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Project of Transfer of Property ACT On Fraudulent Transfer: Submitted By
Project of Transfer of Property ACT On Fraudulent Transfer: Submitted By
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INTRODUCTION
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Fraudulent transfer law developed under the common law and was
codified in the Statute of Elizabeth.1 The Statute of Elizabeth provided for
the avoidance and punishment of transfers made "to the end, purpose
and intent, to delay, hinder or defraud creditors.2 This early fraudulent
transfer statute was apparently in part a criminal law, in part a revenue
measure (the Crown could receive a portion of any recovery), and only in
part a creditor protection. However, when the English courts held that a
judgment creditor could disregard a fraudulent conveyance and levy
execution on the property transferred, the fraudulent conveyance law
became primarily one of creditor protection.
This section deals with the subject known as fraudulent transfers
of immoveable property. Subject to savings hereinafter mentioned, a
transfer is fraudulent when it is made with intent to defeat or delay the
creditors of the transferor or to defraud a subsequent transferee. In the
first instance consideration may or may not be present. In the second
case consideration is non-existent. In either case the transaction is
voidable at the instance of the creditor defeated or delayed or the
transferee defrauded. The Law of Property Act, 1925, on which the
present section is based, is wider; instead of the creditor being entitled to
avoid the transaction the person prejudiced is given the right.
The original section was founded on two statutes of Elizabeth,
namely, 13 Eliz., c. 5 and 27 Eliz., c. 4. These two statutes were repealed
and re-enacted as Sections 172 and 173 of the Law of Property Act,
1925.
1
13 Eliz., ch. 5 (1571) (Eng.). See also Glenn, supra note 9, SS 58- 62.
2
13 Eliz., ch. 5, S 1 (1571) (Eng.).
3
Phoolan Devi v. Surendra Prakash, AIR 1983 All 440 (442).
4
Suresh mallappa shetty v. Spl. Recovry officer, 2003 AIHC 1164.
5
C. Bhandari v. Dy. Commrl T. Officer. AIR 1976 SC 656 (660).
6
Phoolan Devi v. Surendra Prakash, AIR 1983 A1I 440 (442).
7
Phoolan Devi v. Surendra Prakash, AIR 1983 A1I 440 (442).
TRANSFER
8
T. Mudaliar v. T Narayana Reddiar. AIR 1959 Mad 141 (142) (DB); see also Ram Nathan v.
unnamalai, AIR 1942 Mad 632: ILR (1943) Mad 47.
9
(1916) ILR 44 Cal 662, 44 IA 72, 40 IC 242, AIR 1916 PC 232.
FRAUDULENT TRANSFER
10
Prabhu nath v. sarju Prasad AIR 1940 All 407.
11
Chumar v. Alima AIR 1998 Ker. 139.
12
Gurmail Singh v. Udham kaur(deed) by Irs AIR 1999 P&H 300. See generally [65] Civil Procedure.
13
Madan Mohun Singh v. Raja Kishori Kumari AIR 1917 Cal 222, (1917) 21 Cal WN 88.
14
Magan Lal jagjiwandas v. Lakhiram Haridasmal AIR 1968 Guj 193, (1968) 9 Guj LR 161.
15
Sripat Singh v. Naresh Chandra Bose AIR 1926 Pat. 94.
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.
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
(ii) the transfer ought to have been made with intent to defeat or
delay the creditors; and
Any attempt by the debtor to withdraw his assets from the control of his
creditors, therefore, has always received just condemnation by the
courts of law who have compelled the debtor to make good the
representation on the faith of which presumably he had obtained credit.
16
Smt. Phoolan Devi v. Surendra Prakash, A.I.R. 1983 All. 440,
17
Transfer of Property Act 1882 Sec 53 (1) para 1. Nothing in this statutory provision will affect anv law
for the time being in force relating to insolvency: Transfer of property Act 1882 Sec 53(1) para 3.
18
Transfer of property Act, 1882 Sec 53 para 4. See Anantha Raman Pillai V. Arunachalam AIR 1952 TC
105.
19
Maung Din v. Ma Hnin Me AIR 1925 Rang 2278.
20
Kedarwati v Radhey LalAIR 1937 Pat 609,170 lC 353, (1936) Pat WN 898.
