Doctrine of Fraudulent Transfer

Lord Keeper in the case of Partridge v Gopp[1]had enunciated certain words which are relevant herein. He opined that no one has power over his property to such extent using which he, whilst using his right of alienation of property, can delay, defraud or hinder his creditors. The only the situation he can do is when it is bona fide and is done upon consideration considered good in the eyes of law.

The Transfer of Property Act, 1882, in Section 53 which deals with the Doctrine of Fraudulent Transfer, embodies this very principle wherein it says that every transfer of property, which is immovable in accordance with the relevant section of The Transfer of Property Act, 1882, which is done possessed with an intention aimed to delay or defeat the creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ] of the transferor shall be voidable.

Such option to consider the transaction void or not has been left in the hands of the aggrieved party who, here, will be the delayed or defeated creditors. This means that even though such transfer is, in the eyes of law, valid but it is left upon the creditor as to whether he wishes to avoid or not. The motive of the legislature behind such arrangement is to give the option to the party who has suffered or whose interest has been affected.

Object behind the Doctrine of Fraudulent Transfers

Section 53 is attracted in cases wherein any transfer of property, which is immovable in accordance with the relevant sections of The Transfer of Property Act, 1882, is done with the design or scheme to fulfil the objective of defrauding his creditors in a manner that they are defeated or delayed.

It was such practice that compelled the legislature to enact this section. Their objective was to lend protection to creditors who are those to whom the transferor owes some sort of liability which is financial in nature. The basic objective is to lend a blanket to such people who suffer in the nature of delay or defeat of their interest. Such people whose mere fault was to lend money to the ill-intentioned transferor must be provided some kind of security- one which only the legislature through legal policy can provide.

The doctrine of Fraudulent Transfer from the perspective of English Law

Whilst delving into the Doctrine of Fraudulent Transfer from the perspective of Indian Law, it is interesting to see the perspective of the English Law – more so in the case of legislation which were introduced in the colonial era, like The Transfer of Property Act, 1882.

The doctrine of Fraudulent Transfer, from the the perspective of English Law is dependent, to the most extent, upon a the celebrated case of Twyne[2]. In this particular case law, Pierce owed certain liability which was financial in nature to two parties – Twyne and C. Now, C i.e. the second person to whom Pierce owed such liability [ financial in nature ] approached the court by filing a suit seeking help in repayment of his debt by Pierce.

However, before the suit could come to any kind of fruition in the court, Pierce, being in the possession of goods as well as the chattels, in hush-hush manner made a deed of gift which was general in nature with the subject matter encompassing the totality of his belongings of chattels and goods to Twyne, the first person to whom Pierce owed such liability [ financial in nature ]. Such a gift was repayment of the debt that was owed to Twyne.

On a later instance, C secured judgment to procure goods and chattel in a manner that satisfies C’s debt. In execution of such judgment, the seizure was sought to be done – to which Twyne resisted. Twynebrought forth the argument that he had been a purchaser for value,which cannot be deemed to be inadequate, consideration which was also bona fide within the Fraudulent Conveyances Act, 1584.

At this juncture, question as to whether the gift made in favour of Twyne was done with the design as to defraud C, came into being.

To such, the honorable The court opined that:

• The gift in question seemingly held marks and symbol that it was meant to defraud since the gift is quite general, with no necessity, in a normal sense, for the donor to do such.
• Another indication was the unusual behaviour of the donor to continue to hold possession of the gifts and what was even more so out of character was to keep using them as if they were his own only. The court opined that this was a clear indication of his ill – intent in the whole case in question.
• As the saying goes – gifts that are given in secret are always suspicious. In the present case as well, the gift was given in secrecy which arouses suspicion of the court.
• The court questioned the need to gift the title of such substances which were lis pendens. It is a strong symbol of ill – intent to have gifted such substances during the pendency of the suit.
• The trust which existed between the donor and donee made it apparent that the fraudulent act was covered by the trust. The act of donee to allow the donor to not only keep the possession of the goods gifted but to continue to make use of it as of they were his own is certainly an act of trust.
   

