CONTENT

TOPICS PAGE NO
1.INTRODUCTION 1
2.CHARACTERISTIC OF FRAUDULENT
TRANSFER 3
3.PREFERANCE TO ONE CREDITOR 5
4.TRANSFER IS VOIDABLE AT THE
INSTANCE OF CREDITORS 7
5.EXCEPTIONS TO S. 53(1) 7
6.GRATITOUS TRANSFER TO DEFRAUD
SUBSEQUENT TRANSFEREE 9

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INTRODUCTION
A fraudulent conveyance, or fraudulent transfer, is an attempt to avoid debt by transferring money to
another person or company. It is generally a civil, not a criminal matter, meaning that one cannot go to
jail for it, but in some jurisdictions there is potential for criminal prosecution. It is generally treated as
a civil cause of action that arises in debtor/creditor relations, particularly with reference to insolvent
debtors. The cause of action is typically brought by creditors or by bankruptcy trustees.
A transfer will be fraudulent if made with actual intent to hinder, delay, or defraud any creditor. Thus,
if a transfer is made with the specific intent to avoid satisfying a specific liability, then actual intent is
present. However, when a debtor prefers to pay one creditor instead of another, that is not a fraudulent
transfer.
There are two types of fraudulent transfer—actual fraud and constructive fraud. Actual fraud typically
involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider",
and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent,
but rather to the underlying economics of the transaction, if it took place for less than reasonably
equivalent value at a time when the debtor was in a distressed financial condition. It is important to note
that the actual distinction between the two different types of fraud is what the intentions of the debtor
were. For example, where the debtor has simply been more generous than they should have or, in
business transactions, the business should have ceased trading earlier to preserve capital (see generally,
wrongful trading). In a successful lawsuit, the plaintiff is entitled to recover the property transferred or
its value from the transferee who has received a gift of the debtor's assets. Subsequent transferees may
also be targeted, although they generally have stronger defenses than immediate transferees.
Although fraudulent transfer law originally evolved in the context of a relatively simple agrarian
economy, it is now widely used to challenge complex modern financial transactions such as leveraged
buyouts.
Fraudulent transfer liability will often turn on the financial condition of the debtor at a particular point
in the past. This analysis has historically required "dueling" expert testimony from both plaintiffs and
defendants, which often led to an expensive process and inconsistent and unpredictable results. Courts
and scholars have recently developed market-based approaches to try to make this analysis simpler,
more consistent across cases, and more predictable.

PRINCIPLES
Every owner of property has right to transfer his property as he likes . But ,the transfer must be made
with a bona fide intention .Where the transfer is made with a fraudulent intention e.g. with the the
intention of defeating the interest of creditor or interest of any subsequent transferee . Where the transfer
is made with fraudulent intention , the object of the transfer would be bad in the eyes of equity and
justice though it is valid in law. Since fraudulent transfers are otherwise valid in law , they are not void
.But ,Because they are made with mala fide intention ,equity would render it voidable by the person to
alienate his creditor or any subsequent transferee. This principle of equity has been incorporated in
section 53 of Transfer of Property Act. Law relating to fraudulent transfers as given given in the this
section has two parts .The first part provides a transfer with an intent to delay or defeat the creditor of
the transferor shall be voidable at the option of such transferee. For instance ,A is owner of house .He
takes a lone of Rs 10000/- from B. Thus ,A is a debtor and B is creditor .House is the only property
through which B can recover his lone. B Intends to do so but A becomes aware of B’s intention and
before B could take any action A sells the house to C , who knows that A is selling the house so that B
could not get back his money .The sale of the house is a fraudulent transfer and is voidable by B whose
interest has been defeated.

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Section 53(1) : Fraudulent Transfers – Section 53(1) provides that –
I. Transfer of an immoveable property,
II. Made with intent to defeat or delay the creditors of the transferor,
III. Shall be voidable at the option of the creditor so defeated or delayed.
But the provision of this sub-section shall not affect-
a. The rights of a subsequent transferee in good faith, for consideration, and
b. Any law for time beings in force relating to insolvency.

