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Twynes case.
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Edwards v. Harben
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Nath v. Dhunbaiji
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07
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Middleton v. Collak
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Vinayak v. Kaniram
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INTRODUCTION
Every owner of a property has right to transfer his property as he likes. There must be a
bonfire intention to transfer. If there is a Fraudulent Intention, the intention of defeating
the interest of creditor or interest of any subsequent transferee, the transfer is not valid in
the eyes of law. These transfers arise in debtor and creditor relations, particularly with
insolvent debtors. The action against such debtors is typically brought by creditors or by
bankruptcy trustees. Here in fraudulent transfer, the object of transfer would be bad in
eyes of equity and justice though it is valid in law. In some cases fraudulent transfers are
valid in law but not void, but because they are made with malafide intention, equity
would render it voidable by the person who was so defrauded. This principle of equity
has been incorporated in Section 53 of Transfer of Property Act, 1882. This section
disallows a person to convey or alienate his property when such conveyance defeats or
delays the interest of his creditor or any subsequent transferee.
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necessity for the donor to do this. For it is commonly said, quod dolosus
vesatur in generalibus.
2. The donor continued in possession and used them as his own, so it clearly shows
that he had defrauded and deceived the creditor.
3. The gift was made in secret, et done clandestine sunt simper
suspiciosa.
4. The gift was made during the pendency of suit.
5. Even after the gift was made, the donor was still in possession and therefore here
there was a trust between the parties and the fraud is covered by the trust.
6. The gift deed contains that it was made truly, honestly and bonfire.
So in this case we should observe that, even if there was a true debt due to Twyne, but
the gift which was made with no consideration and bonfire, and it shall be deemed that a
gift made with any trust in favor of donor is considered to be done with fraud.
In another case regarding the same issue, Edwards v. Harben 2, the judgment was given
by Buller,. J. he said if the possession is not followed by deed, it is deemed to be done
with fraudulent intent and it is void.
1
Reported in 3, coke, 80.
2
2 Term Rep. 587
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4
(1899) 23 Bom. 1.
5
(1895) 22 Cal. 185.
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SHAM TRANSFERS
Sham transfer means fictitious transfer. When the transferor does not intend that the
property should be really vested in the transferee, such transfers are therefore unreal or
colourable and never meant to operate between the parties. Such transfers are fictitious
transfers. Benami transaction is also a sham transfer because the real owner has no
intention that property should belong to ostensible owner. It can be clearly explained by
the following cases.
In the case of Jangali Tewari v. Babban Tewari 6, a sham transfer is not a real transfer at
all. The intention of the real owner is not necessarily fraudulent. So, such transfers do not
require to be avoided because the real title already vests in the transferor.
In the case of Petherpermal Chetty v. Muniandi Servai 7, a sale deed of land was executed
in June 1895 in favor of the predecessor of the appellant. The transaction was a benami
transaction, it was not real. An equitable mortgagee of the land sued in September 1895,
to establish his lien on the ground that the sale was intended to defraud creditors and
obtained a decree by which the equitable mortgagee was paid off and the mortgage was
discharged. On the death of the vendor of the land, the appellant, legal representative of
the purchaser was sued by the heir of the vendor (respondent in the case) for the recovery
of the land. The defence argument was that the plaintiff, on account of his participation
6
A.I.R 1982 All. 316..
7
(1907-08) LR 35 IA 98.
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in the fraudulent attempt to defeat his creditor, was not entitled to recover possession of
the land.
The court held that:Persons have been allowed to recover property which they had assigned away, where
they had the intention to defraud or delay creditors, who, in fact, were never injured. But
when fraudulent or illegal purpose has actually been effected by mean of the colourable
grant, the legal maxim in pari delicto potior est condition possidentis applies.
The court will help neither party. It says let the estate lie where it falls. To enable a
fraudulent party to retain property transferred to him in order to effect a fraud must,
according to the authorities, be effected. Then alone, does the fraudulent grantor or
transferor, lose the right to claim the aid or support of the law to recover the property he
has parted with. The principle however will not apply in the case if the transferor seeks
for possession from the transferee before the fraud is effectuated.
