FRAUDULENT

TRANSFER
SECTION 53
53. Fraudulent transfer.—(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 purposes 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.]
Every owner of a property has a right to deal with his own property as he deems fit. But the transfer made by the owner
must be Bona-Fide and not a fraudulent one. Section 53 incorporates the principle of equity that does not allow a person to
alienate his property in order to defeat or delay the creditor.
Fraudulent transfer S. 53
Every transfer of immoveable property made with intent to defeat or delay creditors of the transferor shall be voidable at the option of
any creditor so defeated or delayed, and every transfer of immovable property made without consideration, with intent to defraud a
subsequent transferee, is voidable at the option of such transferee. Thus, S.53 deals with two types of fraudulent transfers. The first
part provides that a transfer with the intent to delay or defeat the creditor shall be voidable by the creditor. The second part says that a
gratuitous transfer with the intent to defraud the subsequent transferee shall be voidable by such transferee.
As for the first rule is concerned, when the consideration for transfer and good faith on the part of the transferee is present, the
intention of the transferor to defeat or delay his creditor is immaterial. Thus, S.53 has a limited scope restricted to immovable property
and not to movable property. Moreover, the benefit of this section is not restricted to existing creditors alone, but it extends to
subsequent creditors also. This section does not make the transaction void-ab-initio but only voidable and that too only at the option of
any person defeated delayed or defrauded.
Transfer of Immovable Property: For the applicability of this section, a valid transfer of immovable property is necessary.
This section makes a valid transfer void at the option of the creditor after the property had already been vested in the transferee.
Voidable at the option of Defeated or Delayed Creditor
Every transfer of immovable property, which is made with intent to defeat or delay creditors of the transferor, is voidable at the
option of any creditor, who is so defeated or delayed. Section 53 does not make the transfer void. For example, Bashir is
indebted to Ahmad, and he attempts to sell his house and his intention is to convert his house into cash to defeat Ahmad. And
if Rasheed is aware of Bashir’s indebtedness, but he purchases Bashir’s house, then such a transfer is voidable at the option
of Ahmad.
Rights of Transfer In Good faith and for consideration
Transfer of immovable property, which is made with intent to defeat or delay creditors of the transferor, does not affect the
rights of the transferee in good faith and for consideration. Where the transferee has no knowledge i.e. actual or constructive
notice of the fraudulent intent of the debtor, the creditors cannot avoid the transfer under this sub-section even if they prove
fraudulent intent of the debtor. Knowledge and mala fide intention of the transferee are determining factors. For example,
Bashir is indebted to Ahmad, and he attempts to sell his house, and his intention is to convert his house into cash to defeat
Ahmad. And if Rasheed is not aware of Bashir’s indebtedness, but he purchases Bashir’s house against consideration of ten
lakh rupees, then such a transfer does not affect the rights of Rasheed.
Burden of proof under fraudulent transfer
There is no presumption in law that the transfer was affected with the intent to defeat or delay creditors. The existence of
fraud will not be presumed by the court, it has to be proved. Therefore, when the transfer of property is challenged on
grounds of fraud, the primary onus will be on the petitioner to show how he was connected to the property and how the fraud
has taken place.
Therefore, the primary onus here is on the creditors to prove that the transfer was affected to defeat or delay the debtors. But
once this is proven then the burden shifts on the transferee to prove that he has purchased the property with good faith
and consideration.
Proviso: –
A bona fide transferee who paid the consideration for the transfer has been protected under this section. Bona fide transferee
will mean that the transferee is unaware of or has no knowledge of the fake intentions of the transferor. Knowledge includes
real and constructive notices. If Transferee has constructive notice of fraud, it will be presumed that he knew about the fraud.
Also, the consideration must be the essence of the transfer. The transferee of an unjustified transfer would not be protected.
Intent to defeat or delay: A transfer made with the intent of either defeating or delaying the interest of a creditor is a fraudulent
transfer. The only interest of a creditor in the debtor’s property is that he can recover his money from that property in case the debtor
fails to repay it personally.
The fraudulent intention must be proved by direct or circumstantial evidence and every case must be examined in the light of
surrounding circumstances. However, the following circumstances may give a strong presumption that the transfer was fraudulent:
• The transfer was made secretly and in haste.
• Transfer was made soon after the decree was passed against the judgment debtor.
• The transferor who was indebted alienated substantially the whole property for instance; gift of all properties before attachment.
• The consideration was very small amount in comparison of the value of the property transferred.
• There is evidence that there was no actual payment of consideration as shown in the sale deed.
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, a transfer in favor of one creditor does not amount to an
intention to defeat or delay the remaining creditors. A debtor is entitled to pay debts in any order of preference.
Musahar Sahu v Hakim Lal ((1915) 43 Cal. 521): It will not be fraud if the debtor chooses to pay one creditor and leave
others unpaid provided that he must not retain any benefit.
The facts of this were that creditor Musahar Sahu sued the debtor Kishun Benode for recovery of his debt in December
1900. In January 1901, during the pendency of the suit, the creditor applied for the attachment of the properties of the
debtor before judgment. In February 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 September 1901, he sold his properties to
another creditor, Hakimlil. It was held that although the sale defeated Musahar Sahu, the first creditor, but it was for the
satisfaction of a genuine debt and 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 Section 53.
It was observed that a transfer that defeats or delays creditors is not an instrument that prefers one creditor to another
but an instrument that removes the property from the creditors to the benefit of the debtor.
Representative Suit: Order 1 Rule 8 CPC: A suit instituted by the creditor under this section must be instituted on behalf
of the, 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 the creditors. The purpose of this rule is to protect the debtor from a multiplicity of
suits by other creditors. However, where there are two or more creditors, although a creditor is not entitled to file suit only
for himself but he cannot be compelled to defend such a suit on behalf of all the 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 so by attaching the property transferred. In Abdul Shukoor v. Arji Papa Rao, (AIR 1963
Mad. 682) the Supreme Court observed that attaching the property which the debtor has transferred fraudulently is
sufficient evidence of his intention to avoid the transfer. No separate suit under Section 53 is necessary.
Law Relating to Insolvency
Transfer of immovable property, which is made with intent to defeat or delay creditors of the transferor, does not affect
any law, which is in relation to insolvency and which is in force. The 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.