Characteristics of fraudulent Transfers- The essential condition for the applicability of

section 53(1) are :
1. There is transfer of immoveable property.
2. The transfer is fraudulent i.e. mode with an intent to defeat or delay the creditors of the
transferor.
When the above mention condition are fulfilled, the transfer of property is voidable by the creditor or
creditors whose interest has been defeated or delayed .

Transfer of immoveable property

There must be a valid transfer of immoveable property . For applicability of this section , it is necessary
that there is a transfer of property and such transfer is valid and enforceable so that property vests in the
transferee. Section 53 (1) does not apply where the transfer is in itself void. This section makes a valid
transfer void at the option of creditor after the property had already vested in transferee. A suit under
this section must accept the validity of the transfer first and the proceed to get it invalidated if it proved
to be fraudulent . In other words , transfer under this section must be perfectly valid till it is declared
void under this section buy the a defrauded creditor.
This section is applicable only where the transaction is transfer of property with in the meaning of
section 5 of the Act . Relinquishment is not transfer of property . Therefore , relinquishment of share
by one co-parcener in favour of other in not a transfer of property with in the meaning of this section
and section 53 in terms does not apply. Similarly, this section is inapplicable to surrender. But ,surrender
by life-estate holder has been held to be section .Dissolution of partnership is also in this regarded as
transfer, therefore, a deed of dissolution of partnership was not held transfer and this section was
applied.
A deed wakf executed with the object of making the property inalienable and beyond the reach of
creditor was held to be a transfer which falls with in the meaning of this section.It may be noted that
this section doesn’t in any way violate rule of muslim law because under Muslim law too a person cant
constitute wakf of his entire property without payment of debts.Where a settlement provided for an
appointment and the appointment was made for the purpose of delaying or defeating the interest of
creditor, it was held that the appointment under this settlement was fraudulent transfer.

PARTITION
Partition and family settlement are not transferred under this act.Therefore, this section may not apply
to partition or family settlement. However , if the object of partition is to merely defraud creditor it may
be regarded as transfer under this section. Where a partition was made not as normal allotment of
shares in family-property but to allot the shares in such a manner that property given to a sharer was to
be kept only for himself and only there by that share was placed beyond the reach of creditors, the
partition was held a fraudulent transfer. A partition was made in such a way that father was not given
any share in property and whole property was allotted to sons with a direction that they shall pat fathers

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debt. It was held that partition was a transfer with in the meaning of this section, Partition was therefore
declared void at the instance of the creditor. Accordingly, it mat be stated that though partition is
generally not transferred but if it is effected with malafied intention to defraud the creditors it comes
wit in the scope of this section.

Sham transfer-
Sham transfer means fictitious transfer. A transfer is fictitious when the transferor does not intend that
property should really vest in the transferee. Such transfers are therefore unreal or colourable transfers
and are never meant to operate between the parties. The transferor may transfer a property in favour of
transferee only for name’s shake i.e. in the false name of transferee . Such transfers are, therefore,
unreal or colourable transfers and are not made to operate between the parties. Benami transaction is
also a sham transfer because the real owner has no intention that property should belong to ostensible
owner.
Sham transfers e.g. a benami transfers are outside the scope of this section. Section 53 safeguards the
interest of creditor in case of only real transfer which is made with a fraudulent intention.On the other
hand ,a sham transfer is actually not real transfer at all ; the intention of the real owner is not necessarily
fraudulent . Therefore , such fictitious or sham transfers or sham transfers do not require to be avoided
because the real title already vests in the transferor.
Where a transaction results in rights and obligation , it can never be treated as a sham transaction.
However ,whether a transfer is real or sham , is to be determined on the basis of fact and circumstances
in each case. In certain cases where its is fully established that the very object of transfer is to defeat
the interest of creditors, the transfer can be avoided by the creditor under this section . In Keshab
chandra Nayak v. Laxmidhar Nayak , it was held by the Orissa High Court thet reference to section
53(2) of this Act shows that in certain situation ,a sham transfer can also be treated as voidable at the
instance of some persons and they may approach the appropriate authority for getting its so adjudged
and its cancellation.
It is significance to note that now the Benami Transaction Act, 1998 provides that properties purchased
in the name of ostensible owner or benamidar and real owner can not recover its form him. In essence
, this Act now treats benami transaction as real transfer under which the benamidar becomes real
owner .However section 3 of the benami transaction Act ,1998 provides that nothing contained In this
Act shall affect the provisions of section 53 of the Transfer of property Act or any law relating to
transfers for illegal purposes.

