinafter „FRA, 2011‟) are referred to, to submit that the suit raises various triable issues as a recovery suit under Order XXXVII, Rule 1 (2)(b)(iv) CPC is only maintainable against the Debtor. It is submitted that as per the judgment of the Supreme Court in GE Capital Services India v. Mayflower Healthcare Pvt. Ltd., [CS(OS)2859/2011, Decided on 31st August, 2012], entries would have to be proved under Section 34 of the Evidence Act, 1872 for the balance at the foot of the account to be arrived at and hence a suit, such as the present suit, claiming an amount which is only the balance due at the foot of the account is not maintainable under Order XXXVII CPC.

12. On the other hand, ld. counsel for the Plaintiff, Mr. Srivastava, has submitted that the agreement and the guarantee are admitted by the Defendants, including Defendant No.2. He relies upon two judgments, namely M/s Housing Development Finance Corporation Ltd. v. Vikas Garg, [CS (OS) 217/2011, Decided on May 20, 2014] and Bijender Chauhan v. M/s Financial Eyes (India) Ltd., ILR (2013)

IV DELHI 3234 to argue that a suit based on a statement of account is maintainable under Order XXXVII CPC. It is further submitted by ld. counsel for the Plaintiff that the CPC was specifically amended and a provision was introduced to protect NBFC’s like the Plaintiff to file a suit under Order XXXVII CPC. The said amendment was introduced in 2012 and the same was not noticed in the case of IFCI Factors Ltd. v. Maven Industries Ltd. & Anr. (Supra). There being a specific amendment to the CPC, it cannot be held that the suit under Order XXXVII CPC is not maintainable. It is further submitted that the Plaintiff is entitled to recover money either from debtors or from the assignors. Ld. counsel for Plaintiff also seeks to distinguish the judgment in IFCI Factors Ltd. v. Vasudev Rao & Anr. (Supra) on the facts. Factoring services – Concept

13. In the 1980s, internationally, it was noticed, that small and medium scale businesses which used to supply goods and services to bigger enterprises were facing several difficulties due to belated recovery or nonrecovery of dues from their customers. This used to result in clogging up their capital and left lesser money in circulation for them. In order to better the liquidity of such businesses the concept of `Factoring’ was formalised in the UNIDROIT Convention on International Factoring, adopted on 28th May

1988. This Convention defined a `factoring contract’ as under: “Article 1 …

2. For the purposes of this Convention, “factoring contract” means a contract concluded between one party (the supplier) and another party (the factor) pursuant to which: (a) the supplier may or will assign to the factor receivables arising from contracts of sale of goods made between the supplier and its customers (debtors) other than those for the sale of goods bought primarily for their personal, family or household use; (b) the factor is to perform at least two of the following functions: - finance for the supplier, including loans and advance payments; - maintenance of accounts (ledgering) relating to the receivables; - collection of receivables; - protection against default in payment by debtors;

(c) notice of the assignment of the receivables is to be given to debtors.”

14. However, the above Convention itself was applicable to only international transactions and not domestic transactions.

15. In India, the Factoring Regulation Act, 2011 (hereinafter, „FRA, 2011‟) is a legislation, which has been introduced to regulate a factoring facility availed of by a small scale or an ancillary industrial undertaking. The legislation was enacted in the background of various reports, which recommended the development of factoring services for small scale industries in order to effectively trace the problem of liquidity for micro or small industries. It was in this background that the central government introduced a bill titled “The Regulation of Factor (Assignment of Receivables) Bill, 2011”. The said bill was thereafter enacted as the FRA,

2011.

16. A factoring agreement is an agreement under which the receivables are assigned and the collection of amounts is contracted out, thereby reducing the cost, inconvenience and manpower employed in recovering dues, maintenance of accounts related to the same, management of the risks associated with the debts etc., The FRA 2011 defines a factoring business as under: “(j) “factoring business” means the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include —

(i) credit facilities provided by a bank in its ordinary course of business against security of receivables;

(ii) any activity as commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever or any activity relating to the production, storage, supply, distribution, acquisition or control of such produce or goods or provision of any services. Explanation. — For the purposes of this clause —

(i) the expression “agricultural produce” shall have the meaning assigned to it under clause (a) of section 2 of the Agricultural Produce (Grading and Marking) Act, 1937 (1 of 1937); and

(ii) the expressions “goods” and “commission agent” shall have the meanings assigned to them respectively under clause (d) and Explanation (ii) of clause (i) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952);”

17. In every factoring transaction, there are at least three parties and sometimes four if there is a surety or a guarantor. They are -  the assignor i.e., the principal borrower,  the assignee i.e., the factor,  the approved debtor i.e., the purchaser of the goods or services; and  optionally, a surety or a guarantor. A factoring agreement is slightly different from a bill discounting facility in the sense that in the case of bill discounting the principal borrower has the responsibility of collecting the bills and remitting the proceeds to the financing agency whereas in a factoring arrangement the responsibility of collecting the bills and remitting after deducting the charges and commission are that of the financing agency. Further the financing agency, in a bill discounting facility, does not offer any other additional services such as management of the account, maintenance of ledgers etc.

