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

HT Estates - - HTESTATES - Su­nil Tyagi

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.


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