Fraudulent Transfers

Introduction:

The term “Transfer of Property” means an act, which a living person conveys property to one or more other living persons, in present or in future is called transfer property. Such transfer of immovable property is regulated by the Transfer of Property Act, 1882. Any kind of property may be transferred except it is prohibited by this Act or any other law in force.

Following properties cannot be transferred:

• Easement
• A mere right to sue
• A public office and also the salary of the public officer
• Stipends allowed to military forces viz. Army, Naval, Air force
• Civil pensioner of the Government
• Political pensions
• Transfer made against unlawful object or consideration

Person competent to transfer:

1. Every person who is competent to make a contract and entitled to transferable property
2. He is authorised to dispose of the property not owned by him
3. He is competent to transfer property either wholly or in part absolutely or conditionally

The term “Fraud” means, when a thing is done by a person with the intention to defraud others, he or she is said to have done that thing fraudulently.  Supreme Court in Dr Vimla vs Delhi Administration defined fraud as, ” The term defraud involves 2 elements

1. Deceit;
2. Injury to the person deceived. The word injury is not restricted upto economic loss only. It is extended upto deprivation of property or money and also includes any harm caused to the body, mind and reputation of the person.

Fraudulent Transfer

Fraudulent Transfer can also be called as a fraudulent conveyance. In simple words, fraudulent conveyance means when a person seeks to avoid debt either by transferring money to another person or company or organisation. It is considered as a civil cause which means it does not arise criminal liability. The cause of action arises in the case of insolvent debtors. Generally, the action is brought by creditors.

A fraudulent transfer can be defined as when a debtor intentionally tries to impede, delay, deceive, defraud or hinder any creditor, such transaction is known as a fraudulent transfer. If a debtor pays the amount to one of the creditors in place of another, it can not be said as a fraudulent transfer. Therefore, the intention of a debtor is the main characteristic for determining the liability of a debtor.

There are two main types of Fraudulent Transfers;

1. Actual fraud:

In this type of fraud, a debtor for the protection of assets gives his assets to another person and becomes insolvent as he has nothing to pay his creditors. It is known as actual fraud. The intention of actual fraud is visible and plays a significant role.

2. Constructive fraud:

Constructive fraud signifies no clear intention. It might take place when the debtor is in distressed financial condition. Therefore, in constructive fraud, an intention to deceive is absent.

In India, Section 53 of the Transfer of Property Act, 1882 defines fraudulent transfer. Every owner of a property has the right to transfer his property. The transfer shall be made with a Bonafide Intention. When the transfer is made with the fraud intention for example deprivation of property or money, violence caused to any person.

Following are the essentials of Fraudulent Transfers:

1. Every transfer of immovable property made with the intent to defeat
2. Delaying the payment of the transferor
3. Transfer of immovable property made without consideration with intention of defrauding a transferee
4. Such transfer is voidable at the option of the subsequent transferee.

Intention of defeating or delaying the creditors:

In this Act, the creditor means a person to whom the transferor (Person who owns the property) owes the financial liability. The creditor and subsequent creditor comes under this section.

The transferor is not necessary to be in debt at the time of transfer. If the transferor intentionally takes a loan in future before the debt transaction and wants to take property out of reach of the creditors, can be said as equally fraudulent.

It is necessary to have the fraudulent intention and the intention of transfer must be to defeat or delay of payment to creditors.

Mina Kumari vs Bijoy Singh

In this case, Privy council held that when there are two or more creditors, the debtor has the right to give preference to any creditor and can clear his debts in any order as per his choice.

Provisions related to Fraudulent Transfers:

In these cases, the burden of proof lies in the creditors for showing the transfer was made to delay or defeat the creditor.

Gratuitous transfer of immovable property with the intention of fraud a subsequent transferee shall be voidable at the option of the subsequent transfer.

Case Laws

• Chogmal Bhandari vs Deputy Commissioner Tax Officer, Kurnool:

There was a partnership firm of two partners which was dissolved in the year of 1963. In the registered deed of trust which was executed by which the properties vested in the trustees for the purpose of payment of creditors. Thereafter a business was started by the grandson of one partner in the year 1966. In the year 1971, the Sales Tax authorities found that assessments in the name of the Hindu Undivided Family (HUF) that the tax could not be realised from the assessee’s account of the Trust Deed.

Therefore, they treated Deed as void and fraudulent and alleged that assessments were made to defeat the debts of the Tax Department. In this case, the  Supreme Court observed that there was no intention of use of unlawful purpose by the Trust. Also, the Trust Deed clearly mentions the names of creditors to whom the debts are to be payable. Therefore the Supreme Court held that “Observing the facts and circumstances of the case, the Trust deed was not executed to defraud the creditors. It is the fact that the debtor can choose or prioritise one creditor over the other.”

• Musahar Sahu and Ors. Vs Hakim Lal and ors, 1915:

It was the matter of when a debtor Hakim Lal chose one creditor over Musahar Sahu. Privy council heard the matter and passed a judgement that “Transfer of property by a debtor to one creditor or subsequent debtor in preference of another debtor can not be called as a fraudulent transfer. As there is the absence of intention to defeat or delay the interest of other creditors”.

• Abdul Shukoor Saheb vs Arji Papa Rao and Others:

This case was related to procedural matters to obtain attachment of the property for the protection of mortgage money. The Honourable Supreme Court held that the creditor might claim the attachment of the property of the debtor for the protection of mortgage money. The Supreme Court also remarked that there is no need to file suit for Attachment, the creditor may directly seek the debtor under section 53 of Transfer of Property Act,1882.

Conclusion

Fraudulent Transfer is also known as a fraudulent conveyance. Fraudulent Transfers is dealt by Section 53 of the Transfer of Property Act, 1882. The object of Fraudulent Transfer is to protect the creditor and any other subsequent creditor. The essentials of Fraudulent Transfers are transfer of immovable property and intention to defeat the creditor. While filing the suit the Privity of Contract principle is followed which means only parties to contract can file a suit. The burden of proof lies on the petitioner i.e. Creditor. It is a civil matter therefore it does not attract severe punishment but damages are charged.

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References:

• Section 53 of Transfer of Property Act, 1882
• Ashish Kumar Charan, Fraudulent Transfers, SCRIBD, (10 Nov 2012) https://www.scribd.com/doc/112546198/Fraudulent-Transfers
• Chogmal Bhandari & Others vs Deputy Commercial Tax Officer on 4 February, 1976 1976 AIR 656, 1976 SCR (3) 325
• Mina Kumari Bibi v/s Raja Bijoy Singh Dudhuria Decided On, 11 December 1916 (1917) 19 BOMLR 424
• Abdul Shukoor Saheb vs Arji Papa Rao And Others 1963 AIR 1150, 1963 SCR Supl. (2) 55
• Musahar Sahu vs Lala Hakim Lal, (1916) ILR43CAL52, Page No. 521-526