Recourse Factoring Classified as Financial Debt: NCLAT Upholds Section 7 Admission
- REEDLAW
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REEDLAW Legal News Network reports: In a significant ruling impacting trade finance and receivable-based lending, the National Company Law Appellate Tribunal upheld the admission of a Section 7 application under the Insolvency and Bankruptcy Code, holding that recourse factoring arrangements—supported by an irrevocable undertaking—create a financial debt enforceable against the corporate debtor. The Tribunal affirmed that where the factor retains the right to seek repayment from the assignor upon default by the account debtor, the liability squarely falls within Section 5(8)(e) of the Code.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while deciding a Company Appeal, held that a recourse factoring structure supported by an irrevocable undertaking obligated the corporate debtor to make good any shortfall arising from the account debtor’s default. The Tribunal observed that such an arrangement inherently carried the commercial effect of a borrowing and therefore constituted a financial debt under Section 5(8)(e) of the IBC, thereby justifying the admission of the Section 7 petition.
The appeal arose from an order dated 17.06.2025 of the National Company Law Tribunal (NCLT), Special Bench at Indore, which admitted a Section 7 application filed by the financial creditor against the corporate debtor. The appellant, a suspended director of the corporate debtor, challenged the admission on the ground that the receivable purchase/factoring transactions were on a non-recourse basis and, therefore, did not constitute a financial debt under Section 5(8)(e) of the Insolvency and Bankruptcy Code, 2016.
The corporate debtor had entered into a Receivable Purchase Factoring Agreement and a Collateral Management Agreement with the financial creditor on 04.04.2019, along with an indemnity and an irrevocable undertaking, for the purpose of financing receivables. Subsequently, six invoices issued by the corporate debtor to the account debtor were assigned to the financial creditor, and an aggregate amount of USD 842,520 was advanced. Part payments were made by the corporate debtor, but the account debtor failed to settle the outstanding, prompting the financial creditor to issue notices of default and ultimately file a Section 7 application claiming default of USD 429,104.
The appellant contended that the factoring agreement was on a non-recourse basis as per Clause 7.1 of the Master Agreement and that Schedule 2 did not prescribe any debtor limits, so the transaction could not be classified as a financial debt. It was argued that the undertaking executed on 20.06.2023 was only for facilitating the release of the bill of lading and did not override the Master Agreement or create recourse liability. Reliance was also placed on RBI guidelines that, according to the appellant, mandated non-recourse factoring for MSMEs.
The financial creditor, however, argued that the irrevocable undertaking dated 04.04.2019 explicitly provided for recourse factoring and that in case of any conflict, the recourse terms prevailed over the Master Agreement. It was submitted that the six invoices were assigned collateral, and partial payments were acknowledged by the corporate debtor, evidencing its liability. The financial creditor further submitted that similar applications had been admitted by the adjudicating authority under identical agreements.
Upon examination of the agreements, undertakings, and the sequence of events, it was held that the transactions concerning the six invoices were on a recourse basis. The definitions of “Remedy Event” and the clauses of the Master Agreement and Recourse Terms, along with contemporaneous correspondence, indicated that the corporate debtor had undertaken a binding obligation to pay the outstanding amounts in case of non-payment by the account debtor. The deed of undertaking executed on 20.06.2023 reinforced the conclusion that the factoring arrangement was on a recourse basis. Consequently, the financial creditor’s claim constituted a financial debt under Section 5(8)(e) of the IBC, and the Section 7 application was rightly admitted by the NCLT.
The appeal was, therefore, dismissed, upholding the admission of the Section 7 application and the appointment of the insolvency professional by the adjudicating authority.
Mr. Puneet Jain Sr. Advocate, with Ms. Christi Jain, Mr. Harsh Jain, Mr. Siddharth Jain and Mr. B.M. Maheshwari, Advocates, represented the Appellant.
Mr. Chandrashekhar A. Chakalabbi and Mr. Jatin Kumar, Advocates, appeared for the Respondent.
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