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AMITY LAW SCHOOL

PROPERTY LAW
On
Fraudulent Transfer

Guided by :- Submitted by :-
Dr Ruchi Lal Tanushree Singh
Roll no. 7225
Section D

SECTION 53: - FRAUDULENT TRANSFER

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INTRODUCTION
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This section. while safeguarding the rights of transferees in good faith and for con-
sideration empowers the creditors to avoid any transfer of immovable property made by
the debtor with intent to defeat or delay the creditors S. 53 is not exhaustive and therefore
the principle of the section would apply in cases of fraudulent transfers even jf the section
may not apply in terms. The provisions of S. 53 must be strictly construed.
The basic requisites for the applicability of S. 53 are:-
(i) there should be a transfer of immovable property;
(ii) the transfer ought to have been made with intent to defeat or delay the creditors;
and
(iii) the suit must be brought by the creditor, acting on behalf of or for the benefit
of the entire body of creditors, for avoiding such transfer.
Under S. 53 of the T.P. Act a person who challenges the validity of the transaction
must prove two facts- (I) that the document was executed by the settler; and (2) that the
said document was executed with clear intention to defraud or delay the creditor. How the
intention is to be proved is a matter which would largely depend on the facts and circum-
stances of each case.

Under Section 53 of the Transfer of Property Act a person who challenges the va-
lidity of the transaction must prove two facts-(l) that a document was executed by the set-
tler; and (2) that the said document was executed with clear intention to defraud or delay
the creditors, that the purchaser did not acted in good faith.

The primary requirement for the applicability of this section is the existence of a
valid transfer. Where it is claimed that the transfer made by the debtors was a sham and
fictitious transaction and there was no animus transfer end i.e. when the real intention of
the parties was not to give effect to the supposed transfer at all and it was merely to be used

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as a shield or a facade for achieving some ulterior purpose, Section 53 cannot legitimately
be taken aid of. S. 53; presupposes a transfer, which is prima facie valid and operative. If
the sale is valid ab initio, and does not exist in the eye of law, a creditor need not bring any
suit for avoiding it. Policy of law always has been to frown upon all attempts at fraudulent
transferors. While law favours exchange of property as a natural right of a person to deal
with it in a normal manner, the law has always set its face against this privilege being
abused to the detriment of the innocent public. Creditors inclusive, who had dealt with
transferor on the faith of the security of their debtor. Any attempt by the debtor to withdraw
his assets from the control of his creditors threrefore, has always received just condemna-
tion by the courts of law who have compelled the debtor to make good the representation
on the faith of which presumably he had obtained credit. In such circumstances, the courts
have never been loath in setting aside such transactions. Before Section 53 of the Transfer
of Property Act can be applied, the creditor plaintiff must come to the Court in the premise
that although the transaction was genuine and effective, yet it was entered into with intent
to delay or defeat the creditors. It is only to such cases that Section 53 will in terms apply.

S. 53 speaks of fraudulent transfers i.e. real transactions, it does not apply to sham
fictitious transactions. Where the sale deed specifically recited that the entire sale consid-
eration had been received by the executants before the execution of the deed, the deed
could not be said fraudulent deed. Where in execution of a fraudulent decree possession
had already been delivered to the auction purchaser, creditor's suit for declaration that the
decree and all the proceedings in execution were null and void was otherwise maintainable
apart from the provisions of S. 53.