In order to take out the case from the operation of Section 53, it is,
however, essential that the debtor must not reserve any benefit for
himself. If the debtor sells property to another creditor to discharge the
debt due to him and the price obtained is considerably in excess of the
debt discharged, this would be evidence of intent to defraud.22
The terms of Section 53 (1) are satisfied even if the transfer does not
'defeat' but only 'delays' the creditors. Therefore, the fact that the entire
property of the debtor was not sold, does not by itself negative the
applicability of Section 53 (1) unless there is cogent proof that there is
other property left sufficient in value and of easy availability to render
the alienation in question immaterial for the creditors.23
21
(1910) 33 Mad. 334 : 5 I.e. 33.
22
Hanifa Bibi v. Punnamma, (1907) 17 Mad. L.J.11.
23
Abdul Shukoor Saheb v. Arti Papa Rao. A.I.R. 1963 S.C. 1150
The principle of s 53 has been adopted in the Punjab where the TP Act
was not in force, and was also followed in Bombay before the TP Act was
extended to that Presidency.
It has, however, been held that the requirement that any suit filed to set
aside a fraudulent transfer must be a representative suit, will not be
insisted upon in Punjab as that is a mere technicality.25
Creditor:
The word 'creditor' has been used in this section in somewhat wide
sense. Thus, it includes all those who are creditors at the date of transfer
as well as those who become creditors subsequent to the date of
fraudulent transfer.26
24
Rajani Kumar Dass v Gourkishore Shaha (1908) ILR 35 Cal 105l.
25
Badri Dass v Chunilal (1961) 63 Punj LR 319,AlR 1961 Punj 398; Shallo Devi v Mobinder Singh AIR
1971 P&H 325.And see State of Punjab v Giani Bir Singh (1968) ILR 1 Punj 10 ,AlR 1968 Punj 479.
26
Ram Das v. Debu, A.I.R 1930 All. 610.
Further, it includes not only those creditors who have obtained decrees,
but also those whose claims have yet to be proved in a Court.27 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.
Partition:
This section has been applied to cases of partition. The
correctness of these decisions was a question canvassed before the
Supreme Court in Sarin v. Poplai,28 but the Supreme Court declined to
go into the question.
27
Islvar v. Devar, 30 Bom.146.
28
1966 1 SCR 349, AIR 1966 SC 432.
29
Vinayak v. Mureshwar AIR 1994 Nag. 44.
A partition which does not provide for the payment of a Hindu father's
debt is mala fide, and may be avoided by a creditor in proceedings in
execution of a decree against the father. Similarly, in a partition in which
no property was allotted to the father who was indebted, it was held that
the partition was illusory, although the sons were directed to pay the
father's debts.30 Where there is partition in a joint Hindu family or a
release deed by an indebted coparcener, S 53 is attracted, if the object of
the allotment of share to such coparcener is to help him defeat his
creditors. Even assuming that partition in a Hindu family and release
deed by a coparcener in respect of his share does not amount to a
'transfer' within the meaning of S 5 and, therefore, is not within the
purview of s 53, the principle of the section can be invoked. If the object
of a given instrument of a partition or a release deed is not to give a
sharer his rightful share in the family properties, but to effect a partition
in such a way that such a sharer would be able to defeat the creditors, it
would amount to a fraudulent partition.
Waqf:
A deed of waqf executed as a device to put property out of the
reach of creditors has been held to be a transfer to which this section
applies, the court observing that S 53 does not infringe any rule of
Mahomedan law, for under that law no person can make a waqf of his
entire property without making arrangements for the payment of his
debts. 31In such a case, it is immaterial that the transfer is valid under
Mahomedan law.
30
Picha moppanar v. Vetu Pillai, AIR 1947 Mad 203.
31
See Har prasad v. Mohammad Usman 1942 All LJ 645.
32
Union of India v. Rajeswari & Co. AIR 1986 SC 1748.
33
A.l.R. (1962) S.C. 370: (1962) 3 S.C.R. 739.
The terms of Section 53 (1) are satisfied even if the transfer does not
"defeat" but only "delays" the creditors.
The fact therefore that the entirety of the debtor's property was not sold
cannot by itself negative the applicability of Section 53 (1) unless there is
cogent proof that there is other property left, sufficient in value and of
easy availability to render the alienation in question immaterial for the
creditors.34
Good Faith and consideration:
If the creditors established that the transfer was made with the
object of defeating them, the burden shifts on the transferee to prove: (i)
that he had paid it fair price, and (Ii) that he was not a party to the fraud.
