What is Fraudulent Transfer
Section 53 of the Transfer of Property Act, 1882 talks about fraudulent transfer. Every owner of a property 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 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.
Essentials of Fraudulent Transfer
1. Transfer of immovable property.
2. Made with intent to defeat or delay the creditors of the transfer.
3. Shall be voidable at the option of the creditor so defeated or delayed.
But the provisions of this sub-section shall not affect-
A. The rights of subsequent transferee in good faith, for consideration.
B. Any law for the time being in force relating to insolvency.
Note: Partition and family settlement are not transferred under this act. So this section may not apply to partition or family settlement.
Note: Sham transfers mean fictitious transfer/Benami transfer, which is outside the scope of this section.
Section 53 safeguards the interest of a creditor in case of only real transfer, which is made with a fraudulent intention. On the other hand, a sham transfer is actually not a real transfer.
Note: Section 53 applies to transfers only of immovable properties. The provisions of this section do not apply to a transfer of movable property.
Musahur Sahu and Another vs. Hakim Lal and Another, 1915
Privy Council held that transfer of property by a debtor to one creditor in preference of the other is not a fraudulent transfer with the intent to defeat or delay the interest of other creditors.
Note: If one creditor represents the other creditors, the purpose of this rule is to protect the debtor from the multiplicity of the suits by the other creditors.
Abdul Shukoor Saheb vs. Arji Papa Rao And Others
Hon’ble Supreme Court held that the creditor might claim the attachment of the property of the debtor to protect the mortgage money.
The creditor will file no separate suit for attachment, and the creditor may seek attachment of the property in section 53.
Provisions Relating to Fraudulent Transfer
The burden of proof lies on the creditors to show that the transfer was made to defeat or delay the creditor.
A transferee who takes property in good faith for consideration is protected. In other words, when a transferee has purchased the property in good faith from a debtor, the creditor cannot make this transfer void.
Section 53 (2) Gratuitous Transfer to Defraud Subsequent Transferee
Section 53 (2) of TPA, provides that gratuitous transfer of immovable property with the intent to defraud a subsequent transferee shall be voidable at the option of the subsequent transferee.
A makes a gift of a house to B in January 1990. In February 1990, A sells the same house to C. Here, B and C are two claimants of the same property.
The general rule is that the first transferee has preference over the second. Under this sub-section, it is provided that if the first transfer is proved to be fraudulent, the subsequent transfer shall prevail over the previous one.
In other words, this sub-section protects the interest of a bona fide transferee for value from a gratuitous fraudulent transfer made earlier.