SVKMS

NMIMS SCHOOL OF LAW

PROJECT SUBMITTED ON;

FRAUDULENT TRANSFERS
IN COMPLIANCE TO THE PARTIAL FULFILLMENT OF THE MARKING
SCHEME, FOR TRIMESTER VII OF 2016-2017, IN THE SUBJECT OF:
PROPERTY LAW
SUBMITTED TO FACULTY:
ISHA KHURANA

SUBMITTED BY:
MUDIT SINGH CHAUHAN
B.B.A. LL.B. (HONS.)
YEAR III
ROLL NO. A061
RECEIVED BY: _____________________

RESEARCH METHODOLOGY:
Objectives and Research Problem:
The objective of the research project is to discuss what fraudulent transfers are, its essentials,
what sham transfers are, how fraudulent transfers can be proved among many things. The
project would be giving answer to the research problem as to what happens when the transfer
of property is not within the meaning of Section 5 of the Act and whether Surrender is
considered transfer of property or not.
This project also talks about what happens, when the consideration is good in part,
subsequent transferees and cancellation of fraudulent registration.

Research Questions:
The project raises the following questions:

Why are there fraudulent transfers, the scope of Section 53 of Transfers of Property
Act, 1882 and the exceptions of Doctrine of Fraudulent Transfer?

English law on fraudulent transfers and the landmark Twyne case

Who are subsequent transferees and cancellation of Fraudulent registration

Limitations
The research fails to conduct primary research in the form of questionnaires, interviews, field
research, etc.
The research conducted is of secondary nature. Materials and fact written are taken from
various books, reports, articles and the internet.

LIST OF CASES:
Twynes case.
Sunder Lal v. Gurusaran Lal
Nath v. Dhunbaiji
Joshua v. Alliance Bank
Mina Kumari v. Bijoy Singh
Chogmal Bhandari v. Deputy Commercial Tax Officer, Kurnool
Vinayak v. Kaniram

Kapini Goundan v. Sarangapani

INDEX:

CHAPTE

TOPIC

PAGE NO

INTRODUCTION

LEGAL PROVISIONS

COMPARATIVE STUDY

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SUBSEQUENT TRANSFEREES AND

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R NO.
1

CANCELLATION OF FRAUDULENT
5

REGISTRATION
CONCLUSION

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INTRODUCTION

Every owner of a property has a bundle of rights attached, which includes the right to transfer
his property and alienate it. There must be a bona-fide intention to transfer. If there is a
Fraudulent Intention, the intention of defeating the interest of creditor or interest of any
subsequent transferee, the transfer is not valid in the eyes of law. These transfers arise in
debtor and creditor relations, particularly with insolvent debtors. The action against such
debtors is typically brought by creditors or by bankruptcy trustees. Here in fraudulent
transfer, the object of transfer would be bad in eyes of equity and justice though it is valid in
law.

English Law on Fraudulent Transfers

Fraudulent transfer law developed under the common law and was codified in the
Statute of Elizabeth.1 The Statute of Elizabeth provided for the avoidance and punishment of
transfers made "to the end, purpose and intent, to delay, hinder or defraud creditors. 2 This
early fraudulent transfer statute was apparently in part a criminal law, in part a revenue
measure (the Crown could receive a portion of any recovery), and only in part a creditor
protection. However, when the English courts held that a judgment creditor could disregard a
fraudulent conveyance and levy execution on the property transferred, the fraudulent
conveyance law became primarily one of creditor protection.

The English law regarding the fraudulent transfer is depended upon the Twynes 3 case. In this
case Pierce was indebted to Twyne and also to C. C filed a suit against Pierce for satisfaction
of his debt, but when the suit was pending in the court, Pierce who was in the possession of
goods and chattels, in secret made a general deed of gift of all his goods and chattels to
1 13 Eliz., ch. 5 (1571) (Eng.). See also Glenn, supra note 9, SS 58- 62.
2 13 Eliz., ch. 5, S 1 (1571) (Eng.).
3 Reported in 3, coke, 80.
5

Twyne, in satisfaction of his debt, without any obstruction that Pierce continued in possession
of the goods, and marked them with his own mark. Afterwards C had judgment against Pierce
and when his goods were sought to be seized in execution of the judgment, Twyne and others
resisted. Here the question arises whether the gift in favor of Twyne was fraudulent, the court
held that:
1

The gift had the signs and marks of fraud, because the gift is general, there is no
necessity for the donor to do this.