Immoveable property
Section 53(1) is applicable to transfers only of immoveable properties. The provisions of this section
donot apply to transfer of movable property. However , the principles laid down in this section have
been applied by the Privy Council to fraudulent transfer of movable property on the ground of equity
,justice and good conscience. The principles of equity incorporated in this section where applied also
to a case of assignment of a decree where it was found that major part of the consideration amount was
secretly reserved for the benefit of the assignor .

Fraudulent transfer to defeat or delay creditor

The transfer which can be avoided by the creditor under the section must be with an intent to defeat or
delay the interest of the creditor of the transferor . In other words , the transfer is made with the sole
object of defeating or delaying the interest of creditor rather then to give the property to transferee
honestly .

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Intent to defeat to delay
A transfer made with an intent of either defeating or delaying the interest of creditor is a fraudulent
transfer . The only interest of a creditor in the debtor’s property is thet he can recover his money from
the property in case the debtors fails to repay it personally. So, where a debtors transfers his property
before creditors makes any attempt to realise his debt from that property , it would no longer be debtor’s
property . In this manner the interest of the creditor would be defeated . Whether a transfer has been
made with intent to defeat or delay creditors , is a mixed question of law and facts .Decision or
fraudulent intentention of the transferor must be taken after considering the facts of the case and the
circumstances in which the transfer was made . There is no specific criterion to ascertain the fraudulent
intention of the transferor .But inference of such intention may be drawn from some broad
consideration.
MUNYAMMAL v. THYGRAJA1 , the madras high court rightly observed thus;
“The factors which constitute a fraudulent conveyance must necessarily depend upon the
circumstances of each case. But certain board indicia have been formulated in England, America and
india . It is surprising how human nature is the same all the world over irrespective of colour , creed ,
race.”
Accordingly, where the debtor sells all his properties after the decree to a purchaser who is in the
knowledge of his debts, it may be presumed that the transferor (debtor) has a fraudulent intent to
defeat or delay his creditor. Such presumption may be more strong if there is evidence that no price
has actually been paid by the purchaser. Where the transferee shares the fraudulent intent and actively
aids and assists the transferor in fulfilling his intention of defrauding the creditor, there is no doubt
that the transfer was made to defeat the interest of the creditor. Where a judgment-debtor who was a
Muslim transferred his property to his wife saying that it was in lieu of her dower and the transfer was
made soon after the attachment of his properties in execution of decree against him, it was held that
the transfer was fraudulent.
Fraudulent intention must be proved by direct or circumstantial evidence ce and every case must be
examined in the light of surrounding circumstances However, following circumstances may give a
strong presumption that the transfer was fraudulent:

(i) The transfer was made secretly and in haste

(ii) The transfer was made soon after the decree was passed against thejudgment-debtor.
(iii) The transferor who was indebted alienated substantially the whole property e 8 gift of all
the properties before the attachment
(iv) The consideration was very small amount in comparison of the real value of the property
transferred.
(v) There is evidence that there was no actual payment of consideration as shown in the sale-deed.
These are, however, some of the circumstances in which inference of intent to defeat or delay
creditors may be drawn. Every case under this section would depend upon its own facts and
circumstances and in all cases it is a matter of fact whether the transfer is bona fide or fraudulent.

