FRAUDULENT TRANSFER: PROVISIONS AND REMEDIES

INTRODUCTION:

The principle of section 53 is based on the rule of justice, equity, and good conscience. The section enumerates fraudulent transfers. A transfer made with the intention to defeat any right of the transferee or of any other person interested therein is called a fraudulent transfer of property.

Such transfer is not void but voidable at the option of the person named. A major remedy for creditors to get debts repaid from defaulting debtors is to seize the debtor’s property.

Often, debtors have no executable property (property that can be sold by creditors to satisfy a debt), but those who do, will often try to protect their property by either hiding it or transferring the property to someone that the debtor trusts.

A fraudulent transfer is the transfer of an asset from the debtor to a transferee with the express purpose of delaying, hindering or defrauding a creditor. Usually, the transferee is an insider, which includes friends, relatives, and employees of a business debtor.

The remedy to fraudulent transfer is to avoid the transfer by forcing the transferee either to return the property to the debtor so that it can be levied by the creditor or to pay an amount equal to the value of the property.

A fraudulent transfer differs from a preference in that a preference is a transfer to a preferred creditor rather than an insider. However, preferential transfers can also be avoided, especially by a bankruptcy trustee if the debtor filed for bankruptcy.

Fraudulent transfer laws were developed to help unsecured creditors to collect their debts from defaulting debtors—secured creditors can rely on their lien on the collateral which is good against any transferees. Since debtors also fraudulently convey property when planning for bankruptcy, the bankruptcy trustee has great powers to avoid transfers.

Since debtors have been using fraudulent transfers to protect property for centuries, the laws used to combat such transfers are almost as old.

Relevant Provisions –

(i) Section 53 Transfer of Property Act 1882.

a) Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed. Nothing in this sub-section shall impair the rights of a transferee in good faith and for consideration.

Nothing in this subsection shall affect any law for the time being in force relating to insolvency. A suit instituted by a creditor (which term includes a decree-holder whether he has or has not applied for execution of his decree) to avoid a transfer on the ground that it has been made with intent to defeat or delay the creditors of the transferor shall be instituted on behalf of, or for the benefit of, all the creditors.

b) Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of such transferee. For the purposes of this sub-section, no transfer made without consideration shall be deemed to have been made with intent to defraud by reason only that a subsequent transfer for consideration was made.

(ii) Cross-reference Section 17 of Contract Act Fraud defined

‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract –

‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract

the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
the active concealment of a fact by one having knowledge or belief of the fact;
a promise made without any intention of performing it;
any other act fitted to deceive;
any such act or omission as the law specially declares to be fraudulent.

Explanation:
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silent to speak, or unless his silence, is, in itself, equivalent to speech.

Illustrations

A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A.
A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A.

PARTITION AND FRAUDULENT TRANSFER

Partition’ is a division of the property between co-parceners/co-tenants resulting in individual ownership/tenancy of interest of each co-parceners/co-tenants; while transfer’ is an act of a party by which the title of the property is conveyed from one person to another.

‘Partition’ under the Hindu Law, puts an end to the unity of the title, ownership, and possession of the property between the co-parceners. In the partition, there is a severance of joint status and of unity of possession between the co-owners/co-tenants.

Partition neither creates any new title in a co-owner/co-tenant in the property nor is there any fresh acquisition of the property. It only enables the parties to know which particular property or portion thereof is their individual exclusive share in the property.

By partition, the subsisting joint title of the co-owner/co-tenant in the joint property transforms into their separate title in respect of the property which came to their share. In a transfer, the transferee acquires the right and title in the property which did not vest in him earlier.

Thus, ‘partition’ of the joint property cannot be treated as a ‘transfer of the property between individual co-parceners or co-tenants. Partition of co-parcenary property, therefore, cannot be regarded as a ‘transfer of the property because the co-parceners have an antecedent right in the entire co-parcenary property.

LANDMARK CASES:

Amb Singh and Anr. vs. Sub-Divisional Officer and Ors., 1996 (3) WLC 431, High Court of Rajasthan, decided on 17.07.1996, A transaction in which property is transfer only on papers and actually by the beneficial owner to the transferee. In this transaction, the title and possession of property do not transfer to the transferee. For a transaction to be “Benami”, there has to exist an actual transaction or arrangement which has taken place.

