FRAUDULENT TRANSFER

Abstract

Fraudulent transfers of property are a major concern in property law, especially when
such transfers are made with the intent to deceive creditors or subsequent purchasers. Section
53 of the Transfer of Property Act, 1882, is a legislative measure that seeks to curb such
practices by declaring certain transfers voidable. This section plays a pivotal role in
maintaining the sanctity of financial and contractual obligations and preventing the misuse of
property transfers to evade liabilities.

Introduction
Every owner of property has the right to transfer his property as he likes. But, the
transfer must be made with a bona fide intention. Where the transfer is made with a
fraudulent intention e.g. with the intention of defeating the interest of the creditor or interest
of any subsequent transferee. Where the transfer is made with fraudulent intention, the object
of the transfer would be bad in the eyes of equity and justice though it is valid in law. Since
fraudulent transfers are otherwise valid in law, they are not void. But, because they are made
with mala fide intention, equity would render it voidable by the person whò was so
defrauded. Equity, therefore, does not allow a person to alienate his own property when such
alienation tends to delay or defeat the interest of his creditor or any subsequent transferee.
This principle of equity has been incorporated in Section 53 of the Transfer of Property Act.
Law relating to fraudulent transfers as given in this section has two parts. The first part
provides that a transfer with an intent to delay or defeat the creditor of the transferor shall be
voidable by such creditor. The second part of this section Provides that a gratuitous transfer
with intent to defraud a subsequent transferee is voidable at the option of such transferee.

Section 53(1): Transfers to Defeat or Delay Creditors

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.
Nothing in this subsection shall impair the rights of a transferee in good faith and for
consideration.

Nothing in this subsection 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.
 The word ‘creditor’ used in this section means any person who is entitled to get a
claim of a certain sum of money from the other called debtor, it includes-

a)​ Who has given some loan to another;

b)​ Who has sold goods to another but could not recover its price;
c)​ A Muslim woman whose dower is unpaid;
d)​ A deserted Hindu wife in her claim for maintenance.

However, a person claiming only an unliquidated sum for damages for tort or breach
of contract is not a creditor.

Characteristics of Fraudulent Transfer

The essential conditions for the applicability of Section 53 (1) are :
1. There is transfer of immovable property: There must be a valid transfer of immovable
property. The provisions of this section do not apply to a transfer of movable property. For
applicability of this section, it is necessary that there is a transfer of property within the
meaning of section 5 of the T.P. Act and such transfer is valid and enforceable so that
property vests in the transferee. Section 53(1) does not apply where the transfer is in itself
void. This section makes a valid transfer void at the option of creditor after the property had
already vested in transferee.
Partition and family settlement are not transfer under this Act. Therefore, this section
may not apply to partition or family settlement. However, if the object of partition is merely
to defraud creditors it may be regarded as 'transfer' under this section. Where a partition was
made not as normal allotment of shares in family-property but to allot the shares in such a
manner that property given to a sharer was to be kept only for himself and thereby that share
was placed beyond the reach of creditors, the partition was held a fraudulent transfer.
Sham transfer means fictitious transfer. A transfer is fictitious when the transferor
does not intend that property should really vest in the transferee. Such transfers are therefore
unreal or colourable transfers and are never meant to operate between the parties. Sham
transfers e.g. a benami transfer is not 'transfer' as contemplated by Section 53. Thus, fictitious
or benami transfers are outside the scope of this section.

2. The transfer is fraudulent i.e. mode with an intent to defeat or delay the creditors of
the transferor: The transfer which can be avoided by the creditor under this section must be
with an intent to defeat or delay the interest of the creditors of the transferor. The only interest
of a creditor in the debtor's property is that he can recover his money from that property in
case the debtor fails to repay it personally. So, where a debtor transfers his property before
the creditor makes any attempt to realise his debt from that property, it would no longer be
debtor's property. In this manner the interest of the creditor would be defeated.
​ Fraudulent intention must be proved by direct or circumstantial evidence and every
case must be examined in the light of surrounding circumstances. However, following
circumstances may give a strong presumption that the transfer was fraudulent :
(i) The transfer was made secretly and in haste.
(ii) The transfer was made soon after the decree was passed against the judgment-debtor.
(iii) The transferor who was indebted alienated substantially the whole property e.g. gift of all
the properties before the attachment.
(iv) The consideration was a very small amount in comparison to the real value of the
property transferred.
(v) There is evidence that there was no actual payment of consideration as shown in the
sale-deed.
These are, however, some of the circumstances in which inference of intent to defeat
or delay creditors may be drawn. Every case under this section would depend upon its own
facts and circumstances and in all cases it is a matter of fact whether the transfer is bona fide
or fraudulent.
The scope of section 53 was critically analysed by the Privy Council in Musahar Sahu
vs. Hakim Lal where it was held that transfer of property by a debtor to one creditor in
preference of the other is not a fraudulent transfer with intent to defeat or delay the interest of
another creditor.

