FRAUDULENT TRANSFER 

Transfer of property Act, 1882

TANMOY MUKHERJEE INSTITUTE OF JURIDICAL SCIENCE

Dr. Tanmoy Mukherjee

[Advocate]

FRAUDULENT TRANSFER [Section 53 of the Transfer of property Act, 1882]-

Tanmoy Mukherjee

[Advocate]

Section 53 of the Transfer of property Act, 1882 lays down the provisions relating to Fraudulent Transfers. Section 53 as amended by the Amending Act of 1929 runs as follows:

1. Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed.

-Nothing in this sub-section shall impair the rights of a transferee in good faith and for consideration.

-Nothing in this sub-section shall affect any law for the time being in force relating to insolvency.

-A suit instituted by a creditor (which term includes a decree holder whether he has or has not applied for execution of his decree) to avoid a transfer on the ground that it has been made with intent to defeat or delay the creditors of the transferor, shall be instituted on behalf of, or for the benefit of, all the creditors.

2. Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of such transferee.

-For the purpose of this sub section, no transfer made without consideration shall be deemed to have been made with intent to defraud by reason only that a subsequent transfer for consideration was made.

Analysis-

The following ingredients are inferred when Sub Section (1) of this section is analyzed-

(1) Transfer of an immovable property;

(2) Transfer must be made with intent to defeat or delay the creditors of the transferor;

(3) Transfer shall be voidable at the option of any creditor defeated or delayed.

Exceptions-

1) The Rights of a transferee in good faith and for consideration are unaffected.

2) Any right created by the law of insolvency remains unaffected.

-The expression 'fraudulent transfer' denotes, "dishonest transfer" or transfer with intent to defeat the interest of the transferee/creditor. Where a person transfers his property so that his creditors shall not have anything out of the property, the transfer is called a fraudulent transfer. A debtor, in order to defeat or delay the rights of a creditor, may transfer his property to some person, who may be his friend or a relative. Section 53 does not allow such transfer.

-A transfer/debtor may transfer his property with an intention to defraud (delay or defeat) the transferee/creditor. Further/Subsequent transfer may be made without consideration with an intention to defraud the subsequent transferee. In such cases, the creditors/transferees are protected under Section 53 of the T.P. Act.

-This section consists of two parts. The first part lays down that every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed. To take one illustration, A, who is heavily indebted, and against whom a suit for the recovery of debts is going to be filed, sells his house to B to save it from being attached and sold in payment of the debt. If B knows of A's fraudulent intention, the sale to B is liable to be set aside at the option of the creditors. It will be seen that the rights of a transferee in good faith and for consideration are not affected even though the transfer is made with intent to defeat the creditors.

-The second part of the section lays down that every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of such transferee, but that no presumption to defraud shall necessarily arise by reason only that a subsequent transfer for consideration was made.

-A transfer to defeat or delay the creditors is not ipso facto void, but voidable at the instances of those who are thus defeated, delayed or defrauded.

Reference Case-

Saroj Ammal vs. Venkateswara Finance Corporation, AIR 1989 NOC 4 Mad-

Madras High Court held that the essential ingredient for invalidating a transfer under Section 5 of the Act is a fraudulent intention to defeat or delay the conditions, the Court also observed that the transferee must share the fraudulent intent and must actively aid and assist the transferor in carrying out this intention.

Creditor-

The word 'creditor' has been used in this section in somewhat wide sense. Thus, it includes all those who are creditors on the date of transfer as well as those who become creditors subsequent to the date of fraudulent transfer. Further, it includes not only those creditors who have obtained decrees, but also those whose claims have yet to be proved in a Court. On the other hand, a person who claims an unliquidated sum for damages for tort or breach of contract is not a creditor, nor a person whose claim for a debt has become time barred.

Intent to defeat or delay-

The intention must be to defeat or delay the creditors. Such intention can be proved by circumstantial evidence. The evidence required to substantiate fraud must necessarily vary according to the circumstances of each case. The mere fact that a transfer is made without consideration will not necessarily lead to an inference that the transfer was made with the intention of defrauding the creditor. The following factors may be relevant to a conclusion that the transaction is not bona fide-

(i) The debtor sells all his property keeping nothing to himself;

(ii) The consideration is grossly inadequate;

(iii) The transfer is made secretly and in haste;

(iv) The transferor puts all his property out of the reach of those who might become his creditors before embarking on some hazardous enterprise.

Reference Cases-

The scope of Section 53 was critically analyzed by the Privy Council in –

Musahar Sahu vs. Hakimlal (43 Cal. 521 PC) -

Musahar Sahu, the creditor in the instant case sued the debtor Kishun Benode for the recovery of his debt in Dec. 1900. In Jan. 1901, during the pendency of the suit, the creditor applied for attachment of certain properties of the debtor before judgment. In Feb. 1901, the debtor filed an affidavit that he had no intention of transferring his properties and the application of the creditor was dismissed. In spite of that in Sept. 1901 he sold the properties to another creditor, Hakimlal. It was held that although the sale defeated Musahar Sahu, the first creditor, but as it was for adequate consideration and in satisfaction of a genuine debt and as the debtor reserved no benefit for himself it was a case of one creditor being preferred to the detriment of another and it is not affected by this section.

This view was repealed by the Privy Council in-

 Meena Kumari vs. Bijoy Singh (44 IA 72 (P.C) (1916-17),

 In which it was observed: "A debtor, for all that is contained in Section 53 of the Transfer of Property Act, may pay his debts in any order he pleases and prefer any creditor he chooses." The Privy Council followed an English decision Meddleton vs. Pollock, 1876-2 Ch. D. 104 in Musahar Sahu and Meena Kumari's Cases.

Who can invoke benefit under Section 53-

-Creditors against whose interest the transfer is made can invoke the benefit in this Section. It includes those who become creditors at the date of transfer as well as those who are creditors subsequent to the date of fraudulent transfer. Creditors here again include to whom a liquidated or definite sum is due and also future creditors Hackay vs. Douglas.

-Where the prior transfer is not voluntary, but is for consideration, howsoever small, the transfer would not be voidable at the option of subsequent transferee.

Illustrations-

(1) A creditor obtained a decree against a widow who had a life interest in the property left to her by her husband. The widow with the object to render the property out of reach of the creditor surrendered her interest to her son. It was held that the surrender was voidable at the option of the creditor under this section.

(2) A being in embarrassed circumstances wished to convert his property into cash so as to conceal it from his creditors. B being aware of A's object assisted him by purchasing the property. The sale was voidable under this section.

(3) A partnership firm, situated at Visakhapatnam was in embarrassing circumstances. It had incurred a debt to the tune of Rs.2 lakhs. In those circumstances the vendor decided to sell his share of immovable property in the firm. The sale deed was registered at Madras instead of Visakhapatnam, where the property was situated. Both the transferor and the transferee belonged to same community and they were in a position to know each other. It was held by the Supreme Court that Section 53 applied, and the transfer was intended to defeat or delay the creditors. The facts and circumstances of the case threw sufficient light on the intention of the transferor and the transferee.

(4) A, the owner of a property, sold the same to his father-in-law B for a small sum of money. The consideration being payment of mortgage debt which had not become due and there was no legal necessity to transfer the property. The transferor even after the sale continued in possession of the property and he made certain payments in satisfaction of mortgage debt. It was held that the transferor had prima facie intention to defeat or delay his creditors, and the transfer was not made in good faith or for consideration.