FRAUDULENT TRANSFER VIS A VIS TRANSFER OF PROPERTY ACT, 1882

#FraudulentTransfer

Under section 53 of the transfer of property act, 1882 the term ‘FRAUDULENT  TRANSFER’ has been defined.  

It states –  

1. Every transfer of immovable property with intent to defeat or delay  creditors of the transferor shall be voidable at the option of any creditor so  defeated or delayed.  Neither this section shall impair the rights of a transferor in good  faith and for consideration nor it 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 his decree) to avoid a transfer o 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 purpose of this subsection, no transfer made without consideration  shall be deemed to have been made with intent to defraud by the reason  only that a subsequent transfer for consideration was made.  

Fraudulent transfer basically has TWO PARTS which is needed to be  understanding i.e. 

A. Firstly, the part one says that every transfer of immovable  property with intent to defeat or delay the creditors of the transferor shall be  voidable at the option of any creditor so defeated or delayed.  

B. 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 such transferee, but no  

presumption to defraud shall necessarily be arise on the reason that a  subsequent transfer for a consideration was made.  

Section 53, while safeguarding the rights of transferee in good faith and for  the consideration, empowers the creditors to avoid any transfer of  immovable property made by the debtor with intent to the defeat or the  delay the creditors. It however requires that such a suit must be instituted  either in a representative capacity or for the benefit of all the creditors at  present.  

The basic conditions for the applicability of section 53 is stated as follows – 

1. There should be transfer of immovable property .  

2. The transfer ought to have been made with intent to defeat or delay the  creditors.  

3. The suit must be brought by the creditor, acting on behalf of or for the  benefit of the entire body of creditors.  

Exception:

 A transferee from such debtor will be protected -- 

1. if he acquires property for value in good faith without the knowledge of transferor's intention.

2.   If he himself is a creditor and the transfer is made in satisfaction of his pre-existing debt.

If the creditor established that transfer was made with the object of defeating him, the shifts on the transferee to prove -

 1) that he had paid a fair price, and

 2) That he was not a party to the fraud.  

The intention must be to defeat or delay the creditors. Such intention can be  provided only by the circumstantial evidence be present . The evidence require to substantiate fraud  must necessarily vary according to the circumstances of each case. The mere fact  that the transfer made without consideration will not necessarily lead to an  inference that the transfer was made with the intention of defrauding the creditor. 

The following factors may be relevant to the conclusion that the transaction must  not be bona fide –  

1. The debtor sells his property keeping nothing to himself.  

2. The condition is grossly inadequate  

3. The transfer is made secretly and in an unclear manner .  

4. The transfer put all the property out of the reach of those who might  become his creditors before embarking on some hazardous enterprise.  

It must, however, be noted that when the person acquires property for value and in good faith , means without being a party to any design on the part of the  transferor’s intention might have been fraudulent.  

In fact whenever section 53 has been applied, it is the transferee who in the end suffers as he knew of the fraudulent intention of the transferor. The  knowledge and the intention of the transferee are the main factors. In cases where the substantial portion of the transaction is fraudulent and the fraudulent and not fraudulent portions cannot be separated, then the whole transaction would become voidable.

There is no presumption in law that the transfer was effected with the intention to defeat or delay the creditors. The existence of fraud would not be presumed by the court, it has to be proved by the evidence be presented before the court. So, when the transfer of property is challenged on the grounds of fraud then the primary focus is on the petitioner to show how he was connected to the property and  how has the fraud taken place.  

Hence, here the primary part is on the creditors to prove that the transfer was affected with the intention to defeat and delay the creditors. But once it has been proved then the burden shifts on the transferee to prove that he bought the property in good faith and consideration.

Written By Mr. Dhruv Kapoor, 4th Year Law Student, Fairfield Institute of Management and Technology, Delhi.