Preference to one creditor.-If there are several creditors, transfer in favour of one creditor
does not amount to an intention to defeat or delay the remaining creditors. A debtor is entitled to pay
his debts in any order of preference. For example, A, who has taken loan from B, C and D, transfers
certain properties to B in satisfaction of the loan taken from him (B) This transfer is not necessarily
with intent to defeat or delay the interest of remaining creditors C and D. It has been held by the Privy

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Council that in case there are two or more creditors, "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" 3 In Chogmal Bhandari v. Deputy Commercial Tax Office, Kurnool1 a deed of settlement
was executed allegedly to evade the payment of sales tax, but there was no sales tax order against the
author of the settlement deed. The Supreme Court held that the fact that a debtor prefers one creditor
does not lead to an inference that the intention was to defeat the other creditor (Sales-Tax
Department)
It is significant to note that the word used in this section is creditors not creditor. Therefore transfer
must be to defeat or delay the creditors in general and not to prefer one creditor to another. In
Musahar Sahu v. Hakim Lal2 is a leading case on this point. Facts and the law laid down by the Privy
Council in this case is given below:
Musahar Sahu v. Hakim Lal.-Kisun Binode was debtor and Musahur Sahu was creditor: In
December, 1900 the creditor Musahar Sahu sued the judgment debtor Kisun Binode for recovery of
his debts. During pendency of this suil, in January, 1901, Musahar Sahu presented a petition before
the Court for attaching properties of the debtor by way of security. In February, 1901 Kisun Binode,
the debtor gave an affidavit that he did not intend to transfer any of his properties whereupon the
petition for attachment was dismissed. But despite his affidavit Kista Binode (debtor) sold his
properties to Hakim Lal who was another creditor of Kisun Binode. Musahur Sahu the plaintiff
(appellant) pleaded that since the transfer of properties by his debtor Kisun Binode were made with
intent to defeat or otherwise delay his interest, it should be held void under Section 53 and Hakim Lal
should not be given properties transferred to him.
Decision-The Privy Council dismissed the appeal and held that transfer of property by a debtor to one
creditor in preference of the other is not a fraudulent transfer with intent to defeat or delay the interest
of another creditor
Their Lordships observed that the transfer which defeats or delays creditors is not an instrument
which prefers one creditor to another but an instrument which removes property from the creditors to
the benefit of the debtor. The Court further observed that so soon as it is found that the transfer here
impeached was made for adequate consideration in satisfaction of genuine debts, and without
reservation of any benefit to the debtor, it follows that no ground for impeaching it lies in the fact that
the plaintiff who also was a creditor was a loser by payment being made to this preferred creditor,
there being in the case no question of bankruptcy
Creditors-Word creditor as used in this section, means any person who is entitled to get a certain sum
of money from the other called debtor. Thus, a person who has given some loan to another is creditor
of that other person. It includes not only those persons who have already obtained a decre in their
favour from the Court but also includes persons who have a claim to be established by Court. A
person who has sold goods to another but could not
recover its price is also a creditor within the meaning of this section. Und Muslim Law dower is that
sum of money or property which every husband mi pay to his wife. Unpaid dower is therefore a debt.
Until the dower debt is paid wife is creditor and husband is debtor. Similarly, a deserted Hindu wife in
te claim for maintenance is a creditor. But, a person claiming only an unliquidated (uncertain) sum for
damages for tort or breach of contract is not a creditor .
______________________________
1.AIR 1976 SC 656
2.(1915) 43 Cal 521 :32 IC 343 PC