18. In the present case, there were three contractual relationships that were created:

1. Contract between Defendant No.1 and Approved Debtors/Purchasers: Defendant No.1 to sell steel articles to Approved Debtors/Purchasers on whom invoices are raised. These approved debtors signed notices of assignment of debts confirming that they would make payments to the Plaintiff.

2. Contract between Defendant No. 1 and Plaintiff: Plaintiff to disburse up to 80% of Defendant No. 1’s invoice value raised on the approved debtors, in exchange for Defendant No. 1’s receivables, interest and other charges in terms of the schedule to the agreement.

3. Contract between Plaintiff and Defendant No. 2: Contract of personal guarantee by Defendant No. 2 to the Plaintiff for pre-payments made to Defendant No. 1. A diagrammatic representation of the factoring arrangement is set out below: DEFENDANT NO. 2 (Guarantor) DEFENDANT NO. 1

1. Assignor [S.2(c), FRA, 2011]

2. Principal Borrower APPROVED DEBTOR/PURCHASER PLAINTIFF

1. Factor [S.2(i), FRA, 2011]

2. Assignee [S.2(b), FRA, 2011]

19. One of the objects of the said Act was to introduce an amendment in the CPC to make available the benefit of summary procedure for recovery of debts. Accordingly, CPC came to be amended and sub-section (iv) was inserted in Order XXXVII, Rule 1 (2) (b) by the FRA, 2011. Section 35 of the FRA, 2011 reads as under: “35. The enactments specified in the Schedule shall be amended in the manner specified therein.” The amendment introduced in the CPC, reads as under: “In Order XXXVII, in rule 1, in sub rule (2), in clause (b), after sub clause (iii), the following sub-clause shall be inserted, namely:— "(iv) suit for recovery of receivables instituted by any assignee of a receivable." The notes on clauses for clause 35 reads as under: ―Clause 35. — This clause relates to amendments of certain enactments. This clause provides to amend the Code of Civil Procedure, 1908 to make available the benefits of summary proceedings for recovery of debts or dues under a factoring arrangement to a factor and amends the Credit Information Companies (Regulation) Act, 2005 to define factor as a “credit institution which are consequential nature.”

20. A perusal of the above provisions and notes on clauses clearly shows that the purpose of the legislation was to extend the benefit of availing summary procedure for ‘recovery of debts‟ given under Factoring arrangements. The wording of the amendment brought about in the CPC as also Section 16 of the FRA, 2011, clearly shows that rights are conferred on the assignee to file a summary suit for recovery of receivables. The amendment in the CPC is not qualified in any manner as to against whom such a suit can be filed. Clearly, there is nothing in the wording of the amendment to raise any ambiguity that a suit is not maintainable against the assignor or guarantor and is only maintainable against the debtor. Section 16 of the FRA, 2011 provides broader rights to the assignee to sue the debtor. However, that does not mean that the suit cannot be filed against the assignor or guarantor. Since there is no privity of contract between the assignee and the debtor, the statute specifically confers a right to sue the debtor. Availability of the said remedy does not in any manner foreclose the remedy against the assignor and the guarantor. Recently in IFCI Factors Ltd. v. Gangotri Iron and Steel Co. Ltd., [C.S. (COMM) 1579/2016, Decided on January 17, 2018], a ld. Single Judge of this Court has, expressed some reservations as to against whom such a suit would be maintainable. However, on a perusal of the statement of objects and reasons, the notes on clauses and the amendment to the CPC, as also the purpose behind the modification, it is clear that the suit is maintainable by the assignee of the debt, i.e. the factor under FRA, 2011, against the debtors and the assignors/guarantors, if any.

21. Insofar as Defendant No.2 is concerned, moratorium under Section 14 of the IBC does not apply. Section 14(3)(b), which deals with moratorium has clearly provided that the moratorium under Section 14 (1) does not apply to a surety or guarantor. The said section has been amended in 2011 with retrospective effect from 6th June, 2018, which reads as under:

22. Thus, the moratorium against Defendant No.1 does not extend the benefit of the moratorium to Defendant No.2. It is also a well settled position in law that the guarantee is an independent contract from the main factoring agreement. The guarantee provided in the present case clearly states that the guarantee is distinct from the main factoring agreement. The said clauses read as under:

Defendant No.2, who has executed the guarantee, is thus bound to honour the same, independent of Defendant No. 1 as the liability is several.