In view of such and keeping note of the fact that the gift deed was indeed made on good consideration but was, in no circumstances, bonafide - the celebrated Star Chamber [ comprising of Sir Thomas Egerton, Chief Justice Popham, and Anderson ] held this particular gift, in question, was indeed an attempt by Pierce to defraud one of his creditors under the Fraudulent Conveyances Act, 1571.

In another celebrated case dealing with a similar issue, Edwards v. Harben[3], the judgment, which was delivered by Buller, J., opined that if the possession is not done via a deed [ made before or after ], it is deemed to have been carried out with an intent to defraud. In such a case, it is void.

Essentials of the Doctrine of Fraudulent Transfer

The essential requirements of Section 53 of TPA are as mentioned below:

1. Transfer of property
2. The property must be immovable in nature
3. Transfer in question must have been done with the plan or scheme in mind to delay or defeat
4. Such delay or defeat must be suffered by the creditor(s)
5. The transfer would be voidable
6. Transfer must be for consideration

1. Transfer of Property

   The very first essential is the application of The Transfer of Property Act, 1882 itself. If the transaction does not fall within the ambit of such legislation, there is absolutely no question of application of Section 53 of The Transfer of Property Act, 1882. According to the Act[4], transfer of property means when any person transfers property to one or more people, or to himself and one or more people.
   
   Such a person may include a company, a body of individuals, an individual or association, and even immovable property can be transferred – which would not, in any case, include growing crops, standing timber, or grass[5]. Such transfer can be in present or even the future. However, there are certain rights which cannot be, in any case, be transferred which have been stipulated in Section 6 of The Transfer of Property Act, 1882. This transfer, moreover, shall be valid ( in the eyes of law ) and additionally, should bestow a good title upon the transferee.
   
   Following are some examples of transactions which do not transfer of property:
   
   • Surrender and relinquishments.
   • Relinquishment of share by one co-parcener in favour of the other[6].
   • Partition and family settlements but in case such partition is done with the design or scheme which is aimed towards affecting creditors in a manner that would delay or defeat the interests of the creditors, this section will apply
   • Where it is claimed that the transfer was a transaction that would be deemed to be fictitious or sham ( in the eyes of law ) and there was no real transfer and was merely used in such a manner that it acted as a shield for achieving a hidden agenda, Section 53 is not applicable.
      

2. The property must be Immovable in Nature

   Section 53 of The Transfer of Property Act, 1882 attracts application to only those property which is considered to be immovable in nature. At this juncture, we face the pertinent question as to what are immovable properties:
   While The Transfer of Property Act, 1882 does not define what is immovable property, according to Section 3 of the Act, the immovable property does not, within its ambit, include:
   
   • Grass [which refers to fodder]
   • Standing Timber [which refers to trees which are fit to be used in repairs or buildings]
   • Growing Crops [which includes all such vegetables, etc. which are grown with the sole purpose of their produce]
     
     Scholars consider this definition to be a negative one since instead of outrightly providing definition of immovable property, The Transfer of Property Act, 1882, merely gives us three things that are not immovable property.
     
     We look towards the General Clauses Act, 1867, for a more comprehensive definition of immovable property. The General Clauses Act, 1867 specifies the following as immovable property:
     
     •  Land:
       The term land includes within its ambit both - the lower as well as the upper surface area of earth. Any kind of interest which tends to vest in such would be treated as it is of immovable property. It includes streams, well, etc.
     • Benefits which are arising out of the land :Within such portion is includes every thing which deals with interest and rights vested inland, as defined above. Right of collect of rent is one prominent example.
     • Things that are attached to Earth : Within this category, there are further three subcategories that need to read into:
       
       • Things which are rooted in the Earth:
         like shrubs, trees but does not include grass, standing timber, and growing crops. For example, mango trees are immovable property.
         
         Note:
         In the celebrated case of Marshall v. Green[7], the learned court opined that if the sale was only of the right to cut and enjoy the trees as timber then it does not qualify as an interest in an immovable property but instead qualifies as an interest in movable property. It is only when such right is extended over a number of years, it will qualify as an interest in an immovable property.
          