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Transfer is voidable at the instance of creditors.
When a transfer is proved to have been made with intent to defeat or delay creditors it is voidable by
creditors, Section 53 does not as such make a fraudulent transfer void. It remains a perfectly valid
transfer until the creditors exercise their right to avoid the transfer. Since the right to avoid the transfer
is optional, a creditor may or may not exercise his right under this section. Where creditors do not
prefer to avoid the transfer, the transfer shall continue to be a valid transfer under which the property
has already vested in the transferee. Moreover, under this section only creditors are entitled to avoid
fraudulent transfer Transferor or transferee or any other person has no such right.
Representative Suit- It is provided in Section 53 (1) that a suit instituted by a creditor under this
section must be instituted on behalf of, or for the benefit of, all the creditors. Accordingly, a creditor's
suit to avoid a fraudulent transfer must be a suit not only for himself but on behalf of all creditors of
the transferor. That is to say, any one creditor represents other creditors. The purpose of this rule is to
protect the debtor from multiplicity of suits by other creditors. However if there is only one creditor
whose interest has been defeated or delayed by fraudulent transfer, he can file that suit as a single
creditor. It may be noted that where there are two or more creditors, although a creditor is not entitled
to file a suit only for himself but he cannot be compelled to defend such suit on behalf of all creditors.
Attaching Creditor-Creditors may protect their interests not only by avoiding the transfer under
Section 53 but also by another method. They may do it by attaching the property transferred In Abdul
Shukoor v. Arii Papa Rao1 the Supreme Court observed that attaching the property which debtor has
transferred fraudulently, is sufficient evidence of his intention to avoid transfer. No separate suit
under Section 53 is necessary. Where a creditor is proceeding against the property of the debtor by
way of attachment an transferee is putting forth claim, it is not essential for the attaching credit file a
fresh suit for challenging the transfer as fraudulent.
It is to be noted that also in view of the amended provisions of 0.21 the Civil Procedure Code, the
question of filing a separate suit is barred and all questions relating to title or interest in respect of the
attached property
property are to be decided and adjudicated only in the claim proceedings and not by any separate suit.
Burden of proof-The burden of proof lies on the creditors to show that the transfer was made to
defeat or delay their interest. When they have proved on the basis of facts which prima facie show that
the transferor intended to defraud the creditors, the burden shifts on the debtors to explain the facts
and prove that it was not fraudulent. However, the decision of the Court must not rest only on
suspicion howsoever doubtful the transfer might be The decision that the transfer was fraudulent must
be taken by the Court on legal grounds established by legal testimony .

Exceptions to Section 53(1)

Section 53 (1) recognises two exceptions. The rule that a fraudulent transfer can be avoided by
creditors, is not applicable to :
(a) a transferee in good-faith for consideration, and
(b) any law relating to insolvency for the time being in force

__________________________
1.AIR 1963 SC 1150

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Transferee in good-faith for consideration. -A transferee who takes property in good-faith for
consideration is protected. Where a transferee has purchased the property in good faith from a debtor,
the creditors cannot avoid the sale under Section 53 (1). Good-faith has not been defined in this Act.
But, the generally accepted meaning which is given to this term is that, an act is done in good-faith if
it is done honestly whether it is done negligently or not Where a transferee has no knowledge ie. no
actual or constructive notice of the fraudulent intention of the transferor (debtor), the creditors cannot
avoid the transfer under this subsection even if they prove fraudulent intent of the debtor. But, where
transferee is aware of fraud or aids and takes part in transferor's fraudulent dealings, he cannot be said
to have acted in good-faith. Knowledge and mala fide intention of the transferee are determining
factors Where the transferor's intention was to convert his immovable property into cash so as to put it
out of the reach of his creditors and the purchaser was aware of that intention, it was held that
purchaser was party to fraud and the sale was voidable by creditors. If the purchaser had no
knowledge of fraud, the sale is valid and cannot be avoided.
The interest of transferee in good faith has been protected only where he has paid consideration.
Consideration here means pecuniary consideration as defined in the Indian Contract Act. Natural love
and affection is therefore not consideration. Dower-debt has been regarded as a valid consideration,
therefore, transfer of properties by a Muslim husband to his wife in lieu of unpaid dower is a good
consideration under this section and cannot be avoided by the husband's creditors if made in good-
faith. In Kapini Goundan Sarangapani a man who had taken large sum of money as loan, transferred
his whole property to the children of his first wife in consideration of her relations allowing him to
marry a second wife. In this interesting case, the Madras High Court held that this was a good
consideration and transfer was not a fraud on the creditors. It is submitted that this decision must be
regarded only an exception and should not be regarded as a general rule.
Good faith on the part of transferee is more significant factor in protection of the rights of transferee
than payment of consideration. Therefore, even if it is proved that consideration is real, it does not
always mean that transferee was in good-faith. However, no presumption of fraud can be made merely
on the ground that consideration was inadequate
A notice was sent under certificate of posting as soon as the real owner came to know about the
clandestine sale. A copy of the notice along with the certificate of posting was produced in evidence.
The agreement of purchase by the subsequent purchaser was signed five days after despatch of the
notice. The Supreme Court held that it could be presumed that the notice was duly served on him
before he signed the purchase agreement. He was thus not a bona fide purchaser for value without
notice. The suit was decreed in favour of the real owner .
Rights created under insolvency laws.-Section 53 does not affect the rights created under the law of
insolvency. Thus, rights of a transferee created under any provision of insolvency law are not affected
even if the transferor's intent was to defeat or delay the interest of creditors. The object of Insolvency
laws is to distribute the insolvent properties in equal proportion among his creditors without giving
any preference to any one. If one creditor is given an preference, it may be fraudulent under the law of
insolvency Whereas, such preference has not been regarded as fraud under Section 53 Therefore,
there are inconsistencies in the laws of insolvency and Section 53. In Tamadi Narasimhamurti .
Maharaja Pithapur the Madras High Court observed that it is necessary to distinguish between certain
classes of cases and to remember that Section 53, Transfer of Property Act does not apply to
transactions which though supported by good consideration, might in case of an insolvency be
impeached as fraudulent preferences." The Court has given others points of difference between
insolvency laws and the law given in Section 53.

