FRAUDULENT TRANSFER

Introduction
Every property owner has the right to transfer his property as he likes. But the
transfer must be made with a Bonafide intention. 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. In simple words, fraudulent
transfer of property denotes an illegal transfer of property with the malicious
intent to defraud or delay the creditors.

In case of fraudulent property transfer, the debtor intentionally deprived the

creditor of his lawful and just entitlements. 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. The rules regarding fraudulent transfer of
property are recognized under section 53 of the Transfer of Property Act, 1882.

Section 53 - Fraudulent transfer1:

53. Fraudulent transfer:

1. 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. 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

1
Section 53
 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.]

Section 53 of TPA, 1882 is comprised of two parts. The first part prescribes the
principal defeat or delays his creditors that the transfer shall be voidable at the
option of any creditor so defeated or delayed. Under section 53 of TPA, 1882 the
right of a bona fide purchaser will be protected provided that he acted in good
faith and he purchases that property for consideration even though the transfer
was made by the seller with intent to defeat or delay the creditors.

The second part of section 53 of TPA, 1882 formulated the principle that, where
a transfer of immovable property is made gratuitously or without consideration
by the transferor to defraud the subsequent purchaser, such transfer shall be
voidable at the option of such transferee. This sub-section protects the interest of
a bona fide transferee for value from a gratuitous fraudulent transfer made earlier.

For example, A makes a gift of a house to B in January 1990. In February 1990,

A sold the same house to C. Here, B and C are two claimants of the same property.
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.

Section 53 of the Transfer of Property Act, 1882 talks about fraudulent transfers.
Fraudulent Transfer in general parlance, therefore, refers to transfers which are
made 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. 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. 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).
In Dr Vimla vs. Delhi Administration2, 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.

The doctrine of Fraudulent Transfer from the perspective of English Law

Whilst delving into the Doctrine of Fraudulent Transfer from the perspective of
Indian Law, it is interesting to see the perspective of English Law more so in the
case of legislation that was introduced in the colonial era, like The Transfer of
Property Act, 1882. The doctrine of Fraudulent Transfer, from the perspective of
English Law, is dependent, to the most extent, upon a celebrated case of Twyne.
In this particular case law, Pierce owed certain liability which was financial to
two parties Twyne and C. Now, C i.e. the second person to whom Pierce owed
such liability [financial] approached the court by filing a suit seeking help in
repayment of his debt by Pierce. However, before the suit could come to any kind
of fruition in the court, Pierce, being in the possession of goods as well as the
chattels, in a hush-hush manner made a deed of gift which was general with the
subject matter encompassing the totality of his belongings of chattels and goods
to Twyne, the first person to whom Pierce owed such liability [financial]. Such a
gift was repayment of the debt that was owed to Twyne.

In a later instance, C secured judgment to procure goods and chattel in a manner

that satisfies C's debt. In execution of such judgment, the seizure was sought to
be done which Twyne resisted. Twyne brought forth the argument that he had
been a purchaser for value, which cannot be deemed to be inadequate, a

2
Dr Vimla vs. Delhi Administration
consideration that was also bona fide within the Fraudulent Conveyances Act,
1584.
At this juncture, the question as to whether the gift made in favour of Twyne was
done with the design as to defraud C, came into being.

To such, the honourable court opined that:

The gift in question seemingly held marks and symbol that it was meant to
defraud since the gift is quite general, with no necessity, in a normal sense, for
the donor to do such.

• Another indication was the unusual behaviour of the donor to continue to

hold possession of the gifts and what was even more so out of character
was to keep using them as if they were his own only. The court opined that
this was a clear indication of his ill intent in the whole case in question.

• As the saying goes gifts that are given in secret are always suspicious. In
the present case as well, the gift was given in secrecy which arouses
suspicion of the court.

• The court questioned the need to gift the title of such substances which
were lis pendens. It is a strong symbol of ill intent to have gifted such
substances during the pendency of the suit.

