FRAUDULENT

TRANSFERS
C

POOJA OGALE
RAMAIAH COLLEGE OF LAW
BANGALORE
• Every owner of the 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 the fraudulent intention e.g. with the intention of defeating
the interest of creditor or interest of creditor or interest of any subsequent transferee it is known as a fraudulent
transfer.
• Where the transfer is made with a fraudulent intention, the object of 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 the mala
fide intention, equity would render it voidable by the person who was so defrauded.
• Equity therefore does not allow a person to alienate his own property when such alienation tends to delay or defeat
the interest of his creditor or any subsequent transferee.
• The principle of equity has been incorporated in Sec 53 of the TP Act.
• For instance, A is the owner of a house. He takes a loan of Rs 10000/- from B. Thus A is debtor and B is a creditor.
House is the only property through which B can recover his loan. 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 fraudulent transfer and is voidable by B whose interest
has been defeated.
Sec 53 Fraudulent Transfers
• The Section provides that-
i. Transfer of an immovable 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
Characteristics of Fraudulent Transfers
• The essential conditions for the applicability if Section 53 (1) are
1. There is transfer of immovable property
2. The transfer is fraudulent i.e. mode with an intent to defeat or delay the creditors of the transferor.
When the above- mentioned conditions are fulfilled the transfer of property is avoidable by the creditor or
creditors whose interest has been defeated or delayed.
Transfer of immovable property
• There must be a valid transfer of immovable property.
• For the 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 in the cases where the transfer is in itself is void.
• This section makes a valid transfer void at the option of the creditor after the property had already vested in
the transferee.
• The suit under this section must accept the validity of the transfer first and then proceed to get it invalidated if
it is proved to be fraudulent.
• In other words the transfer under this section must be perfectly valid till it is declared void under this section
by the defrauded creditor.
• This section is applicable only where the transaction is a transfer of property within the meaning of Section 5
of the Act.
• Sunder Lal v Gurusaran Lal: Relinquishment is not coming under the aspect of transfer of property.
Therefore relinquishment of share by one co-parcenor in favour of the other is not transfer of the
property within the meaning of this section and Sec 53 is not applicable in those cases.
• This section is not applicable to the cases of surrender. (Nath v Dhunbhaiji).
• Dissolution of partnership is also not regarded as a transfer, therefore a deed of dissolution of partnership
was not held as transfer and this section was applied. (Ishwar Dass Hem Raj v Radha Mal Arjan Dass)
• Partition and family settlement are not transfer under this Act. Therefore this section may not apply to the
partition or family settlement. However, if the object of partition is merely to defraud creditors it may be
regarded as transfer under this section. Where a partition was made not as normal allotment of shares in
the 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 thereby that share was placed beyond the reach of creditors, the partition was held
as a fraudulent transfer. (Vinayak v Moreshwar)
Sham Transfers
• Sham transfers 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 the name’s sake i.e. in the name of transferee.
• Benami transaction is also a sham transfer because the real owner has no intention that property should
belong to ostensible owner.
Fraudulent Transfer to defeat or delay
creditor
• The transfer which can be avoided by the creditor under this section must be with an intent to defeat or
delay the interest of the creditors of the transferor. In other words, the transfer is made with the sole
object of defeating or delaying the interest of creditors rather than to give the property to transferee
honestly.
Fraudulent intention must be proved by direct or circumstantial evidence 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 is made secretly and in haste.
ii. The transfer was made soon after the decree was passed against the judgement-debtor.
iii. The transferor who was indebted alienated substantially the whole property e.g. 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.
The above are certain circumstances in which inference of intent to defeat or delay creditors can be drawn. Every
case will be evaluated as per its own facts and circumstances.
Exceptions to Sec. 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,
Sec 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 person.
• Under this sub section the subsequent transferee may avoid fictitious or sham transfer and was made with a
view to defraud him
• For example; 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 C are two claimants over 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.
• Therefore this sub section protects the interest of a bona fide transferee for the value from a fraudulent
gratuitous transfer made earlier (Firm Mansingh v B. N Sinha)