Section 53 (Transfer of Property Act), Fraudulent Transfer: A Brief Overview

 

Section 53 (Transfer of Property Act), Fraudulent Transfer: A Brief Overview

Bare Law:

Fraudulent transfer.—

1. Every transfer of immoveable 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 immoveable 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.]

Bare Law Explanation

The bare law of this section has two parts- subsection 1 and subsection 2.

Subsection 1 explains a scenario where a person transfers his immovable property with the fraudulent intention to defeat or delay his creditors. Supposing, I owe credit to some people that I cannot pay back, and I fear that very soon my creditors would bring a suit against me, and the court would award them a decree to sell one or more of my immovable properties to pay for the debt owed by me. To prevent this from happening, I transfer my immovable property to someone close to me, to deny my creditors the price that could have accrued to them through its sale. All transfers of immovable property of the sort described in the foregoing are fraudulent; and, voidable at the option of the creditors to whom I owe money.

However, section 53 (1) also protects a person who buys a property without notice or knowledge that creditors already have claims over it. If it can be proven that the transferee bought the property in good faith and for a good price, and he was not aware of the creditors’ claim on it, then such a transfer cannot be declared void.

There is a further added proviso that nothing in this section has any effect on the existing laws relating to insolvency.

And, the last proviso to 53 (1) says that if one creditor initiates a legal suit to prevent the kind of transfer of immovable property described above, then such a legal suit is considered to have been initiated on behalf of, and to the benefit of, all the creditors affected by it.

Subsection 2 deals with fraudulent transfers made without consideration   (made for free) with the intention of denying a subsequent transferee his claim over the property. 

Supposing, I transfer my immovable property to a son, and then later sell the same property to a person ‘Z’ for a good price; the prior transfer would be voidable at the option of ‘Z’. Provided that Z is able to prove that my prior transfer to my son had been made with the intention of defrauding him.

For this section to be brought into effect, there must be a bona fide transfer of property as per section 5 of the transfer of property act: i.e. a living person must convey property in present or in future to another living person. This section becomes applicable only if there is a valid transfer that confers a good title on the transferee.

In Dolai Maliko v Krushna Chandra Patnaik, 1967, the Supreme Court decided that only legally valid transfers of property fall within the ambit of section 53. If the transfer is nominal, sham or simulated, then this section does not come into effect, as there was no real transfer of property.

The surrender or relinquishment of one’s interest in an immovable property is not regarded as a transfer of property, however, in Natha v Dhunbaiji, 1899, it was held that surrender by a life-estate holder may be considered to be a transfer under this section if its express purpose was to commit fraud upon creditors.

Partition of family property and other settlements of the like nature are generally not considered to be a transfer of property, however, if the purpose of such partition is only to defeat or delay legitimate creditors, then the provisions of section 53 Transfer of Property are attracted.

As per the provisions of this section, the word ‘creditor’ has a broad scope. It was held in Ram Das v Debut,1930, that the term ‘creditors’ includes such claimants as well who became creditors subsequent to the date of fraudulent transfer.

It must be kept in mind though that the mere fact of transferring immovable property without consideration is not enough to conclude that it was done to delay or defraud creditors. Possibly the person making the transfer has more property which is enough in value to pay back his creditors. Therefore, courts look into the concrete facts and circumstances of the case to ascertain whether any fraud was committed- ‘Did the debtor sell off his entire property, keeping nothing for himself? Was the deal performed secretly? Whether the purpose of the transfer was to render the property out of reach of persons who would become his creditors at some future date.  And generally, whether, after making such transfer, the debtor is left with assets enough to pay back his creditors.’ These are some of the questions that courts look into while applying section 53 of the transfer of property act.

What if the property transferred is meant to satisfy one of the creditors, to the exclusion of the rest? Dealing with this question, in Musahar Sahu v Hakim Lal, 1915, the Privy Council held that there is nothing in the law to prevent a debtor from paying one of the creditors in full and leaving other creditors unpaid. A similar situation arose in Mina Kumari v Bejoy Singh, 1916- In this case, the creditor applied to the court and obtained a decree for the attachment of the debtor’s property. However, before the property could be attached and sold for the satisfaction of the debt, the defendant sold it to another person, to whom he owed a debt and was related through the ties of blood. In this case again, in line with the judgment of Musahar Sahu v Hakim Lal, the court held that while it was true that the debtor had given preference to a debtor who was his relative, the transfer did not become fraudulent for this reason alone. There is nothing in this section that bars a debtor from giving preference to one of his creditors over others. So long as the transfer is not calculated to benefit the debtor in some ulterior manner, he is at liberty to pay one creditor and leave another unpaid.