• The trust which existed between the donor and donee made it apparent that
the fraudulent act was covered by the trust. The act of donee to allow the
donor to not only keep the possession of the goods gifted but to continue
to make use of it as if they were his own is certainly an act of trust.

Given such and keeping note of the fact that the gift deed was indeed made on
good consideration but was, in no circumstances, bonafide - the celebrated Star
Chamber held this particular gift, in question, was indeed an attempt by Pierce to
defraud one of his creditors under the Fraudulent Conveyances Act, 1571.

In another celebrated case dealing with a similar issue, Edwards v. Harben, the
judgment, which was delivered by Buller, J., opined that if the possession is not
done via a deed [made before or after], it is deemed to have been carried out with
an intent to defraud. In such a case, it is void.

Essentials of the Doctrine of Fraudulent Transfer

The essential requirements of Section 53 of TPA are as mentioned below:

1. Transfer of property

2. The property must be immovable in nature

3. Transfer in question must have been done with the plan or scheme in mind
to delay or defeat

4. Such delay or defeat must be suffered by the creditor(s)

5. The transfer would be voidable

6. Transfer must be for consideration

• Transfer of Property: The very first essential is the application of The

Transfer of Property Act, 1882 itself. If the transaction does not fall within
the ambit of such legislation, there is absolutely no question of application
of Section 53 of The Transfer of Property Act, 1882. According to the Act,
transfer of property means when any person transfers property to one or
more people or to himself and one or more people. Such a person may
include a company, a body of individuals, an individual or association, and
 even immovable property can be transferred which would not, in any case,
include growing crops, standing timber, or grass. Such transfer can be in
present or even the future. However, there are certain rights which cannot
be, in any case, being transferred which have been stipulated in Section 6
of The Transfer of Property Act, 1882. This transfer, moreover, shall be
valid (in the eyes of law) and additionally, should bestow a good title upon
the transferee.

Following are some examples of transactions which do not

transfer property:

o Surrender and relinquishments.

o Relinquishment of share by one coparcener in favour of the other.

o Partition and family settlements but in case such partition is done

with the design or scheme which is aimed towards affecting creditors
in a manner that would delay or defeat the interests of the creditors,
this section will apply.

o Where it is claimed that the transfer was a transaction that would be

deemed to be fictitious or sham (in the eyes of law) and there was
no real transfer and was merely used in such a manner that it acted
as a shield for achieving a hidden agenda, Section 53 is not
applicable.

2. The property must be Immovable in Nature Section 53 of The Transfer

of Property Act, 1882 attracts application to only that property which is
considered to be immovable. At this juncture, we face the pertinent
question as to what are immovable properties: While the Transfer of
Property Act, 1882 does not define what is immovable property,
 according to Section 3 of the Act, the immovable property does not,
within its ambit, include:

o Grass [which refers to fodder]

o Standing Timber [which refers to trees which are fit to be used in

repairs or buildings]

o Growing Crops [which includes all such vegetables, etc. which are
grown with the sole purpose of their produce]

Scholars consider this definition to be a negative one since instead of outrightly

providing the definition of immovable property, The Transfer of Property Act,
1882, merely gives us three things that are not immovable property. We look
towards the General Clauses Act, 1867, for a more comprehensive definition of
immovable property. The General Clauses Act, 1867 specifies the following as
immovable property:

o Land: The term land includes within its ambit both - the lower as
well as the upper surface area of the earth. Any kind of interest which
tends to vest in such would be treated as it is of immovable property.
It includes streams, well, etc.

o Benefits that arise out of the land: Within such portion is included
everything which deals with interest and rights vested in the land, as
defined above. The right of collection of rent is one prominent
example.

o as immovable. An appropriate example here would be ceiling fans,

doors, and windows.
To determine whether a fixture in question is permanent or is merely
temporary, we must consider the following points:

o Mode of fixation that is to say it is temporary, standing on its own or

has been dug in the Earth, etc.

o Objective or the purpose which the fixation is intended to fulfill

3. The transfer in question must have been done with the plan or scheme
in mind to delay or defeat: The third essential of Section 53 is that the
intention behind the transfer must be to delay or defraud creditors. This is
to say that it is important to cull out the intention behind the transfer which
is in question. If such transfer has been with the scheme or design to result
in delay or defeat of the creditors such transfer is voidable.

