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Table of Cases Introduction Section 53 & Its Essentials English Law on Fraudulent Transfers Indian Law on Fraudulent Transfers Sham Transfers How Fraudulent Intention in the Transfer Can Be Proved If there are Several Creditors Exceptions to Section 53 (1) Section 53 (2): Gratuitous transfer to defraud subsequent transferee Burden of Proof Conclusion Bibliography 02 03 04 05 06 07 09 10 12 13 13 14 15
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Table of Authorities
Table of Cases:
Twynes case. Edwards v. Harben Sunder Lal v. Gurusaran Lal Nath v. Dhunbaiji Joshua v. Alliance Bank Jangali Tewari v. Babban Tewari Petherpermal Chetty v. Muniandi Servai Immani Appa Rao v. Gollapalhili Rama Lingamurthi Mina Kumari v. Bijoy Singh Chogmal Bhandari v. Deputy Commercial Tax Officer, Kurnool Musahur Sahu v. Hakim Lal Middleton v. Collak Vinayak v. Kaniram Kapini Goundan v. Sarangapani Chandradip v. Board of Revenue 05 05 06 06 06 07 07 07 10 10 11 11 12 12 13
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INTRODUCTION
Every owner of a property has right to transfer his property as he likes. There must be a bonfire 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. In some cases fraudulent transfers are valid in law but not void, but because they are made with malafide intention, equity would render it voidable by the person who was so defrauded. This principle of equity has been incorporated in Section 53 of Transfer of Property Act, 1882. This section disallows a person to convey or alienate his property when such conveyance defeats or delays the interest of his creditor or any subsequent transferee.
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SHAM TRANSFERS
Sham transfer means fictitious transfer. When the transferor does not intend that the property should be really vested in the transferee, such transfers are therefore unreal or colourable and never meant to operate between the parties. Such transfers are fictitious transfers. Benami transaction is also a sham transfer because the real owner has no intention that property should belong to ostensible owner. It can be clearly explained by the following cases. In the case of Jangali Tewari v. Babban Tewari6, a sham transfer is not a real transfer at all. The intention of the real owner is not necessarily fraudulent. So, such transfers do not require to be avoided because the real title already vests in the transferor. In the case of Petherpermal Chetty v. Muniandi Servai7, a sale deed of land was executed in June 1895 in favor of the predecessor of the appellant. The transaction was a benami transaction, it was not real. An equitable mortgagee of the land sued in September 1895, to establish his lien on the ground that the sale was intended to defraud creditors and obtained a decree by which the equitable mortgagee was paid off and the mortgage was discharged. On the death of the vendor of the land, the appellant, legal representative of the purchaser was sued by the heir of the vendor (respondent in the case) for the recovery of the land. The defence argument was that the plaintiff, on account of his participation in the fraudulent attempt to defeat his creditor, was not entitled to recover possession of the land. The court held that:Persons have been allowed to recover property which they had assigned away, where they had the intention to defraud or delay creditors, who, in fact, were never injured. But when fraudulent or illegal purpose has actually been effected by mean of the colourable grant, the legal maxim in pari delicto potior est condition possidentis applies. The court will help neither party. It says let the estate lie where it falls. To enable a fraudulent party to retain property transferred to him in order to effect a fraud must, according to the authorities, be effected. Then alone, does the fraudulent grantor or transferor, lose the right to claim the aid or support of the law to recover the property he has parted with. The principle however will not apply in the case if the transferor seeks for possession from the transferee before the fraud is effectuated. In the case of Immani Appa Rao v. Gollapalhili Rama Lingamurthi8, a sale of property was made with the mutual consent of the vendor and the vendee to defraud the creditors of the vendor. There was no consideration and the transferee also agreed to act as a
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benamidar until the transferor required him to reconvey the property to his sons. The transferor and his sons trespassed and occupied the property, as the creditors were defrauded. The transferor, in defence, urged that the transferee has no rights in the property as the transfer was a fraudulent transfer. So in this case the court observed that:The transferors emphasized that the doctrine which is pre-eminently applicable to the present case is ex dolo malo non oritur action or ex turpi causa non oritur actio. It means they contended that the right of action cannot arise out of fraud or out of transgression of law. According to them it is necessary that the possession should lie where it lies, in pari delicto potior est condition possidentis. The law favors him who is actually in possession in case where there is guilty of fraud on both the parties. The principle of public policy is that no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If the cause of action arises from the plaintiffs side, the court says that he has no right to be assisted; it is same in the case of defendants. The Court also said that there is no question of estoppels in such a case because the fraud in question was agreed by both the parties and both the parties have assisted each other in carrying out fraud. It also said, in such a cases the transferee would be guilt for liability of double fraud, as he joined transferor joined in the fraudulent scheme and participated in commission of the transfer and he committed another fraud by suppressing from the Court the fraudulent character of the transfer when he made out the claim for the recovery of the properties conveyed to him. The transfer was not supported by any consideration and therefore no title is transferred to him. So in the view of public interests, the Court held that the plea of fraud is allowed and tried and it is upheld that the estate should lie where it rests. Notwithstanding the rights of transferor and a benami transferee, if the transfer was made to defeat the creditors, a creditor himself can ignore a benami transaction and can proceed against the property as it was of the transferor. The creditor need not have to set it aside under this section because, benami transaction is not a transfer at all. We have to note that, whether the transfer is real or sham, it is depended upon the facts and circumstances in each case. If it is clearly shown that the very object of the transfer was to defeat the interest of creditors, the transfer can be avoided by the creditor under this section. But the present scenario is changed. The Benami Transaction Act, 1988 provides that properties purchased in the name of ostensible owner or benamidar shall belong to benamidar and real owner cannot claim from him. This Act now treats benami transfer as a real transfer under which the benamidar becomes real owner. However, Section 3 of this Act says that the provisions of Section 53 of TPA or any law relating to transfers for illegal purposes are not affected.