       • Things which are embedded in the Earth – like minerals, buildings, etc. By the usage of the word ‘embedded’, it means to structures or things which have laid their roots or foundations laid much below the surface area of the Earth.
          
       • Things which have been fastened, in a the manner which is permanent, to anything which is embedded in the Earth – done for achieving one purpose which is of enjoyment but in a permanent sense. However, if the things which are attached are just temporary or transitory in nature and do not go on to add up to the value as well as the purpose of the structure or thing they have been attached to, they cannot be termed as immovable in nature. An appropriate example here would be ceiling fans,doors, and windows.
         
         In order to determine whether a fixture in question is of permanent nature or is merely temporary, we must consider the following points:
         
         • Mode of fixation – that is to say it is temporary, standing on its own or has been dug in the Earth, etc.
         • Objective or the purpose which the fixation is intended to fulfil
            

3. Transfer in question must have been done with the plan or scheme in mind to delay or defeat

   The third essential of Section 53 is that the intention behind the transfer must be to delay or defraud creditors. This is to say that it is important to cull out the intention behind the transfer which is in question. If such transfer has been with the scheme or design to result in delay or defeat of the creditors – such transfer is voidable. Now the question arises as to how can this, seemingly, ill–intention is proved? It must be proved by making use of evidence – which may be direct or circumstantial in nature. Each case in question must be looked closely into and examined keeping in mind the surrounding circumstances. Some situations which tend to give strong presumption that the transfer,in question, was carried out with a scheme or design which is fraudulent in nature are:
   
   • If the transfer was made under such circumstances that it was not widely known i.e. in secrecy
   • If the transfer was done in haste.
   • If the transfer was carried out soon after a decree was passed against the judgment-debtor. Such decree must be such to order the repayment of debt.
   • If the transfer was such that the debtor, mysteriously, transferred the whole of his property without any thought to himself – i.e. without keeping any part of the property for himself.
   • The consideration made for the transfer was such which was significantly small, when it is compared to the real, original or actual value of the property transferred.
   • In accordance to the evidence discovered, it was proved that there is actually no consideration payment, contrary to what was given in the sale deed.
     
     There are many more such circumstances but what is pertinent is that each case is read in a different light, dependent solely on its own facts and circumstances – there is no straight – jacket formula.
      

4. Such delay or defeat must be suffered by creditor(s)

   The fourth essential is that the delay or defeat must have been suffered by creditor(s). This is to say the ill – intentioned transfer, in question must be such wherein the affected people is or are creditor(s). Herein, it is pertinent to understand the term "creditor". It is said to be understood in a wide sense for this section.
   
   In the case of Ram Das v Debut[8], the term was interpreted to include such people to whom the transferor owes some kind of liability which is financial in nature [ i.e. creditors ] which would include not only those to whom he owes at the time of transfer in question as well as those to whom he owes at a time which is after the transfer in question.
   
   In order to effectuate application of The Transfer of Property Act, 1882, more specifically, the Section 53 of the Act, it is necessary for the affected party to be a person to whom liability is owed to by the transferor, a liability which is financial in nature. However, it is not necessary for the creditor to be secured. On the contrary, such affected creditor could be an unsecured one as well.
   
   Moreover, even a subsequent creditor i.e. a person to whom the liability which is financial in nature is owed to at a later date than the transferor, can move to the court under this particular section. This connotes to the fact that debt to exist at the time of effectuating the transfer is not mandatory.
   
   If transfer of property is effectuated before the transaction of debt, possessed with the intention or scheme that the transferor would undertake a liability [which would be financial in nature] upon his head in future and for such purpose wanted to restrict his property from the reach or hold of future creditors, it is deemed to be equally wrong or fraudulent in the eyes of law. Such transaction is also liable to be set aside. Such setting aside, however, would be at the insistence of creditors only since such transaction is deemed voidable.
   