Transfer is voidable at the instance of creditor:

​ When a transfer is proved to have been made with intent to defeat or delay creditors it
is voidable by creditors, Section 53 does not as such make a fraudulent transfer void. It
remains a perfectly valid transfer until the creditors exercise their right to avoid the transfer.
Moreover, under this section only creditors are entitled to avoid fraudulent transfer.
Transferor or transferee or any other person has no such right.
​ It is provided in Section 53 (1) that a suit instituted by a creditor under this section
must be instituted on behalf of, or for the benefit of, all the creditors. Accordingly, a creditor's
suit to avoid a fraudulent transfer must be a suit not only for himself but on behalf of all
creditors of the transferor. The purpose of this rule is to protect the debtor from multiplicity
of suits by other creditors.
​ The burden of proof lies on the creditors to show that the transfer was made to defeat
or delay their interest. When they have proved on the basis of facts which prima facie show
that the transferor intended to defraud the creditors, the burden shifts on the debtors to
explain the facts and prove that it was not fraudulent.

Exception to section 53(1)

​ Section 53 (1) recognises two exceptions. The rule that a fraudulent transfer can be
avoided by creditors, is not applicable to :
(a) a transferee in good-faith for consideration, and
(b) any law relating to insolvency for the time being in force.
Transferee in good-faith for consideration .- Where a transferee has purchased the property
in good-faith from a debtor, the creditors cannot avoid the sale under Section 53(1).
Good-faith has not been defined in this Act. But, the generally accepted meaning which is
given to this term is that, an act is done in good-faith if it is done honestly whether it is done
negligently or not'. Where a transferee has no knowledge i.e. no actual or constructive notice
of the fraudulent intention of the transferor (debtor), the creditors cannot avoid the transfer
under this subsection even if they prove fraudulent intent of the debtor. The interest of the
transferee in good faith has been protected only where he has paid consideration.

Rights created under insolvency laws .- Section 53 does not affect the rights created under
the law of insolvency. Thus, rights of a transferee created under any provision of insolvency
law are not affected even if the transferor's intent was to defeat or delay the interest of
creditors. Where the transferor (debtor) has been declared insolvent and the transferee
purchases property from such insolvent person, the transfer cannot be avoided by creditors,
under Section 53.

Section 53(2): gratuitous transfer to defraud subsequent transferee

​ 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
such transferee.
For the purposes of this subsection, 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(2) enacts that gratuitous transfer of an immovable property with intent to
defraud a subsequent transferee shall be voidable at the option of subsequent transferee. The
second part of Section 53, therefore, contemplates a situation where an immovable property
is first transferred to a person without consideration and the same property is again
transferred to another person. Under this subsection, the subsequent transferee may avoid the
first transfer if he could prove that the former gratuitous transfer was fictitious or sham
transfer and was made with a view to defraud him (subsequent transferee). In other words,
this sub-section protects the interest of a bona fide transferee for value from a fraudulent
gratuitous transfer made earlier.
However, the mere fact that the first transfer was gratuitous and the second transfer is
with consideration, does not raise presumption of fraud in respect of the prior transfer. Fraud
in the prior transfer must be fully established.
The expression 'subsequent transferee' does not include a purchaser at the Court-sales
whether he is a third party or the decree-holder himself.

Conclusion

Fraudulent transfers undermine the integrity of financial transactions and the equitable rights
of creditors and subsequent transferees. Section 53 of the Transfer of Property Act, 1882,
provides a significant legal safeguard against such deceitful acts by allowing aggrieved
parties to void transfers made with fraudulent intent. While Section 53(1) protects the
interests of creditors by voiding transfers meant to delay or defeat their claims, Section 53(2)
shields bona fide transferees for value against earlier sham or gratuitous transfers. However,
these provisions are carefully balanced with exceptions to protect genuine transactions made
in good faith and in accordance with insolvency laws. Thus, Section 53 upholds the principles
of justice and equity, ensuring that property rights are not misused to defraud stakeholders.