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because the priority of the date or otherwise by itself cannot be misleaded that it was done to defeat the other creditors. In Musahur Sahu v. Hakim Lal11, Kisun Binode and Musahur Sahu were the debtor and creditor respectively. Musahur Sahu sued the Judgment-Debtor Kisun Binode for the recovery of his debts in December, 1900. Musahur Sahu presented a petition for attaching the properties of the debtor as a security. This petition was filed in January, 1901, when the original suit was during pendency. In February, 1901, Kisun Binode, the debtor gave an affidavit that he has no intention to attach any property, accordingly the petition for attachment was dismissed. But after the petition was dismissed, Kisun Binode sold his properties to Hakim Lal who was another creditor of him. Then Musahur Sahu, pleaded that the transfer to Hakim Lal were done do defeat or delay his interest and therefore it should be held void under Section 53 of TPA and the properties should not be given to Hakim Lal. In this case, the appeal was dismissed by the Privy Council, and 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 the delay the interest of another creditor. The Lordships observed in the case Middleton v. Collak12, the transfer if defeats or delays the creditors is not an instrument which prefers one creditor to another but an instrument which removes a property from the creditors to the benefit of the debtor. The debtor must not remain any advantage or benefit for himself. He may one creditor and leave another unpaid. The court further observed that as soon as it is found that the transfer here impeached was made for adequate consideration in satisfaction of genuine debts, and without retaining any benefit to the debtor, it follows that no ground for impeaching it lies in the fact that the plaintiff who also was a creditor was a loser by a payment being made to this preferred creditor, there is no question being bankrupt.
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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.
BURDEN OF PROOF
The burden of proof lies on the creditors of the transferor to show that the transfer was made to defeat or delay the interest of the creditor. In the case of Chandradip v. Board of Revenue15, the onus to prove the fraud lies on the person alleging it. But it may be noted that the burden to prove the intention would largely depend upon the facts and circumstances of each case.
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CONCLUSION
Section 53 of Transfer of Property Act, 1882 deals with Fraudulent Transfers. This section has two sub sections. The first part of this section deals with the transfer made to defeat or delay the creditors of the transferors and it is voidable at the option of such creditor. The second part deals with the gratuitous transfers with intent to defeat or delay the creditors. This section has some exceptions in respect of the transfers done towards the transferee in good faith and consideration. But if the transfer is a gift towards the stranger, then the good faith is irrelevant. 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 basis of the section is that one ought to be just before being generous. This section was made to disallow a person conveying the properties to keep it away from the creditors. In my opinion, the laws regarding fraudulent transfers must be made stricter and such transferors or transferees who committed fraud must be penalized for committing fraud.
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BIBLIOGRAPHY
BOOKS
Dr.G.P.TRIPATHI ON THE TRANSFER OF PROPERTY ACT, (16 th EDITION, 2009). S.N.SHUKLA ON THE TRANSFER OF PROPERTY ACT, (27th EDITION, 2009). MULLA ON THE TRANSFER OF PROPERTY ACT, (10th EDITION, 2006). Dr. POONAM PRADHAN SAXENA, PROPERTY LAW, (2nd EDITION, 2011) Dr. AVTAR SINGH, TEXT BOOK ON THE TRANSFER OF PROPERTY ACT, (2nd EDITION, 2009) STATUTES TRANSFER OF PROPERTY ACT, 1882.
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