Fraudulent Transfer
Chapter Twenty-Five
Syllabus topic 1.2, "Fraudulent Transfer"
Pages 126 to 130 of 378
In one line
A person cannot put his property beyond the reach of his creditors by transferring it away, and the creditors can have such a transfer set aside.
In exam wording: section 53(1) provides that 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; and section 53(2) provides that every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of that transferee.
Why the section is needed
A debtor who sees a decree coming has an obvious escape: give the property to a relative, keep the use of it, and let the creditor sue an empty man. The debt survives, but there is nothing to execute against.
Section 53 closes that escape. It does not forbid a debtor from dealing with his property, which would be too wide; a man in debt may still sell his land, pay a pressing creditor and carry on his business. What it strikes at is a transfer made with the intent to defeat or delay the creditors.
The section is a rule about intention, and that separates it cleanly from section 52, where the transferor's state of mind is irrelevant.
Section 53(1): defeating or delaying creditors
The rule. Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor is voidable at the option of any creditor so defeated or delayed.
Voidable, not void. The transfer stands until a creditor elects to avoid it. If no creditor complains, it is perfectly good, and the transferee holds the property. This follows from whose interest the section protects: the creditors', and nobody else's. The transferor himself cannot rely on his own fraud to undo his transfer.
"Defeat or delay." Delay is enough. A transfer that merely postpones the creditors, by forcing them into further litigation to reach the property, is within the section even if they might eventually recover.
The first saving: a transferee in good faith and for consideration. Nothing in the sub-section impairs the rights of a transferee in good faith and for consideration. So an honest purchaser who paid a real price keeps the property even though his seller's motive was to defeat creditors. Both elements are needed: good faith and consideration. A relative who paid a nominal sum knowing exactly what was intended has neither.
The second saving: insolvency law. Nothing in the sub-section affects any law for the time being in force relating to insolvency. Insolvency legislation has its own, often stricter, provisions on transfers before bankruptcy, and section 53 leaves them alone.
Fraudulent Transfer
The representative suit requirement. A suit by a creditor to avoid a transfer on this ground must be instituted on behalf of, or for the benefit of, all the creditors. The section adds that "creditor" includes a decree-holder, whether or not he has applied for execution.
That requirement is not a technicality and it deserves a sentence in an answer. Its purpose is to prevent a race. If each creditor could sue alone and take the recovered property for himself, the quickest creditor would be paid in full and the rest would get nothing, when the whole point of avoiding the transfer is to restore the property to the general fund available to all.
Section 53(2): defrauding a subsequent transferee
The rule. Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee is voidable at the option of that transferee.
This protects a different person from a different mischief. A man makes a gift of his land, keeps the transaction quiet, and then sells the same land to a buyer who knows nothing of the gift. The buyer would find that his seller had nothing left to sell. Sub-section (2) lets that buyer avoid the earlier gift.
Two limits are built in.
It applies only to a transfer made without consideration. An earlier transfer for value is untouched by this sub-section, and priority between two transfers for value is settled by section 48.
No presumption of fraud from the mere fact of a later sale. The sub-section provides expressly that 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. So a man who gifts his land to his daughter and sells other land later has not, by that fact alone, defrauded anybody. Intent must be proved.
How intention is proved
Intention is rarely admitted, so it is inferred from circumstances. The kinds of facts that point to it, and which an answer can list, are:
- the transfer was made when a suit or a decree was pending or imminent;
- it covered substantially the whole of the debtor's property;
- the consideration was absent, nominal or never actually paid;
- the transferor remained in possession and continued to enjoy the property;
- the transferee was a close relative or someone otherwise connected;
- the transaction was carried out with unusual haste or secrecy.
None of these is conclusive by itself. Taken together they are what a court weighs, and the presence of several is what turns suspicion into an inference.
A worked example
Farhan owes Rs. 60 lakh to a bank, which has filed a suit and is close to a decree. Farhan owns a plot at Wai worth Rs. 70 lakh, which is nearly all he has.
Fraudulent Transfer
Version one. A month before the decree, Farhan gifts the plot to his brother Gaurav and continues to live on it. The transfer is of substantially all his property, for no consideration, to a close relative, on the eve of a decree, and he stays in possession. The inference of an intent to defeat or delay the bank is strong. The transfer is voidable at the bank's option under section 53(1). If the bank sues, it must do so on behalf of, or for the benefit of, all Farhan's creditors.
Version two. Farhan sells the plot to Hemant, a stranger, at its full market value of Rs. 70 lakh, the price being actually paid, and Hemant knows nothing of the bank's suit. Even if Farhan's own motive was to convert the land into money he could hide, Hemant is a transferee in good faith and for consideration and the saving protects him. The bank's remedy is against the sale proceeds in Farhan's hands, not against Hemant.
