A transfer of property may be set aside terming it as fraudulent under Section 53 of the Transfer of Property Act, 1882 (“the Act”) if it was made with the intent to defeat, defraud or delay creditors. This applies in cases where the property transferor had any sustaining debt to be paid in instalments at the time of the transfer and he subsequently defaulted in payment, forcing the guarantor of the debt to make payment for borrower’s default. Then guarantor can seek setting aside of the property transfer and recovery of the money he paid against the transferor’s debt.
Intention Is Decisive
The core requirement is the transferor’s intent to place assets beyond a creditor’s reach. It is not necessary that the transferor be in active default at the precise moment of transfer. It is sufficient if, at that time, the transferor was heavily indebted and had reasonable anticipation of a future inability to discharge his debt.
Existing and Subsequent Creditors
Section 53 of the TPA protects both existing creditors and subsequent creditors. Where a transfer is made to shield property from a debt that the transferor knows, or ought to know, will eventually be defaulted upon, the transfer may be challenged once the default has occurred.
Voidable, Not Void
Such a transfer is not automatically void. It is voidable at the option of the creditor aggrieved by the transfer. The creditor must institute a suit seeking a declaration that the transfer be set aside. Until so set aside by a competent court, the transfer remains effective.
Bona Fide Transferee Protected
A transfer cannot be set aside as against a transferee who acted in good faith, paid adequate consideration, and had no notice of the fraudulent intent of the transferor. This protection for a bona fide purchaser for value without notice is a well-established safeguard under the proviso to Section 53.
Factors Indicating Fraud
Courts have, in a consistent line of decisions, identified certain indicia of fraudulent intent. These factors are not individually conclusive but are considered cumulatively to draw an inference of fraud:
- Transfer of the entirety or bulk of the transferor’s assets;
- Transfer made in secrecy or with unusual haste;
- The transferor continuing in possession or enjoyment of the property after the purported transfer;
- Transfer to a close relative or associate at a price substantially below market value, or for no consideration at all.
Burden of Proof
The burden of proof lies on the creditor to establish that the transfer was effected with the intent to defeat or delay the creditor’s claim. However, where the creditor establishes the signs of fraud referred to above, the evidentiary burden may shift to the transferee or transferor to rebut the inference of fraudulent intent.
Important Judgments
In C. Abdul Shukoor Saheb v. Arji Papa Rao [AIR 1963 SC 1150], the Supreme Court held that the sale of immovable property (a tannery) by the continuing partner of a dissolved firm was executed with the intent to defeat and delay creditors, rendering it voidable under Section 53(1) of the Transfer of Property Act. The Court found that the transferee was not a bona fide purchaser for value and had acted with knowledge of the fraudulent design. The cumulative circumstances relied upon included the secrecy of registration, the heavy pre-existing indebtedness of the firm, the absence of any pressing reason for an urgent sale, and the transferee’s failure to ensure that the sale proceeds were applied towards the firm’s debts.
A Full Bench of the Kerala High Court in Verizon Builders and Developers Ltd. v. Jyothi Susan John [2018/KER/66649] held that it is permissible under Order XXI Rule 58 CPC to adjudicate questions arising under Section 53 of the Transfer of Property Act, in a claim petition or as an objection to attachment, both at the trial and at the execution stage.
The Supreme Court in L.K. Prabhu @ L. Krishna Prabhu (Died) Through LRs v. K.T. Mathew @ Thampan Thomas & Ors. [2025 INSC 1364] held that a property transferred through a registered sale deed prior to the filing of a suit cannot be subjected to attachment before judgment under Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC). It is well settled that attachment before judgment cannot extend to properties which have already been alienated prior to the institution of the suit. The property already transferred prior to the suit cannot be attached under this provision. On the contrary, in cases where such prior transfer is alleged to be fraudulent, the remedy lies under Section 53 of the TPA.
The Court added that jurisdiction that can be exercised under Section 53 of the Transfer of Property Act is not to set aside the entire document as “fraudulent transfer” or to cancel the same or to make a declaration to that effect by a decree, but to declare that transfer of property under that document would stand subject to the liability of creditors and to that extent, the transfer thereunder would stand voidable.
Further, a purchaser of the property prior to the order of attachment, who obtained independent title over the property cannot be brought under the sweep of a “representative” of party to a proceedings or a suit/ decree, except in the case of a sham document, diligently executed in collusion with transferor with the intention to defraud his creditors.
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