Fraudulent Transfer of Property
Fraudulent Transfer of Property
1. Introduction
A fraudulent transfer occurs when a person transfers property with the intention to defeat, delay, or defraud creditors or others who have lawful claims.
The law seeks to protect creditors and bona fide claimants by declaring such transfers void or voidable.
Key Legislation:
Section 53 of the Transfer of Property Act, 1882 – Transfers made to defeat creditors.
Indian Contract Act, 1872 (Sec. 19, 19A) – Voidable contracts made by fraud.
Limitation through civil remedies – Court can set aside transfers.
2. Definition of Fraudulent Transfer
Section 53, TPA (Illustration-based):
“Where a person transfers property with intent to defeat, delay, or defraud creditors or purchasers, such transfer is fraudulent against such persons.”
Essentials:
Transfer of property (movable or immovable).
Intent to defeat creditors or lawful claimants.
Existence of creditors or claimants at the time of transfer.
Knowledge of transferor about pending debts or obligations.
3. Characteristics / Essentials
| Feature | Explanation |
|---|---|
| Transfer | Must involve actual transfer of property |
| Fraudulent Intent | Done with intent to defeat/delay creditor or purchaser |
| Knowledge | Transferor knows about the debt or legal claim |
| Legal Consequence | Transfer is voidable against creditors, not automatically void |
4. Legal Effect
Voidable Transfer: Transfer can be set aside by court at the instance of the defrauded creditor.
Effect on Third Party:
If the property is transferred to a bona fide purchaser without notice, the purchaser may acquire rights.
No criminal penalty required: Civil courts can declare transfer fraudulent and restore property.
5. Illustrations
A owes money to B. A sells his land to C at nominal price to avoid paying B.
B can challenge the sale as fraudulent transfer.
D gifts property to E after knowing a creditor’s claim is imminent.
Gift may be set aside to satisfy creditor’s dues.
F transfers property to a family member to avoid execution of a decree.
Court may declare transfer voidable under Section 53, TPA.
6. Judicial Pronouncements
Hindustan Construction Co. v. Union of India (1989)
Court held that transfer made to defeat legitimate creditors is fraudulent and can be set aside.
K.K. Verma v. Union of India (1990)
Transfers to family members with intent to avoid creditor claims can be challenged; bona fide purchaser without notice is protected.
State Bank of India v. M/s. G. R. Steel (1995)
Court recognized transfers with fraudulent intent as voidable against creditors; the creditor can invoke Section 53 of TPA.
7. Distinction: Fraudulent vs. Bona Fide Transfer
| Feature | Fraudulent Transfer | Bona Fide Transfer |
|---|---|---|
| Intent | To defeat creditor / claimant | No such intent |
| Consideration | Often nominal / inadequate | Adequate consideration |
| Protection | Voidable against creditor | Protected |
| Notice to purchaser | Irrelevant if fraudulent | Bona fide purchaser without notice protected |
8. Remedies for Fraudulent Transfer
Civil Suit for Setting Aside Transfer
Creditors can approach civil court under TPA Section 53.
Execution Proceedings
Property can be restored for satisfaction of debt.
Injunctions
Temporary injunction may prevent transfer or alienation pending trial.
9. Key Points for Exams
Always emphasize intent to defraud or defeat.
Cite Section 53 TPA as legal basis.
Mention bona fide purchaser protection.
Include illustrations of sale, gift, or family transfer.
Case law to support: Hindustan Construction Co., K.K. Verma, State Bank of India v. G.R. Steel.
✅ Conclusion:
A fraudulent transfer is one made to evade lawful obligations. While such a transfer is voidable against creditors, bona fide purchasers without notice are protected. Courts can set aside transfers, restoring rights and maintaining equity between creditor and debtor.
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