The term 'consideration' as used in this section has the same meaning as
it has in the Contract Act and therefore excludes natural love and
affection. Transfers for natural love and affection and treated as transfers
without consideration.
Where the fraud on the part of the transferor is established, the
burden of proving that the transferee falls within the exception is upon
him, and, in order to succeed, he must establish that-
(a) he was not a party to the design of the transferor,
(b) he did not share the intention with which the transfer has been
affected, and
(c) he took the sale honestly believing that the transfer was in the
ordinary and normal course of business.
When once the conclusion is reached that the transaction was effected
with the intent on the part of the transferor to convert the property into
each so as to defeat or delay his creditors, then the following
circumstances prove that the plaintiff shared that intention:
34
Abdul Shakoor Sahib v. Arji Papa Rao, AIR 1963 SC 1150.
(i) The plaintiff and the vendor belong to the same community,
a small, compact and well knit one, and they must obviously
have known each other having been in trade for several years
in several places in common and must, therefore, have been
well acquainted with the financial and business affairs of
each other.
(ii) The plaintiff admittedly had with him a copy of the deed of
dissolution which discloses that the firm's business had
resulted in losses and that it was greatly indebted, the debts
amounting to Rs. 2 lakhs. Even when the plaintiff was fixed
with notice that the firm's business had been running at a
loss and had accumulated a very large volume of debts, the
purchaser did not insist that the consideration which he was
paying should be utilised for the discharge of at least some of
the debts.
(iii) The property is situated at Vizianagram but the document of
sale-deed was registered at Madras. This was a view to keep
the transaction secret from the creditors, and the plaintiff
was as much a party to the secrecy as the transferor.
(iv) The plaintiff made the enquiries before he took the transfer.
He led evidence to show that he consulted his lawyers about
the title of the vendor but any attempt at an enquiry of
defendant 4 as to why he was affecting the sale of the only
immovable property of the firm which was allotted to him
under the dissolution deed is significantly absent.
In these circumstances, it stands to reason that the plaintiff must be
fixed with notice of the design in pursuance of which transfer was
effected.
Nature of suit:
A creditor's suit to avoid a transfer must be a suit on behalf not
only of himself, but of the whole body of creditors (See Order 21, Rule 63,
C.P.C.). This rule has been laid down with a view to protect the debtor
from multiplicity of suits by each and every creditor, if there are more
than one.
In a suit to avoid a transfer under this section, the issues to be
framed are: -
(1) Was the transfer made with intent to defeat or delay the
creditors?
(2) If so, was the purchaser from such a debtor a transferee in good
faith and for consideration?
The onus of proving the first issue lies on the creditor, and' if that is
established, the onus of proving the second issue is on the transferee.
Suit by transferee:
A transfer which is voidable under Section 53 (1) of the Transfer of
Property Act can be avoided not only by a suit instituted by a creditor
challenging the transfer on behalf of himself and the other creditors,
but also by way of defence to a suit under Order 21, Rule 63 C.P.C. by a
transferee (claimant) whose petition was rejected in the summary
proceeding under Order 21, Rules 58 to 61, C.P.C.
In order to avoid transfer which come within the mischief of
Section 53 of the Transfer of Property Act, it is not necessary that the
person who intends to avoid the transaction should file a suit for the
purpose. He may as well manifest his intention to avoid the transaction
otherwise than by filing a suit, as for example, by attaching the property
transferred. His very act of attaching the property would be sufficient
evidence of his intention to avoid it.35
Where in a suit under Section 53, brought by one of the creditors,
the heading of the plaint did not indicate that the suit was for and on
behalf of all other creditors, but the names of other creditors whom the
plaintiff knew were given in the body of the plaint, the plaintiff was held
to have locus standi to file the suit and the suit is maintainable.36
The appellant was shown to be the only creditor. There were no other
creditors.
Held:
As a creditor he could not be defrauded, because his loans were secured
by the mortgage deeds. A gift in respect of properties already mortgaged
could not in any way defeat or delay the mortgagee's right because the
donee under the gift-deed could only take the properties subject to the
mortgages.
35
Ashutosh Rath v. Vysyaraju Badareenarayan, (1972) 38, C.L.T. 857 [ A.I.R. (1963) S.C, 1150 rel. on.
36
Talwar v. Adeshwar Lal, A.I.R. (1972) Delhi 122.
BIBLIOGRAPHY
Primary Sources
1. AIRs
2. CLT
3. Transfer of Property Act, 1882
Secondary Sources
Websites Referred: