Report No. 70
Ordinarily, the law does not, in determining questions of civil liability, take account of the motives of person. An act which is lawful does not, in general, become actionable merely because the motive is improper. But there are exceptions to this general rule. One such exception is created by section 53 in the interests of creditors of the transferor and subsequent transferee of the same property.
It constitutes a qualification of the general rule that a person may do what he likes with his own property. The exception is created on the basis of the paramount policy of the law to check fraud. No one is permitted to effect a transfer with the object of defrauding his creditors or with the object of defrauding a subsequent transferee.
48.2. Section 53.- Section 53 reads-
"53. (1) 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 sub-section 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.
(2) 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."
The ancestry of the section is usually traced to two statutes of Elizabethan times. By 13 Eliz., Chap. 5 it was provided that conveyances of any kind of property, whether land or goods, with intent to defraud creditors were voidable at the instance of the person thereby prejudiced, except where the transferee had taken the property for good consideration and without notice of the intent to defraud. By 27 Eliz. Chap. 4, it was provided that conveyances of lands (not good) with intent to defraud subsequent purchasers were void against such, for value, except where the prior transferee had taken the property for good consideration and bona fide.
Before the 1882 Act was passed these two statutes were applicable to the Presidency Towns of India. The principles underlying them were also applied in the mofussil, as being in conformity with justice, equity and good conscience. In section 53 of this Act, the Legislature introduced with some modifications the above-mentioned provisions of the two statutes and thus codified what had been recognised as the law in this country. The two statutes were repealed by this Act. It was held in a Bombay case1 that the above statutes may be accepted as guides to the law before the Act.
1. Bhagwant v. Kedari, 1901 ILR 25 Born 202 (208, 209).
48.4. Law in England.-
In England, the law was altered by the Voluntary Conveyances Act, 1893. That Act, and the earlier statutes, are now replaced by sections 172-173, Law of Property Act, 1925. In India, in 1929, section 53 was amended in the light of the English statute of 1925.
Section 53, in its first sub-section, deals with transfers in fraud of creditors. In sub-section (2) it deals with transfers in fraud of subsequent transferees. Neither of these sub-sections deals with a transfer giving one creditor preference over the other. That is a matter dealt with by the insolvency law under "Fraudulent preference1."
1. See para. 48.12, infra.
48.6. Sub-section (1)-Evidence of intention.-
We shall now consider a few points of detail concerning sub-section (1). The section as it stands after the 1929 amendment contains no presumption as to intent. There may be a fraudulent indent even though the transfer is for consideration. Conversely, the transfer may be without consideration and yet there may be bona fide. The principal object of the first sub-section is to ensure that the property of the debtor is applied in payment of the demands of the creditors and that there is no intention to defeat or delay them.
Creditors may be prejudiced not only by a transfer without consideration, but also by a transfer with consideration whereunder the debtor reserves a substantial benefit for himself. Conversely, a transfer even without consideration may be bona fide-for example, a transfer to a charity in performance of a moral obligation undertaken in good faith at a time when the transferor was in financially comfortable circumstances.
48.7. Law before 1929.-
Before 1929, the section provided that a transfer may be presumed to have been made with a fraudulent intent if its effect was to defeat or delay creditors and it was made gratuitously or for a grossly inadequate consideration. The prevision, however, created doubts as to whether it implied that in regard to a transfer for adequate consideration a conclusion of fraudulent intent could not be made. The paragraph has now been deleted. This does not of course mean that as a matter of policy a different view was taken.
The Court is still free to make such a presumption but it must have regard to the whole of the circumstances. The principle that every man ought to be just before he is generous1 has not been given the go-bye. But it has to be applied on a consideration of all the circumstances. Regard will, therefore, have to be had to the extent of his indebtedness, on the one hand, and the circumstances leading to the voluntary transfer on the other hand. Thus when the transferor has no debts and is not in embarrassed circumstances, the execution of a voluntary transfer cannot be held in itself to be in fraud of subsequent creditors2.
Even if he is under a debt, a transfer cannot be considered to be fraudulent only on that account, as otherwise a person of means, indebted in a trifling sum of money, may be prevented from making a transfer-let us say-a mortgage of property of secure future advances for bona fide investments in a lawful business. Thus, in an Allahabad case3, a mortgagor who had executed a mortgage, gifted non-mortgaged property. The gift was challenged as voidable under this section. It was, however, found that the mortgaged property was sufficient to satisfy the mortgage debt.
It was held that the gift could not be said to be with a view to defeating the mortgagee. In contrast4, where the mortgaged property is not sufficient to satisfy the mortgage debt, a transfer by the mortgagor of his other property can indicate a fraudulent intention. It is therefore legitimate to consider the value of the property sold and its proportion to the extent of the demands of the creditors at that time. In recommending the deletion of the relevant paragraph of section 53, the Special Committee of 1927 stated that its object was to leave the determination of the question of intent to be determined by the ordinary rules of evidence5.
1. Freeman v. Papa, (1870) 5 Ch D 538.
2. Umar Sait v. Union of India, AIR 1965 Mad 395 (397).
3. AIR 1928 All 476 (479).
4. Raj Kuer v. Rajendra Bahadur, AIR 1951 All 443 (447).
5. Report of the Special Committee (1927), discussion of section 53.
48.8. Transfer voidable under sub-section (1).-
It is obvious from the language of the section that the transfer hit by sub-section (1) is not absolutely void. It is voidable at the instance of the creditors, and the suit to set it aside must be a representative suit. This does not of course, mean that there must necessarily be numerous creditors in every case. There may be only one creditor at the time of the transfer. If the intention of the transferor was to defraud that creditor who was the only creditor at that time, the section would be attracted. Of course, if, by the time, a suit is instituted, other debts also come into existence, the suit must be for the benefit of all.
48.9. Suit not the only remedy.-
If a suit is filed for a declaration that the transfer does not bind the body of creditors, then all creditors must be the beneficiaries. But this does not mean that a suit must be filed for the purpose of expressing a creditor's repudiation of the transfer. Judicial decisions1 established the proposition that any act of the creditor showing an unequivocal repudiation of the transfer is enough.
1. e.g., AIR 1963 SC 1150 (1160).
48.10. Benami transactions.-
There appears to be a misconception as to the relationship between benami and fraudulent transactions. A benami transaction may or may not be fraudulent, and a fraudulent transaction may or may not be benami. This does not, of course, mean that against a benami transaction a creditor has no remedy. Rather, the opposite is the position in general.
As a rule, a creditor of A can always prove that property standing in the name of B is held benami and that the real owner is A. If the creditor succeeds in proving it, the property becomes available to the creditor, not under section 53 but because of the position that the creditor of A has always available the property of A, whoever be the ostensible owner. This is subject, of course, to any transactions already entered into by the ostensible owner that are recognised by special rules of law.1
1. E.g. section 41.