The donor continued in possession and used them as his own, so it clearly shows that
he had defrauded and deceived the creditor.

The gift was made in secret.

The gift was made during the pendency of suit.

Even after the gift was made, the donor was still in possession and therefore here
there was a trust between the parties and the fraud is covered by the trust.

The gift deed contains that it was made truly, honestly and bonfire.

So in this case we should observe that, even if there was a true debt due to Twyne, but the gift
which was made with no consideration and bonfire, and it shall be deemed that a gift made
with any trust in favour of donor is considered to be done with fraud.

Indian Law on Fraudulent Transfers

Section 53 of TPA as it is originally stood was based on the statutes of Elizabeth. Now, this
section is in consonance with that of the English statute. The first part of the section deals
with the transfers in fraud of creditors, and the second deals with the fraud of subsequent
purchaser. A transfer though it may not offend this section could be still be avoided either
under Section 55 of the Presidency Towns Insolvency Act, 1909, or Section 53 of the
Provincial Insolvency Act, 1920, and a provision saving insolvency law is introduced in the
section.

This section is applicable only where the transaction is transfer of property within the
meaning of Section 5 of the Act. In the case of Sunder Lal v. Gurusaran Lal 4, it was held that
relinquishment of share by one co-parcener in favor of other is not a transfer of property
within meaning of this section and Section 53 does not apply. Surrender is not a transfer of
property, but in the case of Nath v. Dhunbaiji 5, the court held that surrender by a life-estate
holder is a transfer and it is covered by this section. In the case of Joshua v. Alliance Bank 6, a
settlement was provided for the appointment and it was found that the appointment was done
to defeat or delay the creditors. Therefore observing the facts, the court held that appointment
made with reference to the settlement was fraudulent transfer. Naturally a question is arises
regarding the Section 53 of TPA, that when the consideration is good in part. If the transfer
was for the purpose of delaying or defeating creditors, the transaction will be set aside as
there was fraud in it. But if a part of the consideration is utilized for paying off a mortgage
debt of the transferor, then either the transfer would be treated as valid to that extent or if the
transfer is set aside the vendee is given charge on the property.

4 A.I.R 1938 Oudh 65

5 (1899) 23 Bom. 1.
6 (1895) 22 Cal. 185
7

LEGAL
PROVISIONS

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.

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
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.
8

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
voidable 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.
Section 53, while safeguarding the rights of transferee in good faith and for
consideration, 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 requirement 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 Property 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
9

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.7
Every transfer of immovable property made with intent to defeat or delay the creditors
of the transferor will be voidable at the option of any creditor so defeated or delayed 8. 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 must be instituted on behalf of or
for the benefit of, all the creditors 9. Thus, a marriage settlement, a deed of appointment', a
surrender of a life estate, a relinquishment, a collusive award or decree is voidable at his
option but not a deed of dissolution of partnership with intent to defeat the creditors.

How Fraudulent Intention in the Transfers Can Be Proved

Fraudulent intention in transfers must be proved by direct or circumstantial evidence and
every case must be examined in the light of surrounding circumstances. Some circumstances
that give a strong presumption that the transfer was fraudulent are:
1

The transfer was made in secret and haste.

The transfer was made soon after the decree ordering the payment of debt was passes
against the judgment-debtor.

The debtor in the case transferred whole of his property without keeping anything for
himself.

7 Smt. Phoolan Devi v. Surendra Prakash, A.I.R. 1983 All. 440,

8 Transfer of Property Act 1882 Sec 53 (1) para 1. Nothing in this
statutory provision will affect anv law for the time being in force
relating to insolvency: Transfer of property Act 1882 Sec 53(1) para 3.
9 Transfer of property Act, 1882 Sec 53 para 4. See Anantha Raman
Pillai V. Arunachalam AIR 1952 TC 105.
10

The consideration paid was very small when compared to the real or original value of
the property transferred.

Evidence was shown that there was no actual payment of consideration as given in the
sale deed.

Not only these circumstances, but there are many other circumstances in which inference of
intent to defeat or delay creditors may be drawn. So every case is depended upon its own
facts and circumstances. It is subject to a matter of fact that the transfer is bonfire or
fraudulent.