23. The guarantee also clearly relates to a liquidated sum, which is clear from clause 6 of the guarantee extracted above. As per the said clause, the guarantee covers the sum of Rs.10 crores with interest at the agreed rate, costs, charges and other expenses, including legal expenses. The same is clearly a liquidated sum with interest and other charges being nothing but a percentage of the amount disbursed. Thus, the amount is clearly an ascertainable and not an unascertainable sum. The facts of IFCI Factors Ltd. v. Maven Industries Ltd. & Anr. (Supra) and IFCI Factors Ltd. v. Vasudev Rao & Anr. (Supra) are clearly distinguishable. IFCI Factors Ltd. v. Maven Industries Ltd. & Anr. (Supra), was based on a statement of account, which was required to be proved in order for the amount due to be arrived at. This is clear from a reading of paragraph 9 of the judgment wherein various sums were disbursed. The Defendants had made several payments and thereafter the suit was filed for a sum of Rs.10.45 crores. In the said judgment, the specific amendment, which was brought about in the CPC by FRA, 2011 is not brought to the notice of the Court.

24. Insofar as the ld. Division Bench judgment in IFCI Factors Ltd. v. Vasudev Rao & Anr. (Supra) is concerned, in the said case, the Court came to the conclusion that the Plaintiff had failed to plead that the suit was for a liquidated demand and even the statement of account was not acknowledged by the Defendants.

25. A reading of FRA, 2011 and the provisions therein clearly shows that the Legislature was conscious of the fact that the factor would be entitled to various sums apart from the money disbursed. This is clear from a perusal of the definition of receivables, which is broad enough to include interest and other charges. Section 2(p) reads as under: “(p) ―receivables‖ mean all or part of or undivided interest in any right of any person under a contract including an international contract where either the assignor or the debtor or the assignee is situated or established in a State outside India; to payment of a monetary sum whether such right is existing, future, accruing, conditional or contingent arising from and includes, any arrangement requiring payment of toll or any other sum, by whatever name called, for the use of any infrastructure facility or services;”

26. In fact, the statement of objects and reasons also specifically mentions that one of the objects of this legislation is to provide for the process of assessment of receivables. The CPC having been specifically amended to enable summary procedures for recovery of `receivables’, the argument that the suit is not maintainable as it is not an ascertained sum or a liquidated sum, would not be tenable. If such an argument is accepted, it would run contrary to the intent and purpose of the amendment itself.

27. The amount, thus, payable by the Defendants is clearly an ascertainable sum. From the said amount, any amount that has been paid would have to be given credit to.

28. Under the factoring agreement, Defendant No.1 assigned all its receivables which existed on the date of commencement to the Plaintiff. Clause 4 of the agreement reads as under:

29. The purchase price of each of the existing receivables and future receivables was payable by Defendant No. 1 to the Plaintiff. Defendant No.1’s Debt Purchase Account was also to be maintained by the Plaintiff. Upon receipt of the receivables, the pre-payment was to be made by the Plaintiff. Service charges, Discount Charges etc. could be deducted. However, if any petition for winding up, bankruptcy etc. was instituted against Defendant No. 1 or if Defendant No.1 went into liquidation, the prepayment obligation remained suspended and at that stage, the Plaintiff could terminate the agreement.

30. Defendant No.1 had filed a reference before the Board of Industrial and Financial Reconstruction (hereinafter, „BIFR‟) on 7th November, 2012. The BIFR dissolved with effect from 15th December, 2016 and the enquiry/reference against Defendant No. 1 abated. Thereafter a moratorium was declared by the NCLT on 8th January, 2018. While the BIFR proceedings were pending, the guarantee of Defendant No. 2 was invoked by the Plaintiff on 25th May, 2016 and thereafter the present suit was filed on 9th March, 2018.

31. Under Clause 4(1) of the factoring agreement, the receivables could either be existing receivables on the date of agreement, i.e., on 31st December, 2009, or future receivables. The various invoices which have been confirmed by the approved debtors are of August, 2011. The transactions continued till November, 2011. The reference was filed on 7th November, 2012 before the BIFR, which was abated only on 15th December,

2016. When insolvency proceedings were pending, all pre-payment stopped.

32. Under the extant Sick Industrial Companies (Special Provisions) Act, 1985, the legal position as per Section 22 was that during the pendency of an enquiry under Section 16, the preparation/consideration/implementation of any scheme under Section 17 or an appeal under Section 25, any guarantee in respect of any loans or advance granted to the industrial company stood suspended. Section 22 of the Act reads as under: ―22. Suspension of legal proceedings, contracts, etc.— (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority. (2) Where the management of the sick industrial company is taken over or changed in pursuance of any scheme sanctioned under section 18, notwithstanding anything contained in the Companies Act, 1956 (1 of

1956) or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law— (a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company; (b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board. (3) Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period of consideration of any scheme under section 18 or where any such scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adaptations and in such manner as may be specified by the Board: Provided that such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate. (4) Any declaration made under sub-section (3) with respect to a sick industrial company shall have effect notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly,— (a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and (b) on the declaration ceasing to have effect—

(i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and

(ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed. (5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded.”