   However, armed with the mere fact that the loan was undertaken right after the property was transfer or that there were subsequent debtors, is not sufficient for establishing the fact that there was a scheme or design to defraud, delay or defeat the subsequent creditors.
   
   Furthermore, one must remember that by usage of ‘creditors’, the legislator does not mean that the intention should be to delay or defeat all the people to whom the transferor owes some kind of liability which is financial in nature. The intention or scheme or plan to delay or defeat some or even just one of the people to whom the transferor owes some kind of liability which is financial in nature is sufficient to ensure application of Section 53.
   
   In the case of Kanchanbai v. Moti Chand[9], the term creditors used in Section 53 was discussed. In such case, the transferor undertook a liability which was financial in nature amounting to a value of Rs. 2600 i.e. two thousand and six hundred rupees. The creditor requested repayment of the money which was owed to him.
   
   However, even after doing so, he was not paid back. At such instance, such person to whom money was owed warned that he would move to the court to seek payment of his money. On receipt of notice of such filing of suit, the transferor, by executing a gift deed [ in favour of his daughter ], gifted his property. At this point, fed up of the transferor’s antics, the creditor moved to the court seeking respite under Section 53 of the Act.
   
   The transferor put forth the argument that Section 53 requires more than one creditor and in the present instance, there is only one creditor. Hence, Section 53 would not be applied.
   The learned court, on the other hand, opined that the usage of word creditors cannot be construed to mean that Section 53 would be applicable only in the occasion of presence of multiple creditors. This section would attract application even if one single creditor is delayed or defeated or when there was an intention to delay or defeat even a single creditor. Therefore, in the present case, Section 53 was held to be applicable.
    

5. Transfer would be voidable

   Every transfer of property, which is immovable in accordance to the relevant section of The Transfer of Property Act, 1882, which is donepossessed with an intentionaimed to delay or defeatthe creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ] of the transferor shall be voidable. Such option to consider the transaction void or not has been left in the hands of the aggrieved party who, here, will be the delayed or defeated creditors.
   
   This means that even though such transfer is,in the eyes of law, valid but it is left upon the creditor as to whether he wishes to avoid or not. The motive of the legislature behind such arrangement is to give the option to the party who has suffered or whose interest has been affected.
   
   However, we must make note of the fact that only the particular part of transaction which was effectuated with an ill – intention, would be regarded as one which is fraudulent in nature. The rest of the transfer – which was not tainted with this scheme, would be effectuated normally i.e. something akin to severability would be effectuated. The catch here is that in transfers wherein a major part of the transaction in question is held to be one made possessed with an ill – intent to delay or defeat the creditor(s) and fraudulent parts of the transaction cannot be severed from the rest of the transaction, then whole of such transaction in question would be held to be voidable.
    

6. Transfer must be for consideration

   The transfer must be such which is for consideration, one which is not such which was significantly small, when it is compared to the real, original or actual value of the property transferred. This is to say the consideration for the transaction, in question, must be adequate.
   
   

   Exceptions to Doctrine of Fraudulent Transfer

   The Transfer of Property Act, 1882, by way of Section 53 has recognized two exceptions in totem.
   The doctrine of fraudulent transfer is not applicable to:
   
   1. The person to whom the transfer is made does the whole deed in good faith and for consideration.
   2. Application of any law which relates to insolvency which is being enforced at such time.
      
      The person to whom the transfer is made does the whole deed in good faith and for consideration.

The transferee i.e. the person to whom the transfer is made is protected by law if they took the property, in question, in absolute good faith and gave due consideration for the same. When the transferee i.e. the person to whom the transfer is made purchased any property, being immovable in nature, possessing such intent which is considered good faith and paid consideration which is considered adequate – the creditors [ i.e. the people to whom the transferor owes some kind of liability which is financial in nature ] cannot take the help or derive benefit from Section 53 of the Act.

