Fraudulent Transfers 1e5070

Table of Contents Table of Cases

02

Introduction

03

Section 53 & Its Essentials

04

English Law on Fraudulent Transfers

05

Indian Law on Fraudulent Transfers

06

Sham Transfers

07

How Fraudulent Intention in the Transfer Can Be Proved

09

If there are Several Creditors

10

Exceptions to Section 53 (1)

12

Section 53 (2): Gratuitous transfer to defraud subsequent transferee

13

Burden of Proof

13

Conclusion

14

Bibliography

15

1|Page

Table of Authorities Table of Cases:  Twyne’s case.

05

 Edwards v. Harben

05

 Sunder Lal v. Gurusaran Lal

06

 Nath v. Dhunbaiji

06

 Joshua v. Alliance Bank

06

 Jangali Tewari v. Babban Tewari

07

 Petherpermal Chetty v. Muniandi Servai

07

 Immani Appa Rao v. Gollapalhili Rama Lingamurthi

07

 Mina Kumari v. Bijoy Singh

10

 Chogmal Bhandari v. Deputy Commercial Tax Officer, Kurnool

10

 Musahur Sahu v. Hakim Lal

11

 Middleton v. Collak

11

 Vinayak v. Kaniram

12

 Kapini Goundan v. Sarangapani

12

 Chandradip v. Board of Revenue

13

2|Page

INTRODUCTION Every owner of a property has right to transfer his property as he likes. There must be a bonfire intention to transfer. If there is a Fraudulent Intention, the intention of defeating the interest of creditor or interest of any subsequent transferee, the transfer is not valid in the eyes of law. These transfers arise in debtor and creditor relations, particularly with insolvent debtors. The action against such debtors is typically brought by creditors or by bankruptcy trustees. Here in fraudulent transfer, the object of transfer would be bad in eyes of equity and justice though it is valid in law. In some cases fraudulent transfers are valid in law but not void, but because they are made with malafide intention, equity would render it voidable by the person who was so defrauded. This principle of equity has been incorporated in Section 53 of Transfer of Property Act, 1882. This section disallows a person to convey or alienate his property when such conveyance defeats or delays the interest of his creditor or any subsequent transferee.

3|Page

Section 53 & Its Essentials Section 53 deals with the Doctrine of Fraudulent transfers. It provides that:Section 53(1) explains about – 1. Transfers of an immovable property, 2. Made with intent to defeat or delay the creditors of the transferors, 3. Shall be voidable at the option of creditor so defeated or delayed. But the exceptions to the provisions of this sub section area) The rights of a subsequent transferee in good faith for consideration, b) Any law for the time being in force relating to insolvency. Section 53(2) explains about1. Transfer of an immovable property, 2. Transfer without consideration and again transferred to another person, 3. The subsequent transferee may avoid the first transfer.  For the purpose of Section 53(2), if a transfer is made without consideration, it is deemed to be made with intent to defraud.

4|Page

ENGLISH LAW ON FRAUDULENT TRANSFERS The English law regarding the fraudulent transfer is depended upon the Twyne’s1 case. In this case Pierce was indebted to Twyne and also to C. C filed a suit against Pierce for satisfaction of his debt, but when the suit was pending in the court, Pierce who was in the possession of goods and chattels, in secret made a general deed of gift of all his goods and chattels to Twyne, in satisfaction of his debt, without any obstruction that Pierce continued in possession of the goods, and marked them with his own mark. Afterwards C had judgment against Pierce and when his goods were sought to be seized in execution of the judgment, Twyne and others resisted. Here the question arises whether the gift in favor of Twyne was fraudulent, the court held that: 1. The gift had the signs and marks of fraud, because the gift is general, there is no necessity for the donor to do this. For it is commonly said, quod dolosus vesatur in generalibus. 2. The donor continued in possession and used them as his own, so it clearly shows that he had defrauded and deceived the creditor. 3. The gift was made in secret, et done clandestine sunt simper suspiciosa. 4. The gift was made during the pendency of suit. 5. Even after the gift was made, the donor was still in possession and therefore here there was a trust between the parties and the fraud is covered by the trust. 6. The gift deed contains that it was made truly, honestly and bonfire. So in this case we should observe that, even if there was a true debt due to Twyne, but the gift which was made with no consideration and bonfire, and it shall be deemed that a gift made with any trust in favor of donor is considered to be done with fraud. In another case regarding the same issue, Edwards v. Harben2, the judgment was given by Buller,. J. he said if the possession is not followed by deed, it is deemed to be done with fraudulent intent and it is void.

1 2

Reported in 3, coke, 80. 2 Term Rep. 587

5|Page

INDIAN LAW ON FRAUDULENT TRANSFERS Section 53 of TPA as it is originally stood was based on the statutes of Elizabeth. Now, this section is in consonance with that of the English statute. The first part of the section deals with the transfers in fraud of creditors, and the second deals with the fraud of subsequent purchaser. A transfer though it may not offend this section could be still be avoided either under Section 55 of the Presidency Towns Insolvency Act, 1909, or Section 53 of the Provincial Insolvency Act, 1920, and a provision saving insolvency law is introduced in the section. This section is applicable only where the transaction is transfer of property within the meaning of Section 5 of the Act. In the case of Sunder Lal v. Gurusaran Lal3, it was held that relinquishment of share by one co-parcener in favor of other is not a transfer of property within meaning of this section and Section 53 does not apply. Surrender is not a transfer of property, but in the case of Nath v. Dhunbaiji4, the court held that surrender by a life-estate holder is a transfer and it is covered by this section. In the case of Joshua v. Alliance Bank5, a settlement was provided for the appointment and it was found that the appointment was done to defeat or delay the creditors. Therefore observing the facts, the court held that appointment made with reference to the settlement was fraudulent transfer. Naturally a question is arises regarding the Section 53 of TPA, that when the consideration is good in part. If the transfer was for the purpose of delaying or defeating creditors, the transaction will be set aside as there was fraud in it. But if a part of the consideration is utilized for paying off a mortgage debt of the transferor, then either the transfer would be treated as valid to that extent or if the transfer is set aside the vendee is given charge on the property.

3

A.I.R 1938 Oudh 65. (1899) 23 Bom. 1. 5 (1895) 22 Cal. 185. 4

6|Page

SHAM TRANSFERS Sham transfer means fictitious transfer. When the transferor does not intend that the property should be really vested in the transferee, such transfers are therefore unreal or colourable and never meant to operate between the parties. Such transfers are fictitious transfers. Benami transaction is also a sham transfer because the real owner has no intention that property should belong to ostensible owner. It can be clearly explained by the following cases. In the case of Jangali Tewari v. Babban Tewari6, a sham transfer is not a real transfer at all. The intention of the real owner is not necessarily fraudulent. So, such transfers do not require to be avoided because the real title already vests in the transferor. In the case of Petherpermal Chetty v. Muniandi Servai7, a sale deed of land was executed in June 1895 in favor of the predecessor of the appellant. The transaction was a benami transaction, it was not real. An equitable mortgagee of the land sued in September 1895, to establish his lien on the ground that the sale was intended to defraud creditors and obtained a decree by which the equitable mortgagee was paid off and the mortgage was discharged. On the death of the vendor of the land, the appellant, legal representative of the purchaser was sued by the heir of the vendor (respondent in the case) for the recovery of the land. The defence argument was that the plaintiff, on of his participation in the fraudulent attempt to defeat his creditor, was not entitled to recover possession of the land. The court held that:Persons have been allowed to recover property which they had assigned away, where they had the intention to defraud or delay creditors, who, in fact, were never injured. But when fraudulent or illegal purpose has actually been effected by mean of the colourable grant, the legal maxim in pari delicto potior est condition possidentis applies. The court will help neither party. It says let the estate lie where it falls. To enable a fraudulent party to retain property transferred to him in order to effect a fraud must, according to the authorities, be effected. Then alone, does the fraudulent grantor or transferor, lose the right to claim the aid or of the law to recover the property he has parted with. The principle however will not apply in the case if the transferor seeks for possession from the transferee before the fraud is effectuated. In the case of Immani Appa Rao v. Gollapalhili Rama Lingamurthi8, a sale of property was made with the mutual consent of the vendor and the vendee to defraud the creditors of the vendor. There was no consideration and the transferee also agreed to act as a 6

A.I.R 1982 All. 316.. (1907-08) LR 35 IA 98. 8 (1962) 3 SCR 739. 7

7|Page

benamidar until the transferor required him to reconvey the property to his sons. The transferor and his sons tresed and occupied the property, as the creditors were defrauded. The transferor, in defence, urged that the transferee has no rights in the property as the transfer was a fraudulent transfer. So in this case the court observed that:The transferors emphasized that the doctrine which is pre-eminently applicable to the present case is ex dolo malo non oritur action or ex turpi causa non oritur actio. It means they contended that the right of action cannot arise out of fraud or out of transgression of law. According to them it is necessary that the possession should lie where it lies, in pari delicto potior est condition possidentis. The law favors him who is actually in possession in case where there is guilty of fraud on both the parties. The principle of public policy is that no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If the cause of action arises from the plaintiff’s side, the court says that he has no right to be assisted; it is same in the case of defendants. The Court also said that there is no question of estoppels in such a case because the fraud in question was agreed by both the parties and both the parties have assisted each other in carrying out fraud. It also said, in such a cases the transferee would be guilt for liability of double fraud, as he ed transferor ed in the fraudulent scheme and participated in commission of the transfer and he committed another fraud by suppressing from the Court the fraudulent character of the transfer when he made out the claim for the recovery of the properties conveyed to him. The transfer was not ed by any consideration and therefore no title is transferred to him. So in the view of public interests, the Court held that the plea of fraud is allowed and tried and it is upheld that the estate should lie where it rests. Notwithstanding the rights of transferor and a benami transferee, if the transfer was made to defeat the creditors, a creditor himself can ignore a benami transaction and can proceed against the property as it was of the transferor. The creditor need not have to set it aside under this section because, benami transaction is not a transfer at all. We have to note that, whether the transfer is real or sham, it is depended upon the facts and circumstances in each case. If it is clearly shown that the very object of the transfer was to defeat the interest of creditors, the transfer can be avoided by the creditor under this section. But the present scenario is changed. The Benami Transaction Act, 1988 provides that properties purchased in the name of ostensible owner or benamidar shall belong to benamidar and real owner cannot claim from him. This Act now treats benami transfer as a real transfer under which the benamidar becomes real owner. However, Section 3 of this Act says that the provisions of Section 53 of TPA or any law relating to transfers for illegal purposes are not affected.

8|Page

How Fraudulent Intention in the Transfers Can Be Proved Fraudulent intention in transfers must be proved by direct or circumstantial evidence and every case must be examined in the light of surrounding circumstances. Some circumstances that give a strong presumption that the transfer was fraudulent are: 1. The transfer was made in secret and haste. 2. The transfer was made soon after the decree ordering the payment of debt was es against the judgment-debtor. 3. The debtor in the case transferred whole of his property without keeping anything for himself. 4. The consideration paid was very small when compared to the real or original value of the property transferred. 5. Evidence was shown that there was no actual payment of consideration as given in the sale deed. Not only these circumstances, but there are many other circumstances in which inference of intent to defeat or delay creditors may be drawn. So every case is depended upon its own facts and circumstances. It is subject to a matter of fact that the transfer is bonfire or fraudulent.

9|Page

IF THERE ARE SEVERAL CREDITORS If there are several creditors, transfer in favor of one creditor does not amount to an intention to defeat or delay the remaining creditors. It’s upon the debtor’s discretion to pay his debts in any order of his preference. If A has taken loan from B, C and D, transfers certain properties to C in satisfaction of the loan taken from him. This transfer necessarily cannot be considered as a transfer made to defeat or delay the interest of other creditors. It was happened in the case of Mina Kumari v. Bijoy Singh9, the Privy Council held that in the case there are two or more creditors, the debtor can give preference to any creditor and can clear his debts in any order he chooses. Another landmark regarding this context is Chogmal Bhandari v. Deputy Commercial Tax Officer, Kurnool10. The facts of the case were: A partnership of two partners was dissolved in 1963. A ed deed of trust was executed by which the properties were vested in the trustees for purpose of paying off the creditors. Afterwards a business was started by the grandson of one of the partners and some provisional assessments were made his name for the years 1966-1969. In 1971, Sales Tax authorities made the assessments in the name of the t Hindu Family for the first time but found that the tax could not be realized from the assesses on of the Trust Deed, and therefore, treated the Deed as void and fraudulent and contended that the assessments were made to defeat the debts of Sales Tax Department. But in proceedings, these facts were found. It was found there was no assessment made against the t Hindu Family at the time of execution of Trust Deed. Therefore there was no real debt due by from one of the executants of the Trust. There was no intention of use of unlawful purpose by the Trust. In the Trust Deed, the names of the creditors to whom the debts are to be payable were clearly mentioned. The Trustees did not keep reserve any advantage for themselves. It was also found that there was no material to show that the creditors obtained collusive decrees. Here the question arisen before the Supreme Court was that whether this Trust Deed was hit by Section 53 of TPA or not. In this context, Supreme Court held that:Observing the facts and circumstances of the case, it cannot be said that Trust was executed to defraud the creditors, Sales Tax Department. Under the section a person must prove two facts to challenge the transaction. Firstly, the document was executed by settler. Secondly, the said document was executed with a clear intention to defraud or delay the creditors. It is a matter of the fact that intention would be proved on the basis of facts and circumstances surrounding the case. The Supreme Court also held that, it is a well settled that a mere fact that the debtor chooses to prefer one creditor to the either

9

A.I.R. 1916 P.C. 238. A.I.R. 1976 S.C. 656.

10

10 | P a g e

because the priority of the date or otherwise by itself cannot be misleaded that it was done to defeat the other creditors. In Musahur Sahu v. Hakim Lal11, Kisun Binode and Musahur Sahu were the debtor and creditor respectively. Musahur Sahu sued the Judgment-Debtor Kisun Binode for the recovery of his debts in December, 1900. Musahur Sahu presented a petition for attaching the properties of the debtor as a security. This petition was filed in January, 1901, when the original suit was during pendency. In February, 1901, Kisun Binode, the debtor gave an affidavit that he has no intention to attach any property, accordingly the petition for attachment was dismissed. But after the petition was dismissed, Kisun Binode sold his properties to Hakim Lal who was another creditor of him. Then Musahur Sahu, pleaded that the transfer to Hakim Lal were done do defeat or delay his interest and therefore it should be held void under Section 53 of TPA and the properties should not be given to Hakim Lal. In this case, the appeal was dismissed by the Privy Council, and held that transfer of property by a debtor to one creditor in preference of the other is not a fraudulent transfer with the intent to defeat or the delay the interest of another creditor. The Lordships observed in the case Middleton v. Collak12, the transfer if defeats or delays the creditors is not an instrument which prefers one creditor to another but an instrument which removes a property from the creditors to the benefit of the debtor. The debtor must not remain any advantage or benefit for himself. He may one creditor and leave another unpaid. The court further observed that as soon as it is found that the transfer here impeached was made for adequate consideration in satisfaction of genuine debts, and without retaining 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 a payment being made to this preferred creditor, there is no question being bankrupt.

11 12

(1915) LR 43 IA 104. (1876) 2 Ch D 104.

11 | P a g e

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

A transferee in good-faith and consideration: A transferee is protected if he takes property in good-faith and consideration. When a transferee purchases a property in good-faith and consideration, the creditors cannot take benefit of 53(1). Where a transferee has no knowledge i.e. no actual or constructive notice of the fraudulent intention of the transferor, the creditors cannot claim the property or avoid the transfer under Section 53(1). But if the transferee is aware of the fraudulent intent an aim and keeps silent, it is not be done in good-faith and cannot get the benefit of this exception. In the case of Vinayak v. Kaniram13, the transferor’s intention was to convert his immovable property into cash so as to keep it out of reach of the creditors and the purchaser was aware of that intention of the debtor. The Court held that the purchaser was also a party to fraud as he was aware of that fraudulent intention and sale was voidable at the option of the creditors. In Kapini Goundan v. Sarangapani14, 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 case, the Madras court held that the consideration was good and the transfer was not on the basis of fraudulent intention to keep it away from creditors. It should be noted that this decision must be regarded as only an exception and should not be regarded as a general rule. Therefore, good-faith on the part of transferee is more significant factor in protection of rights of the transferee than payment of consideration.