Version three. Farhan sells to his nephew for Rs. 5 lakh, a fraction of the value, the nephew knowing about the bank suit. There is consideration, but it is nominal and there is no good faith. The saving does not apply and the transfer is voidable.
Version four. Farhan gifts the plot to Gaurav in January and in March sells the same plot to Ishita for full value, saying nothing about the gift. Ishita may avoid the gift under section 53(2), the gift being without consideration and made with intent to defraud a subsequent transferee. But if all that can be shown is that a later sale happened, that alone does not prove the intent, because the sub-section says so in terms.
Nobody complains. If neither the bank nor any creditor ever moves, the gift to Gaurav stands. It is voidable, not void.
What it does NOT mean
The transfer is not void. It is voidable at the option of the person the section protects.
The transferor cannot avoid his own transfer. The option belongs to the defeated creditor, or to the defrauded subsequent transferee.
It does not prevent a debtor from dealing with his property. He may sell for value, and may prefer one creditor over another, so long as the object is not to defeat or delay creditors generally.
"Delay" is not a lesser case. A transfer that merely postpones the creditors is within the sub-section.
A good faith purchaser for value is safe under sub-section (1), whatever his seller intended.
Section 53(2) does not presume fraud. A later transfer for consideration does not, by itself, make an earlier gift fraudulent.
Fraudulent Transfer
A single creditor cannot sue for himself alone. The suit must be on behalf of, or for the benefit of, all the creditors.
It does not displace insolvency law, which is expressly saved.
Distinctions
| Section 53(1) | Section 53(2) | |
|---|---|---|
| Who is protected | The creditors of the transferor | A subsequent transferee |
| The transfer attacked | Any transfer of immovable property | Only a transfer without consideration |
| Intent required | To defeat or delay creditors | To defraud a subsequent transferee |
| Who may avoid | Any creditor so defeated or delayed, suing for all | That subsequent transferee |
| Saving | A transferee in good faith and for consideration; insolvency law | No presumption of fraud from a later transfer for consideration alone |
| Section 52 | Section 53 | |
|---|---|---|
| Depends on the transferor's intention | No | Yes |
| Depends on the transferee's notice or good faith | No | Yes, under sub-section (1) |
| Effect | The transfer is subordinate to the decree | The transfer is voidable |
Quick revision
- Section 53(1): a transfer of immovable property with intent to defeat or delay creditors is voidable at the option of any creditor so defeated or delayed.
- Voidable, not void. It stands unless a creditor avoids it, and the transferor cannot avoid his own transfer.
- Saved: a transferee in good faith and for consideration; and any law relating to insolvency.
- The suit must be brought on behalf of, or for the benefit of, all the creditors; "creditor" includes a decree-holder.
- Section 53(2): a transfer without consideration made with intent to defraud a subsequent transferee is voidable at that transferee's option.
- No presumption: a later transfer for consideration does not by itself make the earlier gratuitous transfer fraudulent.
- Badges of intent: an imminent suit or decree; substantially all the property; no or nominal consideration; the transferor remaining in possession; a close relative; haste and secrecy.
Test yourself
1. Is a transfer under section 53(1) void or voidable, and at whose option? Voidable, at the option of any creditor defeated or delayed by it. It remains effective unless and until such a creditor avoids it.
2. Can the transferor himself get his transfer set aside under section 53? No. The sub-section protects the creditors, and the option to avoid belongs to them, not to the person who made the transfer.
3. A debtor sells his land at full market value to a stranger who knows nothing of his debts. Can the creditors avoid the sale? No. Section 53(1) expressly preserves the rights of a transferee in good faith and for consideration, and both elements are present.
4. Why must a creditor's suit be brought on behalf of all the creditors? To prevent a race in which the first creditor to sue takes the recovered property for himself. Avoiding the transfer is meant to restore the property to the fund available to all the creditors.
Fraudulent Transfer
5. What must a subsequent transferee prove under section 53(2)? That the earlier transfer was made without consideration and with intent to defraud him. The sub-section adds that no such transfer is deemed to have been made with that intent by reason only that a subsequent transfer for consideration was made.
6. Name four circumstances from which an intent to defeat creditors may be inferred. That the transfer was made when a suit or decree was pending or imminent; that it covered substantially the whole of the debtor's property; that the consideration was absent, nominal or unpaid; and that the transferor remained in possession, or that the transferee was a close relative.
7. Is "delay" enough, or must the creditors be permanently defeated? Delay is enough. The sub-section applies to a transfer made with intent to defeat or delay the creditors.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.