In the instance that the person to whom the transfer is made lacks any knowledge i.e. possessed no constructive or actual notice of the ill – intent or intention which was fraudulent nature of the transferor, the creditors [ i.e. the people to whom the transferor owes some kind of liability which is financial in nature ] cannot try to stake claim over the property or to effectuate the transfer as void under Section 53 of the Act. But if the transferee i.e. the person to whom the transfer is made was keenly aware that the transferor was possessed of such foul intent and keeping such in mind aims to keep mum about it, the transferee is not in good faith and would not be covered by the exception.

In the case of Vinayak v. Kaniram[10], it was discovered that the intention of the person making the transfer was not one which could be termed as one which was good since the intention was to sell off his property which was immovable in nature and procure cash for it in return so as to, effectively, keep it out of the hands of the people to whom he owed any kind of liability which was financial in nature. Now, to make matters more interesting, it was further discovered that the purchaser of the property was well – aware of his ill – intention to defraud.

The learned court, herein, held that since the person who purchased the property was aware of the transferor’s ill – intention, he also becomes party to the fraud because of his knowledge. The transaction of sale was held to be voidable i.e. option to consider the transaction void or not has been left in the hands of the aggrieved party who, here, will be the delayed or defeated creditors.
In the case of Kapini Goundan v. Sarangapani[11], a person belonging to the male population, had taken a huge sum of money which was his liability which was financial in nature. The man, being clever and thinking he was bigger than law, effectuated transfer of his property to children who were borne from his marriage to his first wife in order to to, effectively, keep it out of the hands of the people to whom he owed any kind of liability which was financial in nature.

He did so considering [ more like claiming ] it as a reward for her allowance to him to wed the second wife. In this case possessing interesting factual matrix, the learned Madras court, held that the consideration the person belonging to the male population was good in law and the transfer lacked any indication of malice which would be to keep the property away from the people to whom he owed any kind of liability which was financial in nature. However, according to the author, the learned court erred in its decision and it would be wise to consider this decision to be an exception and not something of general nature.

Application of any law which relates to insolvency which is being enforced at such time.

The rights of the person to whom the transfer is made, those which stem from any law which relates to insolvency which is being enforced at such time, are not effectuated by the application of Doctrine of Fraudulent transfer i.e. Section 53 even if the person transferring the property possessed such intent which was such to effectuate the interests of the people to whom he owed any kind of liability which was financial in nature so as to in effect, delay or defeat it.

The main point of the laws on insolvency are that the properties owned by the person who has become insolvent are distributed in an equal manner between such people to whom he owed any kind of liability which was financial in nature. However, if any one person to whom he owed any kind of liability which was financial in nature is preferred, in any manner, over the other then the transfer is considered to be of fraudulent by nature under such section. Wherein the person who is transferring the property, is declared to be insolvent and in such circumstances, he sells off his property – the transaction cannot be, in any case, avoided by the people to whom he owed any kind of liability which was financial in nature.

In case of multiple creditors

In the case that there are a number of creditors i.e. there are more than one creditor, the transfer which is made in favour of just one of the creditors is not considered to be made possessed with the intentionaimed to delay or defeatthe creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ].

The logic behind such is that, ultimately, it is upon the debtor i.e. it is his discretion as to decide his own order of payment. He has that kind of power in his hands. To give an example – if T takes a loan from Y, U and O and decides he will transfer his property to Y in order to pay off whatever debt he owed to Y, it is upon his own discretion.

This transfer cannot, prima facie, be termed as one which is made possessed with the intention aimed to delay or defeat the creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ].

In the case of MinaKumari v. Bijoy Singh[12], the learned Privy Council, opined that in the instance of existence of two or more people to whom the transferor owes some kind of liability which is financial in nature, the debtor has the power to give preference to any of the creditors and clear off his debts in any desired order.

Burden of Proof

Burden of proof with respect to showcasing whether the transfer was made possessed with the intention aimed to delay or defeat the creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ] lies on such people to whom the transferor owes some kind of liability which is financial in nature i.e. the creditors. This is so since they are the ones who can actually prove whatever delay, defraud or defeat they suffered at the hands of the ill – intentioned transferor.

