Fraudulent Transfer

What is Fraudulent Transfer under Transfer of Property Act?

Meaning of Fraudulent Transfer: – Fraudulent Transfer means the illegal transfer of property to defraud creditors. 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. To constitute a fraudulent transfer there should be an intention to hinder the creditor from his equitable and legitimate rights. Where the transfer is made with a fraudulent intention, it means intending to defeat the interest of the creditor or interest of any subsequent transferee. Where the transfer is made with a fraudulent intention, the object of the transfer would be bad in the eyes of equity and justice, though it is valid in law.

Section 53 of the Transfer of Property Act, 1882 talks about fraudulent transfers. Fraudulent Transfer in general parlance, therefore, refer to transfers which are made with an intention to defraud. Thus a fraudulent transfer arises in a creditor-debtor relationship. In the fraudulent transfer, the property is put out of reach of the creditor so that the creditor is delayed from satisfying his debt.

For example: When ‘A’ transfers his property to ‘B’ without giving him his ownership of the property with the intention to keep his assets out of reach of his creditor, such a transfer is called a fraudulent transfer.

A fraudulent transfer of property gives rise to a civil cause of action. The court may set aside a fraudulent transfer at the request of the defrauded creditor.

Fraudulent Transfer

The Transfer of Property Act deals with fraudulent transfers under Section 53; “Fraudulent Transfers: – 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.

The law stipulates that all cases of such fraudulent transfers, are voidable at the option of the party so defrauded (the creditors or the subsequent transferee). The Section incorporates the common law principle of equity, justice and good conscience as it attempts to prevent defeat of legitimate claims of creditors or transferees.

Since the Act makes all such cases voidable at the option of creditors/transferees, the burden to prove such fraudulent conduct or intent initially lies on the creditors. Once, facts are proved sufficiently to show prima facie the intention of the debtor to defeat or delay the creditors, the debtor is required to make his case and explain the facts.

Objective behind the Doctrine of Fraudulent Transfers

Section 53 is attracted in cases wherein any transfer of property, which is immovable in accordance with the relevant sections of The Transfer of Property Act, 1882, is done with the design or scheme to fulfil the objective of defrauding his creditors in a manner that they are defeated or delayed.

It was such practice that compelled the legislature to enact this section. Their objective was to lend protection to creditors who are those to whom the transferor owes some sort of liability which is financial in nature. The basic objective is to lend a blanket to such people who suffer in the nature of delay or defeat of their interest. Such people whose mere fault was to lend money to the ill-intentioned transferor must be provided some kind of security- one which only the legislature through legal policy can provide.

What are the essentials of Fraudulent Transfer under Transfer of Property Act?

The essentials of Fraudulent Transfer under Transfer of Property Act are as follows: –

  1. Transfer of the property done by the transferor
  1. It should be immovable property
  1. The transfer is done without consideration
  1. The transfer is done with the intention to defraud a subsequent transferee and with intention to defeat or delay his creditors
  1. Such transfer is voidable at the option of the subsequent transferee.

Exceptions of Fraudulent Transfer under Transfer of Property Act are: –

  1. Acted in good faith, and
  2. The transfer was for consideration.

Framing of suit under fraudulent transfer

Privity of contract is followed which means that only the parties to the contract can sue. Hence, no third party can sue on the creditor’s behalf who is not a party to the suit. The suit is instituted by the creditor on the ground that the transfer is made to defeat or delay the creditors of the transferor.

The suit is instituted in the representative category or for the benefit of all creditors. This is to avoid a multiplicity of suits against the same opposite party/parties on the same subject. Dismissing a creditor’s lawsuit would be binding on all creditors.

Fraudulent Transfer

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.

Burden of proof with respect to showcasing whether the transfer was made possessed with the intention aimed to delay or defeat the creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature lies on such people to whom the transferor owes some kind of liability which is financial in nature i.e., the creditors. This is so since they are the ones who can actually prove whatever delay, defraud or defeat they suffered at the hands of the ill intentioned transferor.

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.

Case laws

  1. Kanchanbai vs. Moti Chand, AIR 1967 MP 145

In this case, the court observed that the phrase creditors would also include a single creditor. The clause would be attracted even if a single creditor was defrauded or intended to defraud only a single creditor. Here the transfer was made to fail and delay the creditor’s claim. Therefore, section 53 would be applicable.

  1. Dr Vimla vs. Delhi Administration AIR 1963 SC 1572: – 1963 Supp (1) CR 585

In this case, the Supreme Court observed that the term defraud involves 2 elements i.e., Deceit and Injury to the defrauded person. The injury does not only mean economic loss. It also includes deprivation of property or money and includes harm caused to body, mind, and reputation to a person.

Leave a Reply