IF THERE ARE SEVERAL CREDITORS

If there are several creditors, transfer in favour of one creditor does not amount to an
intention to defeat or delay the remaining creditors. Its upon the debtors discretion to pay
his debts in any order of his preference.
If A has taken loan from B, C and D, transfers certain properties to C in satisfaction of the
loan taken from him. This transfer necessarily cannot be considered as a transfer made to
defeat or delay the interest of other creditors. It was happened in the case of Mina Kumari v.
Bijoy Singh10, the Privy Council held that in the case there are two or more creditors, the
debtor can give preference to any creditor and can clear his debts in any order he chooses.
Another landmark regarding this context is Chogmal Bhandari v. Deputy Commercial Tax
Officer, Kurnool11. The facts of the case were: A partnership of two partners was dissolved in
1963. A registered deed of trust was executed by which the properties were vested in the
trustees for purpose of paying off the creditors. Afterwards a business was started by the
grandson of one of the partners and some provisional assessments were made his name for
the years 1966-1969. In 1971, Sales Tax authorities made the assessments in the name of the
Joint Hindu Family for the first time but found that the tax could not be realized from the
assesses on account of the Trust Deed, and therefore, treated the Deed as void and fraudulent
and contended that the assessments were made to defeat the debts of Sales Tax Department.
But in proceedings, these facts were found. It was found there was no assessment made
10 A.I.R. 1916 P.C. 238.
11A.I.R. 1976 S.C. 656.
11

against the Joint Hindu Family at the time of execution of Trust Deed. Therefore there was no
real debt due by from one of the executants of the Trust. There was no intention of use of
unlawful purpose by the Trust. In the Trust Deed, the names of the creditors to whom the
debts are to be payable were clearly mentioned. The Trustees did not keep reserve any
advantage for themselves. It was also found that there was no material to show that the
creditors obtained collusive decrees.
Here the question arisen before the Supreme Court was that whether this Trust Deed was hit
by Section 53 of TPA or not. In this context, Supreme Court held that:Observing the facts and circumstances of the case, it cannot be said that Trust was executed
to defraud the creditors, Sales Tax Department. Under the section a person must prove two
facts to challenge the transaction. Firstly, the document was executed by settler. Secondly, the
said document was executed with a clear intention to defraud or delay the creditors. It is a
matter of the fact that intention would be proved on the basis of facts and circumstances
surrounding the case. The Supreme Court also held that, it is a well settled that a mere fact
that the debtor chooses to prefer one creditor to the either because the priority of the date or
otherwise by itself cannot be taken as if it was done to defeat the other creditors.

EXCEPTIONS
Section 53(1) recognizes two exceptions. The rule that a fraudulent transfer can be avoided
by creditors is not applicable to:
a

A transferee in good-faith and consideration,

Any law relating to insolvency for the time being in force.

A transferee in good-faith and consideration:

A transferee is protected if he takes property in good-faith and consideration. When a
transferee purchases a property in good-faith and consideration, the creditors cannot take
benefit of 53(1). Where a transferee has no knowledge i.e. no actual or constructive notice of
the fraudulent intention of the transferor, the creditors cannot claim the property or avoid the
transfer under Section 53(1). But if the transferee is aware of the fraudulent intent an aim and
keeps silent, it is not be done in good-faith and cannot get the benefit of this exception.

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In the case of Vinayak v. Kaniram12, the transferors intention was to convert his immovable
property into cash so as to keep it out of reach of the creditors and the purchaser was aware of
that intention of the debtor. The Court held that the purchaser was also a party to fraud as he
was aware of that fraudulent intention and sale was voidable at the option of the creditors.
In Kapini Goundan v. Sarangapani13, a man who had taken large sum of money as loan,
transferred his whole property to the children of his first wife in consideration of her relations
allowing him to marry a second wife. In this case, the Madras court held that the
consideration was good and the transfer was not on the basis of fraudulent intention to keep it
away from creditors. It should be noted that this decision must be regarded as only an
exception and should not be regarded as a general rule.
Therefore, good-faith on the part of transferee is more significant factor in protection of
rights of the transferee than payment of consideration.