In the case of Chandradip v. Board of Revenue[13], the burden of proof with respect to prove the fraud was held to lie on the person who alleged such fraud. However, in the humble opinion of the author,it must be noted that the onus to prove the possession of ill – intention which would result in delay, defraud or defeat of the creditors would be hugely dependent upon the facts and surrounding circumstances of each case. This is to say there is no straight – jacket formula whilst proving the intention of the transferor.

Sham Transfers

Layman definition of sham transfer is one which is merely fictitious in nature. Such transfers are made with the intention to not, in actuality, effectuate the transfer i.e. the intention of the transfer is not that the property should go in the hands of the transferee.

Sham transfers are an umbrella term which include Benami transactions which are those transactions where the intention of the transfer is not that the property should go in the hands of the ostensible owner. In the celebrated case of Jangali Tewari v. Babban Tewari[14], the learned court opined that a sham transfer cannot be termed as a real transfer, in any kind of sense, since in actuality it is not one.

The real owner is not necessarily possessed of intention which is one which is fraudulent per so. Hence, these types of transfers, in actuality, do not need to be avoided since the ‘real’ title already rests with the transferor.

We must note that, the decision as to whether a transaction is real or fraudulent or sham, is wholly and solely dependent on the factual matrix of the case in question. If it is clearly proved by the creditors that the transfer of property, which is immovable in accordance to the relevant section of The Transfer of Property Act, 1882, is done possessed with an intention aimed to delay or defeat the creditors [ or the people to whom the transferor owes some kind of liability which is financial in nature ] – then such a transaction can be, no doubt, avoided by the people to whom the transferor owes some kind of liability which is financial in nature.

However, the present circumstances have changed. The Benami Transaction Act, 1988 stated that those properties which are purchased under the name or identity of the ostensible owner [ who is also called the benamidar ], the property will belong to such ostensible owner and the owner, who claims to be the real owner, cannot, in any case, claim from him.

This Act now considers such benami transfer as one which are real in nature under which the ostensible owner is considered to be the real one as a matter of fact. However, Section 3 of the Transfer of Property Act, 1882, states that the legal effect of Section 53 of the Act or any law which is related to the transfer for illegal purposes are not effectuated.

Conclusion
Doctrine of Fraudulent Transfers is embodied in The Transfer of Property Act, 1882, in Section 53 wherein it is stated that all those transfers of property, which are considered to be immovable in accordance to the relevant section of The Transfer of Property Act, 1882, which is effectuated possessed with an intentionaimed to delay or defeatthe creditorsof the transferor shall be voidable.

Such option to consider the transaction void or not has been left in the hands of the aggrieved party who, here, will be the delayed or defeated creditors.There are certain exceptions to this doctrine with respect to the transfers which are effectuated towards the transferee with adequate consideration and in good faith.

But if the transfer is merely a gift to a complete stranger, this question of good faith is completely irrelevant.The motive of the legislature behind such arrangement is to give the option to the party who has suffered or whose interest has been affected and to discourage ill – intentioned transfers.

End-Notes:

1. Partridgle v. Gopp,(1758) 28 ER 647 (648).
2. Twyne’s case, Reported in 3, coke, 80.
3. Edwards v. Harben, 2 Term Rep. 587.
4. The Transfer of Property Act, 1882, §5, No. 4, Acts of Parliament, 1982 (India).
5. Id. §3
6. Sundar Lal v. Gursaran Lal, A.I.R. 1938 Oudh 65
7. Marshall v. Green,97 Misc. 492
8. Ram Das v. Debut,A.I.R. 1930 All 610
9. Kanchanbai v. Moti Chand, A.I.R. 1967 MP 145
10. Vinayak v. Kaniram,A.I.R. 1926 Nag. 293
11. KapiniGoundan v. Sarangapani,(1916) Mad. W. N. 288
12. Mina Kumari v. Bijoy Singh,A.I.R. 1916 P.C. 238
13. Chandradip v. Board of Revenue,A.I.R. 1978 Pat 148
14. Jangali Tewari v. Babban Tewari,A.I.R 1982 All. 316