In “Sham” transaction or “bogus” transaction or “fictitious” transaction”, no transaction actually taken place and transaction merely shown to have taken place on paper.

Sree Meenakshi Mills Ltd. Vs. CIT [1957] 31ITR 28; the Supreme Court explained the word “Benami” such as the word “Benami” is used to denote two classes of transactions that differ from each other in their legal character and incidents. In one sense, it signifies a transaction that is real, as for example, when A sells properties to B but the sale deed mentions X as the purchaser. Here sale is itself is genuine, but the real purchaser is B, X being his benemidar.

This type of transaction is generally called “Benami transaction”. But sometimes “Sham Transactions” are also termed as “Benami Transactions”. Suppose A purports to sell his property to B without intending that his title should cease or pass to B is a “Sham Transaction”.

GROUNDS FOR AVOIDANCE

A necessary component to a fraudulent transfer is a fraud, either actual or constructive fraud. Actual Fraud A primary element of actual fraud is dishonest intent in transferring assets so that they won’t be available to creditors. Because it is difficult to prove that the debtor’s motivation was dishonest, courts have relied on badges of fraud, which are patterns of behaviour that at least create a suspicion of fraud.

Some common badges of fraud that have been recognized by the courts over the years include:

transfers to insiders;
transfers that occurred right before bankruptcy, a collection action, or the incurrence of a large debt;
attempted concealment by the debtor;
if the debtor retains possession of the transferred property unless it is normal for a debtor to retain possession, such as for a deed of trust in real estate;
the transfer of property was for less than reasonable equivalent value, particularly when the debtor was insolvent or having financial difficulty.
Badges of fraud are not presumptions of guilt but are simply circumstantial evidence that the debtor is acting deliberately to frustrate creditors’ efforts at collection. Some badges are considered stronger indicators of fraud than others. However, it is the totality of circumstances that will determine the final outcome.

If the transfer exhibits several badges of fraud, then the creditor’s case is strengthened, especially if some of those badges are the stronger indicators of fraud; otherwise, the creditor’s case will be weak. Obviously, if the debtor can provide a reasonable explanation for the transfer that did not involve fraud, then the creditor’s case is greatly diminished.

Constructive Fraud –

While actual fraud is proved by considering all the evidence, constructive fraud is established by certain acts of the debtor, whether or not there was a dishonest intent. Hence, the debtor is held strictly liable for transfers involving constructive fraud.

The 2 elements of constructive fraud are that:

• the debtor transferred property for less than reasonable equivalent value
• while he was insolvent or under financial stress. If the creditor can prove these 2 elements, then constructive fraud will be established as a matter of law, without the need to inquire as to the debtor’s state of mind at the time of the transfer.

Remedies under the Transfer of Property Act –

• First, when there is forging or fabrication of documents like Wills – that is, making fake Will documents. This could be done by somebody to deprive the other shareholders of their due share.

This is one of the most common methods, and here the defaulter takes advantage of the absence of the others and provides fake ownership to get control. For any mutation to happen, anyone owner has to inform about the death of the previous owner. At times, one owner decides not to give the details like these for his selfish motive.

• Second, impersonation is one of the common methods used too. In such cases, one party impersonates as a shareholder and produces himself in court for the same. Some of them are successful too. They manage to go and stake a claim on what belongs to somebody else. Therefore, a careful and proactive approach should be followed by all owners to avoid these fraudulent practices.

• A third very obvious way is the misuse of the Power Of Attorney (POA) documents. In a host of cases, people end up giving general, non-restrictive POAs to their friends or relatives. In a lot of situations, people misrepresent, and there is a betrayal by even family members or close relatives, who give proof of utter mistrust and get properties transferred in their names

It is therefore advised that utmost care should be taken while granting a POA to anybody. Do not ever give any additional powers or you stand the risk of having them misused by vested interests. You may reach out to various law firms to develop severance Agreements for you.