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Where the transferor (debtor) has been declared insolvent and the transferee purchases property from
such insolvent person, the transfer cannot be avoided by creditors, under Section 53. In such cases, the
Insolvency Courts are competent to decide whether the transfer is voidable under Section 53 of this
Act on application made by Official Assignee or the Official Receiver, as thecase may be. However,
this jurisdiction is not exclusive and in some cases the Court of Insolvency would decline to exercise
jurisdiction and leave the matter to be determined under Section 53 in a regular suit.

Section 53 (2) Gratuitous transfer to defraud subsequent transferee

Section 53 (2) enacts that gratuitous transfer of an immovable property with intent to defraud a
subsequent transferee shall be voidable at the option of subsequent transferee. The second part of
Section 53, therefore, contemplates a situation where an immovable property is first transferred to a
person without consideration and the same property is again transferred to another a person. Under
this subsection, the subsequent transferee may avoid the first transfer if he could prove that the former
gratuitous transfer was fictitious or sham transfer and was made with a view to defraud him
(subsequent transferee). For instance, A makes a gift of his house to B in January, 1990. In February,
1990. A sells the same house to C. Here B and Care we claimants of the same property. The general
rule is that first transferee has preference over the second and C should not get the house. But, under
this sub section it is provided that if first transfer is proved to be fraudulent, the subsequent transfer
shall prevail and the first would be voidable by the subsequent transferee. In other words, this sub-
section protects the interest of a bona fide transferee for value from a fraudulent gratuitous transfer
made earlier.
However, the mere fact that the first transfer was gratuitous and the second transfer is with
consideration, does not raise presumption of fraud in respect of the prior transfer Fraud in the prior
transfer must be fully established. For example, where a person settles his properties on A for the
benefit of his children and after sometimes sells the same properties to B, no presumption can be
drawn that prior transfer was necessarily with a view to defraud B. The issue of fraud must be fully
established by B.
The expression 'subsequent transferee does not include a purchaser at the Court-sales whether he is a
third party or the decree-holder himself.

53-A. Part-performance.
Where any person contracts to transfer for consideration any immovable property by writing signed
by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained
with reasonable certainty, and the transferee has, in part performance of the contract, taken possession
of the property or any part thereof or the transferee, being already in possession, continues in
possession in part performance of the contract and has done some act in furtherance of the contract,
and the transferee has performed or is willing to perform his part of the contract, then,
notwithstanding that were there is an instrument of transfer, that the transfer has not been completed
in the manner prescribed therefor by the law for the time being in force, the transferor or any person
claiming under him shall be debarred from enforcing against the transferee and persons claiming
under him any right in respect of the property of which the transferee has taken or continued in
possession, other than a right expressly provided by the terms of the contract.
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no
notice of the contract or of the part performance thereof.