In the case of Immani Appa Rao v. Gollapalhili Rama Lingamurthi 8, a sale of property
was made with the mutual consent of the vendor and the vendee to defraud the creditors
of the vendor. There was no consideration and the transferee also agreed to act as a
benamidar until the transferor required him to reconvey the property to his sons. The
transferor and his sons trespassed and occupied the property, as the creditors were
defrauded. The transferor, in defence, urged that the transferee has no rights in the
property as the transfer was a fraudulent transfer. So in this case the court observed that:The transferors emphasized that the doctrine which is pre-eminently applicable to the
present case is ex dolo malo non oritur action or ex turpi causa non oritur
actio. It means they contended that the right of action cannot arise out of fraud or out of
transgression of law. According to them it is necessary that the possession should lie
where it lies, in pari delicto potior est condition possidentis. The law favors
him who is actually in possession in case where there is guilty of fraud on both the
parties. The principle of public policy is that no court will lend its aid to a man who
founds his cause of action upon an immoral or illegal act. If the cause of action arises
from the plaintiffs side, the court says that he has no right to be assisted; it is same in the
case of defendants. The Court also said that there is no question of estoppels in such a
case because the fraud in question was agreed by both the parties and both the parties
have assisted each other in carrying out fraud. It also said, in such a cases the transferee
would be guilt for liability of double fraud, as he joined transferor joined in the
fraudulent scheme and participated in commission of the transfer and he committed
another fraud by suppressing from the Court the fraudulent character of the transfer
when he made out the claim for the recovery of the properties conveyed to him. The
8
(1962) 3 SCR 739.
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transfer was not supported by any consideration and therefore no title is transferred to
him.
So in the view of public interests, the Court held that the plea of fraud is allowed and
tried and it is upheld that the estate should lie where it rests.
Notwithstanding the rights of transferor and a benami transferee, if the transfer was made
to defeat the creditors, a creditor himself can ignore a benami transaction and can
proceed against the property as it was of the transferor. The creditor need not have to set
it aside under this section because, benami transaction is not a transfer at all.
We have to note that, whether the transfer is real or sham, it is depended upon the facts
and circumstances in each case. If it is clearly shown that the very object of the transfer
was to defeat the interest of creditors, the transfer can be avoided by the creditor under
this section.
But the present scenario is changed. The Benami Transaction Act, 1988 provides that
properties purchased in the name of ostensible owner or benamidar shall belong to
benamidar and real owner cannot claim from him. This Act now treats benami transfer as
a real transfer under which the benamidar becomes real owner. However, Section 3 of
this Act says that the provisions of Section 53 of TPA or any law relating to transfers for
illegal purposes are not affected.
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Not only these circumstances, but there are many other circumstances in which inference
of intent to defeat or delay creditors may be drawn. So every case is depended upon its
own facts and circumstances. It is subject to a matter of fact that the transfer is bonfire or
fraudulent.
10
A.I.R. 1976 S.C. 656.
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dissolved in 1963. A registered deed of trust was executed by which the properties were
vested in the trustees for purpose of paying off the creditors. Afterwards a business was
started by the grandson of one of the partners and some provisional assessments were
made his name for the years 1966-1969. In 1971, Sales Tax authorities made the
assessments in the name of the Joint Hindu Family for the first time but found that the
tax could not be realized from the assesses on account of the Trust Deed, and therefore,
treated the Deed as void and fraudulent and contended that the assessments were made to
defeat the debts of Sales Tax Department. But in proceedings, these facts were found. It
was found there was no assessment made against the Joint Hindu Family at the time of
execution of Trust Deed. Therefore there was no real debt due by from one of the
executants of the Trust. There was no intention of use of unlawful purpose by the Trust.
In the Trust Deed, the names of the creditors to whom the debts are to be payable were
clearly mentioned. The Trustees did not keep reserve any advantage for themselves. It
was also found that there was no material to show that the creditors obtained collusive
decrees.