TRANSFER

SECTION 53: - FRAUDULENT TRANSFER

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The transfers referred to in this section are transfers binding between the parties,
but voidable in the circumstances stated in the section. A document made to defeat or to
delay his creditors is binding on the executant, and those claiming under him. The transfer
is valid until it is set aside, and must not be confused with benami or colorable transfers
which are merely sham transfers, and not meant to operate between the parties. In the
collusive or benami transactions there is no transfer, but the property is merely put in a
false name, and generally for the purpose of defrauding creditors. As observed by Sir Law-
rence Jenkins in Mina Kumari v Bijoy Singh, the difference is distinct though it is often
blurred. Such colorable or sham deeds do not require to be set aside, for the real title is all
along with the transferor. They are outside the scope of the section. It is relevant to note
that a contention that the transaction is a sham and nominal transaction, and that the prop-
erty was never conveyed at all, and remained the property of the original owner, may go
even contrary to the contentions raised that are based upon S 53 of the TP Act. If the con-
tention that it is a sham and nominal transaction is accepted, S 53 may not have any appli-
cation. In fact, the challenge based on S 53 involves the admission that the transfer is a real
one.
Transfer includes a sale; a grant under a 1ease including a lease created by a mort-
gagor transfer by way of a Mortgage or one by exchange or an oral gift under Muslim law.
Any transfer made with the permission of the court and in accordance with the terms im-
posed by it will not be subject to the rule of lis pendens.

FRAUDULENT TRANSFER

Section 53: - Fraudulent transfer.-(l) 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.

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 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 immovable 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.

This section consists of two parts. The first part lays down that every transfer of im-
movable 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 take one illustration,
A, who is heavily indebted, and against whom a suit for the recovery of debts is going to
be filed, sells his house to B to save it from being attached and sold in payment of the
debt. If B knows of A's fraudulent intention, the sale to B is liable to be set aside at the
option of the creditors. It will be seen that the rights of a transferee in good faith and for
consideration are not affected even though the transfer is made with intent to defeat the
creditors.

The 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 voida-
ble at the option of such transferee, but that no presumption to defraud shall necessarily
arise by reason only that a subsequent transfer for consideration was made.

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Section 53, while safeguarding the rights of transferee in good faith and for consider-
ation, empowers the creditors to avoid any transfer of immovable property made by the
debtor with intent to defeat or 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.

The basic requisites for the applicability of Section 53 may be stated to be: (i) there
should be a transfer of immovable property; (ii) the transfer ought to have been made with
intent to defeat or delay the creditors; and (iii) the suit must be brought by the creditor,
acting on behalf of or for the benefit of the entire body of creditors. The primary require-
ment for the applicability of the section, therefore, appears to be the existence of a valid
transfer. Where it is claimed that the transfer made by the debtor was a sham and fictitious
transaction and there was no animus transferendi, i.e. when the real intention of the parties
was not to give effect to the supposed transfer at all and it was merely to be used as a
shield or a facade for achieving solve ulterior purpose, Section 53 of the Transfer of Prop-
erty Act cannot legitimately be taken aid of. Policy of law always has been to frown upon
all attempts at fraudulent transfers. While law favours exchange of property as a natural
right of a person to deal with it in a normal manner, the law has always set its face against
this privilege being abused to the detriment of the innocent public, creditors inclusive,
who had dealt with the transferor on the faith of the security of their debtor. Any attempt
by the debtor to withdraw his assets from the control of his creditors, therefore, has always
received just condemnation by the courts of law who have compelled the debtor to make
good the representation on the faith of which presumably he had obtained credit. In such
circumstances, the Courts have never been loath in setting aside such transactions. Before
Section 53 of the Transfer of Property Act can be applied, the creditor plaintiff must come
to the Court in the premise that although the transaction was genuine and effective, yet it
was entered into with intent to delay or defeat the creditors. It is only to such cases that
Section 53 will in terms apply.
Every transfer of immovable property made with intent to defeat or delay the cred-
itors of the transferor will be voidable at the option of any creditor so defeated or delayed.
A suit instituted by a creditor, which term includes a decree-holder whether he has or has

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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 must be instituted on
behalf of or for the benefit of, all the creditors. Thus, a marriage settlement, a deed of
appointment', a surrender of a life estate, a relinquishment6, a collusive award or decree is
voidable at his option but not a deed of dissolution of partnership with intent to defeat the
creditors.