Now the question arises as to how this, seemingly, ill intention is proved.
It must be proved by making use of evidence that may be direct or
circumstantial. Each case in question must be looked closely into and
examined keeping in mind the surrounding circumstances. Some situations
which tend to give a strong presumption that the transfer, in question, was
carried out with a scheme or design that is fraudulent are: If the transfer
was made under such circumstances that it was not widely known i.e. in
secrecy.

a. If the transfer was done in haste.

b. If the transfer was carried out soon after a decree was passed against the
judgment debtor. Such decree must be such to order the repayment of debt.

c. If the transfer was such that the debtor, mysteriously, transferred the whole
of his property without any thought to himself i.e. without keeping any part of the
property for himself.
d. The consideration made for the transfer was such that it was significantly
small when compared to the real, original, or actual value of the property
transferred.

e. By the evidence discovered, it was proved that there is no consideration

payment, contrary to what was given in the sale deed.

In Palamalai Mudaliar v. South Indian Export Company3, property was

purchased by a person who knew that the transferor desired to convert it into cash
which could be easily secreted to defeat the creditors. It was held that the transfer
was voidable under Section 53.

In Musahar Sahu v Lala Hakim Lal4, it was held that it will not be fraud if the
debtor chooses to pay one creditor and leave others unpaid provided that he must
not retain any benefit.

5. Such delay or defeat must be suffered by creditor (s): The fourth

essential is that the delay or defeat must have been suffered by creditor(s).
This is to say the ill-intentioned transfer, in question must be such wherein
the affected people is or are creditor(s). Herein, it is pertinent to understand
the term "creditor". It is said to be understood in a wide sense for this
section.

3
Palamalai Mudaliar v. South Indian Export Company
4
Musahar Sahu v Lala Hakim Lal
 Who are creditors under the meaning of section 53 of TPA, 1882?

o A landlord is a creditor in respect of rents due to him from the tenant.

o A Hindu wife with a claim for past maintenance against her husband
is a creditor.

o A Muslim wife to whom dower debt is due is a creditor.

o An auction-purchaser, who is not a decree-holder, cannot be a

creditor but a decree-holder who becomes auction-purchaser of the
same property is a creditor.

In the case of Ram Das v Debut5, the term was interpreted to include such people
to whom the transferor owes some kind of liability which is financial [i.e.
creditors] which would include not only those to whom he owes at the time of
transfer in question as well as those to whom he owes at a time which is after the
transfer in question.

In the case of Kanchanbai v. Moti Chand6, the term creditors used in Section
53 was discussed. In such case, the transferor undertook a liability financial
amounting to a value of Rs. 2600 i.e. two thousand and six hundred rupees. The
creditor requested repayment of the money which was owed to him.

4. Transfer would be voidable: Every transfer of property, which is

immovable in accordance to the relevant section of The Transfer of
Property Act, 1882, which is done possessed with an intention aimed to
delay or defeat the creditors [or the people to whom the transferor owes
some kind of liability which is financial] of the transferor shall be voidable.

5
Ram Das v Debut
6
Kanchanbai v. Moti Chand
 Such option to consider the transaction void or not has been left in the
hands of the aggrieved party who, here, will be the delayed or defeated
creditors.

This means that even though such transfer is, in the eyes of the law, valid
it is left to the creditor as to whether he wishes to avoid it or not. The motive
of the legislature behind such an arrangement is to give the option to the
party who has suffered or whose interest has been affected.

5. Transfer must be for consideration: The transfer must be such which is

for consideration, one which is not such which was significantly small,
when it is compared to the real, original, or actual value of the property
transferred. This is to say the consideration for the transaction, in question,
must be adequate.