33. The Plaintiff was therefore entitled to exclude the period between 7th November, 2012 till 15th December, 2016, in calculating the limitation period for institution of the present suit. As the suit was instituted on 9th March, 2018, the Plaintiff is well within the three years’ limitation period prescribed.

34. Further, it is well settled that filing of a complaint under S.138 of the Negotiable Instruments Act, 1888 does not bar the filing of a civil suit for recovery in respect of amounts due and payable. This is settled in D. Purushotama Reddy & Anr. v. K. Sateesh, (2008) SCC 8 505, the relevant paragraph of which is extracted below: ―9. A suit for recovery of money due from a borrower indisputably is maintainable at the instance of the creditor. It is furthermore beyond any doubt or dispute that for the same cause of action a complaint petition under terms of Section 138 of the Act would also be maintainable.”

35. In the case of IDBI Trusteeship Services Ltd. v. Hubtown Ltd., (2017) 1 SCC 568, the Supreme Court has held as under: ―17. Accordingly, the principles stated in para 8 of Mechelec case [Mechelec Engineers & Manufacturers v. Basic Equipment Corpn., (1976) 4 SCC 687] will now stand superseded, given the amendment of Order 37 Rule 3 and the binding decision of four Judges in Milkhiram case [Milkhiram (India) (P) Ltd. v. Chamanlal Bros., AIR 1965 SC 1698: (1966) 68 Bom LR 36], as follows:

17.1. If the defendant satisfies the court that he has a substantial defence, that is, a defence that is likely to succeed, the plaintiff is not entitled to leave to sign judgment, and the defendant is entitled to unconditional leave to defend the suit.

17.2. If the defendant raises triable issues indicating that he has a fair or reasonable defence, although not a positively good defence, the plaintiff is not entitled to sign judgment, and the defendant is ordinarily entitled to unconditional leave to defend.

17.3. Even if the defendant raises triable issues, if a doubt is left with the trial Judge about the defendant's good faith, or the genuineness of the triable issues, the trial Judge may impose conditions both as to time or mode of trial, as well as payment into court or furnishing security. Care must be taken to see that the object of the provisions to assist expeditious disposal of commercial causes is not defeated. Care must also be taken to see that such triable issues are not shut out by unduly severe orders as to deposit or security.

17.4. If the defendant raises a defence which is plausible but improbable, the trial Judge may impose conditions as to time or mode of trial, as well as payment into court, or furnishing security. As such a defence does not raise triable issues, conditions as to deposit or security or both can extend to the entire principal sum together with such interest as the court feels the justice of the case requires.

17.5. If the defendant has no substantial defence and/or raises no genuine triable issues, and the court finds such defence to be frivolous or vexatious, then leave to defend the suit shall be refused, and the plaintiff is entitled to judgment forthwith.

17.6. If any part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit, (even if triable issues or a substantial defence is raised), shall not be granted unless the amount so admitted to be due is deposited by the defendant in court.”

36. The entire purpose of FRA, 2011 and the amendment to the CPC would be defeated, if lenders like the Plaintiff are not given the benefit of summary procedure. The suit under Order XXXVII CPC is within limitation and is maintainable as it is for an ascertainable and a liquidated sum. The amount for which recovery is sought is Rs. 32,02,90,309.32 along with pendente lite and future interest at 13% p.a. The liability of Defendant No.2, under the Guarantee is a sum of Rs. 10 crores along with interest and other charges. The terms of the Guarantee are clear that the liability is independent of the Principal borrower. None of the defences or grounds raised are either tenable, nor is evidence required to be recorded. The Factoring agreement is admitted, the execution of guarantee is admitted and the money disbursed by the Plaintiff is also admitted. The issuance of cheques for a sum of Rs.10 crores by Defendant No. 1 is also admitted. In the facts and circumstances of the present case, Defendant No.2 would not be entitled to any leave to defend insofar as the sum of Rs. 10 crores, which is a liquidated sum as per the guarantee, is concerned. Insofar as any other charges or expenses are concerned, the Plaintiff is free to file its claims before the NCLT against Defendant no.1, the principal borrower.

37. All I.As are disposed of. CS (COMM) 752/2018

38. Accordingly, the suit is decreed for a sum of Rs. 10 crores along with interest at the rate of 8% per annum from the date of filing of the suit, till date, against Defendant No.2 to be paid to the Plaintiff within a period of three months from today. If the payment is not made during the said period, 8% simple interest would be liable to be paid on the decretal sum till date of payment. Decree sheet be drawn.

PRATHIBA M. SINGH, J. JUDGE AUGUST 01, 2019