CONTINGENCIES OF FRAUDULENT TRANSFER

Presumption of fraudulent intention:

The existence of a fraudulent intent has to be proved and would not be presumed
by the court. Each case has to be decided on its own merits, but where the transferee was
in embarrassed circumstances and the transfer is between near relations or members of a
small community; or the transfer was a cover up primarily to retain the benefit for the
transferor unless the benefit is very small, these would be evidences of fraudulent intention
but merely because the transfer was without considerations; or was for discharge of a bona
tide debt in accordance with family policy or was to a female descendant in absence of
present debts would not indicate fraud.

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Intent To defeat or delay creditors:

The intention must be to defeat or delay the creditors generally, that is, all the
creditors or even a single creditor but a mere preference of one over the other creditor is
not enough for the application of this rule unless the transferee shares a fraudulent inten-
tion" or it is with the intention to defeat a particular creditor’s interest , Where the price
realised from one of the creditors is considerably in excess of the debts or where a fictitious
debt is included in the consideration or where more property is transferred than necessary,
it is an evidence of an intent to defeat the creditors generally The mere fact that a portion
of the property is transferred is immaterial unless there is cogent proof that there is other
property left which is sufficient in value and easily available for the creditors. Inadequacy
of consideration may not itself be sufficient to make the transaction voidable.
Such intention can be proved by circumstantial evidence. The evidence required to
substantiate fraud must necessarily vary according to the circumstances of each case. The
mere fact that a transfer is made without consideration will not necessarily lead to an in-
ference that the transfer was made with the intention of defrauding the creditor. The fol-
lowing factors may be relevant to a conclusion that the transaction is not bona fide-
(i) the debtor sells all his property keeping nothing to himself; (ii) the consideration
is grossly inadequate;
(iii) the transfer is made secretly and in haste;
(iv) the transferor puts all his property out of the reach of those who might become
his creditors before embarking on some hazardous enterprise.
But each of the above factors must be considered along with other circumstances
of the case. However suspicious a transaction may be, there must be cogent evidence of
fraud. The mere fact that debts are due from the transferor is not by itself sufficient to
establish a fraudulent intention.
It must, however, be noted that if a person acquires property for value and in good
faith, that is, without being a party to any design on the part of that transferor to defeat or
delay creditors, his rights will not be affected although the transferor's intention might have

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been fraudulent. In fact, whenever Section 53 is applied it is the transferee who ultimately
suffers provided he knew of the fraudulent intention of the transferor. The knowledge and
intention of the transferee are the main factors. In Palamalai v. The South Indian Export
Co., A being in financial difficulties wished to convert his property into cash so as to con-
ceal it from his creditors. B being aware of A 's object assisted him by purchasing the
property. The sale was voidable under this section.
In order to take out the case from the operation of Section 53, it is, however, essen-
tial that the debtor must not reserve any benefit for himself. If the debtor sells property to
another creditor to discharge the debt due to him and the price obtained is considerably in
excess of the debt discharged, this would be evidence of intent to defraud.
The terms of Section 53 (1) are satisfied even if the transfer does not 'defeat' but
only 'delays' the creditors. Therefore, the fact that the entire property of the debtor was not
sold, does not by itself negative the applicability of Section 53 (1) unless there is cogent
proof that there is other property left sufficient in value and of easy availability to render
the alienation in question immaterial for the creditors.

Transfer partly for genuine consideration and partly fraudulent:

Where in a transfer, two considerations are stated one of which is valuable and sep-
arable from the other, effect will be given in the instrument to the exact amount of con-
sideration which is valuable and to the extent the transaction cannot be regarded as fraud-
ulent out where a substantial portion is for fraudulent intention or the two parts are not
separable, the whole transaction would be voidable.

