Fraudulent Transfer Of Property

Meaning

The illegal transfer of property made with fraudulent intention to restrict and defeat the interest of the creditor or any subsequent transferee shall be voidable at the option of such creditor or transferee and such a transfer shall be viewed negatively on the grounds of equity and justice. This transfer is called ‘fraudulent transfer of property.’

Section 53 of The Transfer of Property Act, 1882 enumerates the meaning of “fraudulent transfer” as follows:

There are two kinds of fraudulent transfer.

  • The first rule states that if an immovable property is transferred with a view to defeat or delay the interest of the creditors of a said transferor, such transfer shall be voidable at the option of such creditor.

However this rule does not:-

  1. impair the rights of a transferee in good faith and for consideration; or.
  2. affect any law relating to insolvency

A suit instituted by a creditor to set aside a fraudulent transfer should be instituted on behalf of all the creditors. Thus, it is competent for one creditor to sue, but he must sue, not in his individual capacity, but in a representative capacity and the decree will accrue to the benefit of all the creditors.

In simpler words, a creditor should institute a suit on behalf of all the creditors to set aside a fraudulent transfer. Thus, a creditor should sue in a representative capacity to avail the benefit of all the creditors.

  • The second rules states that every transfer of immovable property made without consideration with intent to defraud a subsequent transferee is voidable at the option of such transferee.

In view of the above purpose, no transfer made without consideration is to be deemed to have been made with intent to defraud, by reason only that subsequently, a transfer for consideration was made.

Example – A transfer his property fraudulently to B without giving him the ownership intending to defeat the interest of his creditor C, is a transfer called a fraudulent transfer.

OBJECTIVE OF FRAUDULENT TRANSFER

The provision of Section 53 of the Act is attracted wherein an immovable Property is transferred by a transferor fraudulently with an unjustified intention of defrauding the interests of the creditors in a manner that they are defeated or delayed.

The legislature aimed at drafting this legislation with a view to protect the creditors of their financial right of acquiring their lent amount.

SCOPES OF FRAUDULENT TRANSFER

1.Section 53 of the Act does not apply to movable properly and only abides by immovable property.

2. A creditors institutes a suit to enjoy the benefit of the provision not in  an individual capacity rather in a representative capacity including subsequent creditors as well.

3. A transaction is not declared void ab initio by this section but can be considered voidable at the option of the creditor who has been defrauded and defeated in regard to his financial interest.

In Saroj Ammal v Sri Venkateswara Finance Corp; AIR 1989 NOC 4 Mad, the Madras High Court observed that the essential ingredient to invalidate a transfer under Section 53 of the Act can be inferred as a fraudulent intention to defeat or delay the creditors. The transferee has to convey about the fraudulent intent to assist the transferor in carrying out this intention.

ESSENTIAL ELEMENTS OF FRAUDULENT TRANSFER

  1. Involvement of immovable property
  2. Transfer of property
  3. Transfer of property must be made fraudulently aiming to delay or defeat the interest of the creditor(s)
  4. Such defeat must negatively impact the creditor(s)
  5. Transfer shall be voidable at the option of the creditor(s)
  6. Transfer must involve a consideration

EXCEPIONS

  1. The transferee acted in good faith
  2. The transfer involved consideration

REMEDIES AVAILABLE TO CREDITORS

These are the following remedies which aid a creditor against the malpractice of defrauding him.

  1. To avoid the transfer under Section 53 of the Act the creditor may institute a Suit on behalf of, or for the benefit of all the creditors through a representative suit filed under Order I, Rule 8 of The Civil Procedure Code, 1908. Here, privity of contract is followed which implies that only parties to the contract can sue without the intervention of any third party to the suit.
  2. Instead of filing a suit, a creditor may make attempts with a will to avoid the transfer. For example – A judgement-creditor may attach the property intending to avoid such a fraudulent transfer.
  3. Section 53 of the Act is considered as a personal defense for the delayed creditor who although doesn’t sue only on his own behalf but also represents whole body of creditors. Nonetheless to say, such representation to avoid the transfer does not come within the purview of his obligation.

BURDEN OF PROOF UNDER FRAUDULENT TRANSFER

Court doesn’t draw any presumption that the transfer was made fraudulently with an intent to defeat and delay creditor(s). Hence the existence of fraud in such a transfer has to be proved to the court wherein the primary onus will be on the petitioner to show how he is connected to the property with the description of the fraud that has affected him.

Therefore, initially the creditors or the people to whom the transferor owes a financial liability have the primary onus but later on this onus shifts on the transferee to prove his purchase of property with good faith and consideration.

Provided that a bona fide transferee is protected under this section making a consideration for the transfer. Here bona fide transferee is the one having no knowledge or belief of the concocted intentions. If the transferee has constructive knowledge, it will be presumed that he had information about the fraud.

RELEVANT CASE LAWS

  1. Kanchanbai (vs) Moti  Chand , AIR 1967 MP 145

In this case, the learned court held that the term ‘creditors’ also includes a single creditor. Hence even if a single creditor is defeated, section 53 of the Act shall be attracted wherein it is shown that the transfer has delayed the creditor’s claim.

  • Ishan Chander (vs) Bishnu Sardar, 24 Cal .825

It is not sufficient to make the transferee a proven transferee otherwise than in good faith with a mere knowledge and belief of an impending execution of a decree against the transferor especially when the transferor has no intention to defeat, delay or defraud his creditors.

  • Dr Vimla (vs) Delhi Administration , AIR 1963 SC 1572 -: 1963 Supp(1) CR 585

In this case, the Honorable Supreme Court observed that the term ‘defraud’ inculcates two essential elements namely, deceit and injury to the defrauded person wherein injury not only signifies economic loss with deprivation of property and money but also includes harm to body, mind and reputation of a person.

CONCLUSION

Fraudulent transfer as effectuated by the provision included in section 53 of the Act gives liberty to the creditor(s) or the aggrieved party to consider a transaction aimed at defrauding him/them with delay and defeating interests to be voidable or not. The legislature has given certain privileges to the party who has suffered in this way and has consciously made an attempt to discourage ill practices with intentional creations of impediments on the part of the transferee impairing their rights. However, this whole deliberate act must not be performed in good faith and for consideration affecting any insolvency law by the transferor.

REFERENCES

I.BOOKS

  • Dr. Poonam Pradhan Saxena , Property Law , (Third Edition, 2017)

II.INTERNET

III.STATUTE

INDIAN LAW

  • The Transfer of Property Act, 1882, No.4, Acts of Parliament, 1882 (India)

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