Framing of suit under fraudulent transfer

A creditor in order to avoid a fraudulent transfer of property must file the suit in
a representative capacity. The benefit will be incurred in favor of all the creditors.
Order 21, Rule 63 of CPC7 deals with the rules of representative suit.

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

7
Order 21, Rule 63 of CPC
multiplicity of suits against the same opposite party/parties on the same subject.
Dismissing a creditor's lawsuit would be binding on all creditors.

Good faith and Consideration: The purchaser of the property from the
transferor must prove firstly, that he had paid a fair and adequate price and
secondly, that he was not a party to the fraud. He also has to prove that he acted
in good faith. The standards of good faith are –

i. There must be an honest dealing between the parties;

ii. The purpose of the transaction needs to be honest;
iii. There must exist faithful performance of duties;
iv. There must be an absence of fraudulent or malice intent.

The term consideration used under section 53 of TPA, 1882 has the same meaning
as it has under The Contract Act, 1872. It excludes natural love and affection
between the parties.

The Burden of Proof

Under section 53 of TPA, 1882 the burden of proving that a transfer is fraudulent
lies on the creditors as he is attacking the debtor with this section. Once the fact
is established by the creditor that the transfer was made fraudulently to defeat or
delay his claims then the burden shifts on the transferee to prove that he acted in
good faith and he is a bona fide purchaser for value and he was not a party to the
fraud. So, the transferee can use this section as a shield for his defense and the
creditor can use this section as a sword to attack the debtor.
Effects of Section 53 of Transfer of Property Act, 1882 A fraudulent transfer
of property is voidable at the option of the creditors and if they not choose to
avoid it, the transfer may be valid between the debtor and purchaser. Where a
substantial portion of the transfer is fraudulent, the whole transfer shall be treated
as fraudulent. Where only a part of the consideration was debt due to the creditor
and the rest of it is fictitious the whole transfer must be void.

Exceptions to Doctrine of Fraudulent Transfer

The Transfer of Property Act, 1882, by way of Section 53 has recognized two
exceptions in totem. The doctrine of fraudulent transfer is not applicable to:

1. The person to whom the transfer is made does the whole deed in good faith
and for consideration.

2. Application of any law which relates to insolvency which is being enforced

at such time.
Conclusion
The doctrine of Fraudulent Transfers is embodied in The Transfer of Property
Act, 1882, in Section 53 wherein it is stated that all those transfers of property,
which are considered to be immovable by the relevant section of The Transfer
of Property Act, 1882, which is effectuated possessed with an intention aimed to
delay or defeat the creditors of the transferor shall be voidable.

Such option to consider the transaction void or not has been left in the hands of
the aggrieved party who, here, will be the delayed or defeated creditors. There
are certain exceptions to this doctrine concerning the transfers which are
effectuated towards the transferee with adequate consideration and in good
faith.

But if the transfer is merely a gift to a stranger, this question of good faith is
completely irrelevant. The motive of the legislature behind such an arrangement
is to give the option to the party who has suffered or whose interest has been
affected and to discourage ill-intentioned transfers.
 BIBLIOGRAPHY

• https://www.legalserviceindia.com
• https://www.mlsu.ac.in/
• https://www.advocatekhoj.com/
• https://indiankanoon.org
• https://lawlegum.com/section-53-of-tpa-fraudulent-transfer
• https://www.whiteblacklegal.co.in/
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to all those who have supported and
contributed to the completion of this project.
First and foremost, I would like to thank Dr. Vishnu Pati Tripathi, my project
supervisor, for their invaluable guidance, constructive feedback, and continuous
encouragement throughout this project. Their expertise and insights were instrumental
in shaping this work.
I am also deeply grateful to the Dept. of Law, School of Legal Studies for providing
me with the resources, facilities, and support necessary to undertake this project. The
staff and faculty members have been a great source of inspiration.
Lastly, I am profoundly grateful to my family and friends for their unwavering
support and understanding throughout this journey. Their encouragement gave me the
strength to stay focused and motivated.
Thank you all for your contributions, which made this project a success.