Applicable as Rule of Justice, Equity and Good Conscience:

The principle of s 53 has been adopted in the Punjab where the TP Act was not in
force, and was also followed in Bombay before the TP Act was extended to that Presidency.
It has, however, been held that the requirement that any suit filed to set aside a fraudulent

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transfer must be a representative suit, will not be insisted upon in Punjab as that is a mere
technicality.
Creditor:
The word 'creditor' has been used in this section in somewhat wide sense.
Thus, it includes all those who are creditors at the date of transfer as well as those
who become creditors subsequent to the date of fraudulent transfer. Further, it includes not
only those creditors who have obtained decrees, but also those whose claims have yet to
be proved in a Court. On the other hand, a person who claims an unliquidated sum for
damages for tort or breach of contract is not a creditor, nor a person whose claim for a debt
has become time-barred.

Partition:
This section has been applied to cases of partition. The correctness of these deci-
sions was a question canvassed before the Supreme Court in Sarin v. Poplai, but the Su-
preme Court declined to go into the question. The correct view, it is submitted, is that a
partition is not a transfer, and, therefore, not strictly within the Section, but that the princi-
ple of the Section applies to a fraudulent partition. Where the object of the transfer is not
merely to give a sharer his rightful share in the family property, but to effect the partition
in such a way that such sharer would be able to defeat the creditors, as for instance, to allot
to him properties which the creditors would not be able to touch and which he would be
able to keep for himself, it is clearly a transaction which fulfills the requirement of the
Section. A reference to arbitration which led to an award and decree for partition by which
the father received an allowance in lieu of his share in the family property, was held not to
be voidable under this section as there were no debts in existence at the time of the refer-
ence, and as the object was not to defeat creditors, but to safeguard the interests of a minor
son. A partition which does not provide for the payment of a Hindu father's debt is mala
fide, and may be avoided by a creditor in proceedings in execution of a decree against the
father. Similarly, in a partition in which no property was allotted to the father who was
indebted, it was held that the partition was illusory, although the sons were directed to pay

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the father's debts. Where there is partition in a joint Hindu family or a release deed by an
indebted coparcener, S 53 is attracted, if the object of the allotment of share to such copar-
cener is to help him defeat his creditors. Even assuming that partition in a Hindu family
and release deed by a coparcener in respect of his share does not amount to a 'transfer'
within the meaning of S 5 and, therefore, is not within the purview of s 53, the principle of
the section can be invoked. If the object of a given instrument of a partition or a release
deed is not to give a sharer his rightful share in the family properties, but to effect a partition
in such a way that such a sharer would be able to defeat the creditors, it would amount to
a fraudulent partition.

Waqf:
A deed of waqf executed as a device to put property out of the reach of creditors has
been held to be a transfer to which this section applies, the court observing that S 53 does
not infringe any rule of Mohammedan law, for under that law no person can make a waqf
of his entire property without making arrangements for the payment of his debts. In such a
case, it is immaterial that the transfer is valid under Mohammedan law. It is open to a debtor
to prefer one or more creditors over the others in the payment of his debts, and so long as
he retains no benefit in the property, the mere circumstance that some creditors stand paid
while others remain unpaid, does not attract the provisions of S 53.
Where it was found that the sale of the assets of the company was effected for the
purpose of discharging the debts payable by the company and that the consideration was
not inadequate, it is immaterial that the transfer was effected in favor of a person who was
not a creditor.
A debtor can prefer one creditor over others in the payment of his debts. So long as
he retains no benefit in the property, the mere circumstance that some creditors stand paid
while others remain unpaid, does not invalidate the transfer. Sale of assets by a company
for adequate consideration is not invalid merely because it is in favor of a non-creditor.