Any law relating to insolvency for the time being in force: The rights of the transferee created under the law of insolvency are not affected by Section 53 even if the transferor’s intent was to defeat or delay the creditor’s interest. The main aspect of the insolvency laws is that the properties of the insolvent are equally distributed between the creditors. If one creditor is given preference, then it is deemed to be a fraudulent transfer under this section. Where the transferor (debtor) has been 13 14

A.I.R. 1926 Nag. 293. (1916) Mad. W.N. 288

12 | P a g e

declared insolvent, and the transferee purchases such property from him, the transfer cannot be avoided by creditors. In such cases, the Insolvency Courts are competent here to decide whether the transfer was voidable under Section 53 of TPA.

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. This section explains about the situation where an immovable property is transferred to person without consideration and the same property is again transferred to another person. So the subsequent transferee has advantage under this section where he can avoid the first transfer. But in this case the subsequent transferee should prove that the first transfer was a sham or fictitious transfer made to defraud him. The general rule is that the first transfer has advantage or preference over the second and so on, but if the subsequent transferee proves that the first transfer was fraudulent and it was made to defraud him, the later transfer would stand valid. It should be noted that this section only protects the interest of the bonafide transferee and the transfer should have some value (consideration). The mere fact that the first transfer was gratuitous and the later transfer was for consideration does not essentially raise the presumption that the prior transfer was made to defraud. Fraud in the prior transfer must be fully established by the subsequent transferee. Under Section 53, the Wakfnama would be voidable only at the option of the person who was defrauded or delayed. An important fact should be noted that this section does not violate the rule of Muslim Law.

BURDEN OF PROOF The burden of proof lies on the creditors of the transferor to show that the transfer was made to defeat or delay the interest of the creditor. In the case of Chandradip v. Board of Revenue15, the onus to prove the fraud lies on the person alleging it. But it may be noted that the burden to prove the intention would largely depend upon the facts and circumstances of each case.

15

A.I.R. 1978 Pat 148.

13 | P a g e

CONCLUSION Section 53 of Transfer of Property Act, 1882 deals with “Fraudulent Transfers”. This section has two sub sections. The first part of this section deals with the transfer made to defeat or delay the creditors of the transferors and it is voidable at the option of such creditor. The second part deals with the gratuitous transfers with intent to defeat or delay the creditors. This section has some exceptions in respect of the transfers done towards the transferee in good faith and consideration. But if the transfer is a gift towards the stranger, then the good faith is irrelevant. The rights of the transferee created under the law of insolvency are not affected by Section 53 even if the transferor’s intent was to defeat or delay the creditor’s interest. The basis of the section is that one ought to be just before being generous. This section was made to disallow a person conveying the properties to keep it away from the creditors. In my opinion, the laws regarding fraudulent transfers must be made stricter and such transferors or transferees who committed fraud must be penalized for committing fraud.

14 | P a g e

BIBLIOGRAPHY BOOKS  Dr.G.P.TRIPATHI ON THE TRANSFER OF PROPERTY ACT, (16 th EDITION, 2009).  S.N.SHUKLA ON THE TRANSFER OF PROPERTY ACT, (27th EDITION, 2009).  MULLA ON THE TRANSFER OF PROPERTY ACT, (10th EDITION, 2006).  Dr. POONAM PRADHAN SAXENA, PROPERTY LAW, (2nd EDITION, 2011)  Dr. AVTAR SINGH, TEXT BOOK ON THE TRANSFER OF PROPERTY ACT, (2nd EDITION, 2009) STATUTES  TRANSFER OF PROPERTY ACT, 1882.

.

15 | P a g e