The truth about fraudulent transfers
Anyone defaulting on a loan can’t sell his property to another party if it has been attached for auction to raise money for the creditor
What happens when one lends money to someone and does not get i t back? The lender or creditor can approach the court to seek a decree against the person who takes the money (debtor). If the charges are proved, then the court can order attachment of the debtor’s property to ensure that proceeds from its auction can be used to repay the creditor. However, there have been cases when the debtor has transferred his property to another person to save his or her property from attachment and to defeat or delay payment to creditors. Such an act is considered to be a fraudulent transfer. Section 53 of Transfer of Property Act contains provisions for protecting the right of a creditor, where a debtor transfers his or her immoveable property for defeating the right of the creditor. Let us take the help of an illustration to learn more about fraudulent transfers. Suppose A takes a loan from B and fails to repay it. B files a suit against A for recovery of his money. The court passes a decree against A. However, prior to execution of decree and attachment of A’s immoveable property, A transfers it (property) to C. This is a case of fraudulent transfer and can be set aside by the court.
A similar case came up for hearing at the Allahabad High Court. Related t o Sundari Versus Bhola Nath, the case involved a debtor, Bachai, who had taken a loan from Raja Ram and had failed to repay it. When Raja Ram filed a suit against Bachai, the court, after hearing the arguments accordingly passed a decree in favour of Raja Ram for recovery of the money, after which Bachai’s property was auctioned and purchased by a third party, Sukku. However, before the auction, the debtor executed a sale deed of the property in favour of one Ganga.
Ganga approached the trial court asking that he be declared the bona fide purchaser. He claimed he had better rights over the property than the third party which had aquired the property through auction.
The Trial Court held that Ganga had ownership rights on the property based on the sale deed executed by Bachai.
Aggrieved by the judgment, the creditor and the third party approached the appellate court. After taking into account all the facts and circumstances, the appellate court observed that Ganga had an implied notice of the fact that Bachai was selling his property to avoid the pay- ment to Raja Ram. He (Ganga) had also not given any consideration to Bachai towards the property. Thus, the appellate court held that Ganga had not purchased the property in good faith nor had he paid any consideration towards the property. The transfer of the property by the debtor to the purchaser was only with the intention to avoid the repayment to the creditor, it said.
Not happy with the apellate court’s judgment, Ganga approached the second appel- late court. However, the judgement of the first appellate court was upheld by this court. It also observed that the sale deed executed by Raja Ram in favour of Ganga was only a sham transaction, and was not executed in good faith. It was just done to defeat the creditor.
However, it must be noted that this section does not affect transfer of immoveable property by the debtor to a bona fide purchaser, who has purchased the property from the debtor in good faith and has paid consideration amount towards the same. Such a transfer will be considered valid and cannot be avoided at the instance of the creditor. In our next article, we will discuss transfers which fall under the category of bona fide purchase.