Plea of defense based on Section 53:

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The following case of the Supreme Court is illustrative of a plea of defense based
on Section 53 of the Transfer of Property Act:
Immani Appa Rao v. Coolapali Ramlingmurthy, The defendant V the father and
manager of the joint Hindu family) had suffered heavy losses in the business conducted by
him with the result that he was indebted to the extent of several thousand rupees. Appre-
hending that the properties would be lost to the family at the instance of his creditors, he
executed a collusive and nominal mortgage deed for Rs 1,000 in favor of the plainliff G.
The execution of the said collusive document between V and G came to the knowledge of
some of the creditors and it led to an insolvency petition against V by one of the creditors.
In these insolvency proceedings, V was adjudicated insolvent and the properties of V were
sold to G subject to aforesaid nominal mortgage in favor of the plaintiff. Really K pur-
chased the property with his own money but benami in the name of G on the condition that
G would reconvey the properties to the family of V whenever called upon to do so. In
pursuance of the said sale-deed the plaintiff G obtained possession but subsequently V
trespassed on the properties and dispossessed. G. Later on the plaintiff G filed a suit against
V for declaration of his title and for recovery of possession. The defendant pleaded that the
document executed in favor of the plaintiff was nominal and collusive and was not sup-
ported by any consideration.

In other words, the material facts in brief were that:

(a) The transaction in favor of the plaintiff was the result of a fraudulent plan to
which both he and the defendant agree",
(b) This transaction was effected with the mutual consent of the vendor and the
vendee to defraud the creditors of the vendor.
(c) So the transfer was not supported by any considerations and the transferee
agreed to act as the benamidar until the transferor required him to reconvey the properties
to his sons.

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(d) The object intended to be achieved and the fraud initially contemplated by both
the parties to the suit had been achieved and the creditors of the defendant had been de-
frauded.
(e) Thus, both the parties to the suit were confederated in the fraud and were equally
guilty of fraud.
It was held by the Supreme Court that:
(i) There can be no question of estoppel for the defendant from pleading in the suit
fraud and absence of consideration. The reason is that the fraud in question was agreed by
both the parties who had assisted each other in carrying out the fraud.
(ii) When it is said that a person cannot plead his own fraud, it really means that a
person cannot be permitted to go to a Court of law to seek for its assistance and yet base
his claim for the assistance of the Court on the ground of his fraud.
iii) The plaintiff can be said to be guilty of a double fraud:
(a) he joined the defendant in his fraudulent scheme and participated in the com-
mission of fraud the object of which was to defeat the creditors of the defendant;
(b) he committed another fraud in suppressing from the Court the fraudulent char-
acter of the transfer when he made out the claim for recovery of possession. The convey-
ance in his favor was not supported by any consideration and was the result of the fraud
and, therefore, conveys no title to him. Yet, if the plea of fraud is not allowed to be raised
in defense, the court would, in substance, be giving effect to the document which was void
ab initio. Therefore, the paramount consideration of public interest requires that the plea
of fraud should be allowed to be raised and tried and, if it is upheld, the estate should be
allowed to remain where it rests. The adoption of this course is less injurious to public
interest than the alternative course of giving effect to a fraudulent transfer.
The terms of Section 53 (1) are satisfied even if the transfer does not "defeat" but
only "delays" the creditors. The fact therefore that the entirety of the debtor's property was
not sold cannot by itself negative the applicability of Section 53 (1) unless there is cogent
proof that there is other property left, sufficient in value and of easy availability to render
the alienation in question immaterial for the creditors.

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Good Faith and consideration:

If the creditors established that the transfer was made with the object of defeating
them, the burden shifts on the transferee to prove: (i) that he had paid it fair price, and (Ii)
that he was not a party to the fraud. The term 'consideration' as used in this section has the
same meaning as it has in the Contract Act and therefore excludes natural love and affec-
tion. Transfers for natural love and affection and treated as transfers without consideration.
Where the fraud on the part of the transferor is established, the burden of proving
that the transferee falls within the exception is upon him, and, in order to succeed, he must
establish that-
(a) he was not a party to the design of the transferor,
(b) he did not share the intention with which the transfer has been affected, and
(c) he took the sale honestly believing that the transfer was in the ordinary and
normal course of business.1 When once the conclusion is reached that the transaction was
effected with the intent on the part of the transferor to convert the property into each so as
to defeat or delay his creditors, then the following circumstances prove that the plaintiff
shared that intention:
(i) The plaintiff and the vendor belong to the same community, a small, compact
and well knit one, and they must obviously have known each other having been in trade
for several years in several places in common and must, therefore, have been well ac-
quainted with the financial and business affairs of each other.
(ii) The plaintiff admittedly had with him a copy of the deed of dissolution which
discloses that the firm's business had resulted in losses and that it was greatly indebted, the
debts amounting to Rs. 2 lakhs. Even when the plaintiff was fixed with notice that the firm's
business had been running at a loss and had accumulated a very large volume of debts, the
purchaser did not insist that the consideration which he was paying should be utilized for
the discharge of at least some of the debts.

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(iii) The property is situated at Vizianagram but the document of sale-deed was
registered at Madras. This was a view to keep the transaction secret from the creditors, and
the plaintiff was as much a party to the secrecy as the transferor.
(iv) The plaintiff made the enquiries before he took the transfer. He led evidence to
show that he consulted his lawyers about the title of the vendor but any attempt at an en-
quiry of defendant 4 as to why he was affecting the sale of the only immovable property of
the firm which was allotted to him under the dissolution deed is significantly absent.
In these circumstances, it stands to reason that the plaintiff must be fixed with notice
of the design in pursuance of which transfer was effected. If the object of a transferor, who
is heavily indebted, was to convert his immovable property into cash for keeping it away
from his creditor and, knowing it, the transferee helped him to achieve this purchase, it has
naturally to be held that he shared that intention and was himself a party to the fraud.
Therefore, it has to be held that the plaintiff was not a transferee in good faith and that the
transfer itself was a scheme by the transferor with the knowledge and concurrence of the
transferee to put property out of the reach of the creditors.
Nature of suit:
A creditor's suit to avoid a transfer must be a suit on behalf not only of himself, but
of the whole body of creditors (See Order 21, Rule 63, C.P.C.). This rule has been laid
down with a view to protect the debtor from multiplicity of suits by each and every creditor,
if there are more than one.
In a suit to avoid a transfer under this section, the issues to be framed are: -
(1) Was the transfer made with intent to defeat or delay the creditors?
(2) If so, was the purchaser from such a debtor a transferee in good faith and for
consideration?
The onus of proving the first issue lies on the creditor, and' if that is established, the
onus of proving the second issue is on the transferee.

Suit by transferee:

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A transfer which is voidable under Section 53 (1) of the Transfer of Property Act
can be avoided not only by a suit instituted by a creditor challenging the transfer on behalf
of himself and the other creditors, but also by way of defense to a suit under Order 21, Rule
63 C.P.C. by a transferee (claimant) whose petition was rejected in the summary proceed-
ing under Order 21, Rules 58 to 61, C.P.C.
In order to avoid transfer which come within the mischief of Section 53 of the
Transfer of Property Act, it is not necessary that the person who intends to avoid the trans-
action should file a suit for the purpose. He may as well manifest his intention to avoid the
transaction otherwise than by filing a suit, as for example, by attaching the property trans-
ferred. His very act of attaching the property would be sufficient evidence of his intention
to avoid it.
Where in a suit under Section 53, brought by one of the creditors, the heading of
the plaint did not indicate that the suit was for and on behalf of all other creditors, but the
names of other creditors whom the plaintiff knew were given in the body of the plaint, the
plaintiff was held to have locus standi to file the suit and the suit is maintainable.

The appellant was shown to be the only creditor. There were no other creditors.
Held: As a creditor he could not be defrauded, because his loans were secured by the mort-
gage deeds. A gift in respect of properties already mortgaged could not in any way defeat
or delay the mortgagee's right because the donee under the gift-deed could only take the
properties subject to the mortgages. The transfer by the deed of gift could not in any way
affect the mortgagee's right under the mortgages.

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