Here the question arisen before the Supreme Court was that whether this Trust Deed was
hit by Section 53 of TPA or not. In this context, Supreme Court held that:Observing the facts and circumstances of the case, it cannot be said that Trust was
executed to defraud the creditors, Sales Tax Department. Under the section a person must
prove two facts to challenge the transaction. Firstly, the document was executed by
settler. Secondly, the said document was executed with a clear intention to defraud or
delay the creditors. It is a matter of the fact that intention would be proved on the basis
of facts and circumstances surrounding the case. The Supreme Court also held that, it is a
well settled that a mere fact that the debtor chooses to prefer one creditor to the either
because the priority of the date or otherwise by itself cannot be misleaded that it was
done to defeat the other creditors.
In Musahur Sahu v. Hakim Lal 11, Kisun Binode and Musahur Sahu were the debtor and
creditor respectively. Musahur Sahu sued the Judgment-Debtor Kisun Binode for the
recovery of his debts in December, 1900. Musahur Sahu presented a petition for
attaching the properties of the debtor as a security. This petition was filed in January,
1901, when the original suit was during pendency. In February, 1901, Kisun Binode, the
debtor gave an affidavit that he has no intention to attach any property, accordingly the
petition for attachment was dismissed. But after the petition was dismissed, Kisun
Binode sold his properties to Hakim Lal who was another creditor of him. Then Musahur
Sahu, pleaded that the transfer to Hakim Lal were done do defeat or delay his interest
11
(1915) LR 43 IA 104.
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and therefore it should be held void under Section 53 of TPA and the properties should
not be given to Hakim Lal.
In this case, the appeal was dismissed by the Privy Council, and held that transfer of
property by a debtor to one creditor in preference of the other is not a fraudulent transfer
with the intent to defeat or the delay the interest of another creditor. The Lordships
observed in the case Middleton v. Collak 12, the transfer if defeats or delays the creditors
is not an instrument which prefers one creditor to another but an instrument which
removes a property from the creditors to the benefit of the debtor. The debtor must not
remain any advantage or benefit for himself. He may one creditor and leave another
unpaid. The court further observed that as soon as it is found that the transfer here
impeached was made for adequate consideration in satisfaction of genuine debts, and
without retaining any benefit to the debtor, it follows that no ground for impeaching it
lies in the fact that the plaintiff who also was a creditor was a loser by a payment being
made to this preferred creditor, there is no question being bankrupt.
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13
A.I.R. 1926 Nag. 293.
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(1916) Mad. W.N. 288
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BURDEN OF PROOF
The burden of proof lies on the creditors of the transferor to show that the transfer was
made to defeat or delay the interest of the creditor. In the case of Chandradip v. Board of
Revenue15, the onus to prove the fraud lies on the person alleging it. But it may be noted
that the burden to prove the intention would largely depend upon the facts and
circumstances of each case.
15
A.I.R. 1978 Pat 148.
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CONCLUSION
Section 53 of Transfer of Property Act, 1882 deals with Fraudulent Transfers. This
section has two sub sections. The first part of this section deals with the transfer made to
defeat or delay the creditors of the transferors and it is voidable at the option of such
creditor. The second part deals with the gratuitous transfers with intent to defeat or delay
the creditors. This section has some exceptions in respect of the transfers done towards
the transferee in good faith and consideration. But if the transfer is a gift towards the
stranger, then the good faith is irrelevant. The rights of the transferee created under the
law of insolvency are not affected by Section 53 even if the transferors intent was to
defeat or delay the creditors interest. The basis of the section is that one ought to be just
before being generous. This section was made to disallow a person conveying the
properties to keep it away from the creditors. In my opinion, the laws regarding
fraudulent transfers must be made stricter and such transferors or transferees who
committed fraud must be penalized for committing fraud.
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BIBLIOGRAPHY
BOOKS
STATUTES
TRANSFER OF PROPERTY ACT, 1882.
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