Any law relating to insolvency for the time being in force:

The rights of the transferee created under the law of insolvency are not affected by Section 53
even if the transferors intent was to defeat or delay the creditors interest. The main aspect of
the insolvency laws is that the properties of the insolvent are equally distributed between the
creditors. If one creditor is given preference, then it is deemed to be a fraudulent transfer
under this section. Where the transferor (debtor) has been declared insolvent, and the
transferee purchases such property from him, the transfer cannot be avoided by creditors. In
such cases, the Insolvency Courts are competent here to decide whether the transfer was
voidable under Section 53 of TPA.

12 A.I.R. 1926 Nag. 293.

13 (1916) Mad. W.N. 288
13

COMPARATIVE
STUDY

Fraudulent Transfers Laws in UK

Section 423 of the Insolvency Act, 1986 deals with fraudulent transfers in United Kingdom.

423. Transactions defrauding creditors.

(1) This section relates to transactions entered into at an undervalue; and a person enters into
such a transaction with another person if
(a) He makes a gift to the other person or he otherwise enters into a transaction with the other
on terms that provide for him to receive no consideration;
(b) He enters into a transaction with the other in consideration of marriage or the formation of
a civil partnership; or
(c)he enters into a transaction with the other for a consideration the value of which, in money
or moneys worth, is significantly less than the value, in money or moneys worth, of the
consideration provided by himself.
(2)Where a person has entered into such a transaction, the court may, if satisfied under the
next subsection, make such order as it thinks fit for

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(a) Restoring the position to what it would have been if the transaction had not been entered
into, and
(b) Protecting the interests of persons who are victims of the transaction.
(3)In the case of a person entering into such a transaction, an order shall only be made if the
court is satisfied that it was entered into by him for the purpose
(a) Of putting assets beyond the reach of a person who is making, or may at some time make,
a claim against him, or
(b) Of otherwise prejudicing the interests of such a person in relation to the claim which he is
making or may make.
(4) In this section the court means the High Court or
(a) If the person entering into the transaction is an individual, any other court which would
have jurisdiction in relation to a bankruptcy petition relating to him;
(b) If that person is a body capable of being wound up under Part IV or V of this Act, any
other court having jurisdiction to wind it up.
(5) In relation to a transaction at an undervalue, references here and below to a victim of the
transaction are to a person who is, or is capable of being, prejudiced by it; and in the
following two sections the person entering into the transaction is referred to as the debtor.

15

Subsequent
Transferees
and
Cancellation of
Fraudulent
Registration

Section 53 (2): Gratuitous transfer to defraud subsequent

transferee
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. This section
explains about the situation where an immovable property is transferred to person without
16

consideration and the same property is again transferred to another person. So the subsequent
transferee has advantage under this section where he can avoid the first transfer. But in this
case the subsequent transferee should prove that the first transfer was a sham or fictitious
transfer made to defraud him. The general rule is that the first transfer has advantage or
preference over the second and so on, but if the subsequent transferee proves that the first
transfer was fraudulent and it was made to defraud him, the later transfer would stand valid. It
should be noted that this section only protects the interest of the bona fide transferee and the
transfer should have some value (consideration). The mere fact that the first transfer was
gratuitous and the latter transfer was for consideration does not essentially raise the
presumption that the prior transfer was made to defraud. Fraud in the prior transfer must be
fully established by the subsequent transferee.

Cancellation of Fraudulent Registration

The Registering Authority has been held to have an inherent power to cancel registration of
fraudulent sale transactions. The sale in such place takes place by reason of fraud played by
the transferor and transferee. Such registration is void. The true owners can nullify such sale
by executing and registering a cancellation fees without seeking a declaration or cancellation
of the transfer deed from court. The registration of a document cannot be taken to be an
absolute sale divesting owners of their rights and rendering otiose section 31 and 34 of the
Specific Relief Act, 1963.
Illustrative cases(I) A creditor obtained a decree against a widow who had a life interest in the property gifted
to her by her husband. The widow in order to render the property out of reach of the creditor
surrendered her interest to her son. It was held that the surrender was voidable at the option of
the creditor under section 53.
(II) A, who is embarrassed, wishes to convert his property into cash so as to conceal it from
his creditors. B, who was aware of his condition, assisted him by purchasing the property.
The sale was held to be voidable under section 53.

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CONCLUSION

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