Fraudulent Transfer Under Transfer of Property Act

A fraudulent transfer is a property transfer made by a defaulter in an attempt to defeat a creditor's collection efforts against the property. This usually happens when a nonpayer attempts to sell the whole thing to anyone for a set amount of money in order to keep his property out of the hands of his creditors. If the court determines that the contract is a deception designed to defraud the creditor, it will set aside the contract and order the person holding the property to return it to the creditor.

Meaning of Fraudulent Transfer

The concept of "fraudulent transfer of property" refers to an illegal transfer of property with the intent to defraud or delay creditors. In the instance of fraudulent property transfer, the debtor intentionally deprives the creditor of his lawful and just entitlements. Most fraudulent transfers occur in the context of a debtor-creditor relationship. Section 53 of the Transfer of Property Act of 1882 recognises the regulations governing fraudulent property transfers.

A constructive fraudulent transfer is the other form of fraudulent transfer. This is relocation when a person does not obtain "rationally equivalent value" in exchange and runs away with insufficient property to pay bills as they come due.

Essential Elements of Fraudulent Transfer

The following are the essentials of a fraudulent transfer under the Transfer of Property Act −

• The transferor makes the property transfer.

• It should be immovable property.

• The transfer is done without consideration.

• The transfer is done with the goal of defrauding a subsequent transferee and defeating or delaying his creditors.

• Such a transfer may be voidable at the option of the subsequent transferee.

Exceptions

The following are the exceptions to fraudulent transfers under the Transfer of Property Act −

• Acted in good faith, and

• The transfer was for consideration.

Objective of Fraudulent Transfer

Section 53 of the Act is applied when an immovable property is fraudulently transferred by a transferor with the unjustified intention of defrauding the creditors' interests in such a way that they are defeated or delayed. The legislature created this legislation in order to protect creditors' financial right to acquire their lent amount.

Burden of Proof

The burden of proving that a transfer is fraudulent falls on the creditors under Section 53 of the TPA, 1882, as they are attacking the debtor with this section. Once the creditor establishes that the transfer was made fraudulently in order to defeat or delay his claims, the burden shifts to the transferee to prove that he acted in good faith, is a bona fide purchaser for value, and was not a party to the fraud. As a result, the transferee can use this section as a shield to defend himself, and the creditor can use it to attack the debtor.

Scopes of Fraudulent Transfer

Major scopes of fraudulent transfer are −

• Section 53 of the Act only applies to immovable property and does not apply to moveable property.

• A creditor files a suit to take advantage of the provision not in an individual capacity but in a representative one that includes subsequent creditors.

• This section doesn't really declare a transaction void from the start, but it can be considered voidable at the option of the creditor who has been defrauded and defeated in his financial interests.

The Madras High Court observed in Saroj Ammal v. Sri Venkateswara Finance Corp. (AIR 1989 NOC 4 Mad) that the essential ingredient to invalidate a transfer under Section 53 of the Act might be inferred as a fraudulent intention to defeat or delay the creditors. The transferee must convey the fraudulent intent in order to help the transferor carry out this intention.

Effects of Section 53 of TPA, 1882

If the creditors do not choose to avoid a fraudulent transfer of property, the transfer may be valid between the debtor and purchaser. When a substantial portion of a transfer is fraudulent, the whole transfer is considered fraudulent. Where only a part of the consideration was owed to the creditor and the rest was fictitious, the whole transfer must be void.

Case Law

Kanchanbai vs. Moti Chand, AIR 1967 MP 145

In this case, the court stated that the term "creditors" might also refer to a single creditor. The provision would be attracted even if only one creditor was defrauded or intended to be defrauded. The transfer was made in this case to fail and delay the creditor's claim. As a result, section 53 would be applicable.

Dr. Vimla vs. Delhi Administration, 1963 Supp. (1) CR 585

The Supreme Court observed in this decision that the term "fraud" has two elements: deceit and injury to the defrauded person. The harm does not just result in economic loss. It also involves the deprivation of property or money, as well as harm to a person's body, mind, and reputation.

Conclusion

The extent of fraudulent transfers is full of potential issues and traps. But still, there would be no poverty for asset protection thinking if the Fraudulent Act did not exist. When a creditor is about to begin collection proceedings, a debtor may have only left his or her assets to family and friends, leaving the creditor with no useful performance to underwrite commerce.

And, while piece debtors may complain about the broad scope of the fraudulent assign act, it is ultimately a very necessary law to ensure the sustainability of technical transactions as well as in part disposition and business.

Frequently Asked Questions (FAQs)

Q1. What is the validity of a fraudulent transfer?

Ans. A fraudulent transfer of property is voidable at the choice of the creditors, and if they do not want to avoid it, the transfer may be valid between the debtor and purchaser.

Q2. What are fraudulent transfers under the Transfer of Property Act?

Ans. In simpler terms, a fraudulent transfer of property refers to an illegal transfer of property with the intent to defraud or delay creditors. In the case of fraudulent property transfer, the debtor intentionally deprives the creditor of his lawful and just entitlements.

Q3. What are the defenses against fraudulent transfers?

Ans. The best defense against a fraudulent transfer claim is that the property transferred was exchanged for something of reasonable value. Courts will use a two-step process to evaluate the whole of the circumstance in determining whether the consideration was reasonably equivalent.