Fraudulent transfer and part performance

1. Section 53(1): transfer to defeat or delay creditors

Section 53(1) provides that 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. Three qualifications follow:

• Nothing in the sub-section impairs the rights of a transferee in good faith and for consideration.
• Nothing in it affects any law relating to insolvency.
• A suit by a creditor (whether he has obtained a decree or not) to avoid a transfer on this ground must be instituted on behalf of, or for the benefit of, all the creditors. It is a representative suit.

Essentials. (i) A transfer of immovable property; (ii) made by a debtor; (iii) with intent to defeat or delay his creditors; (iv) the creditor has in fact been defeated or delayed; and (v) the transferee is not one in good faith and for consideration.

Intent. The intent is inferred from circumstances, the “badges of fraud”: transfer of the whole or almost the whole of the debtor's property, to a close relative, for inadequate or no consideration, while suits or debts were pressing, with the debtor remaining in possession. A transfer may be avoided even if consideration passed, if both parties shared the intent; good faith on the transferee's part means he did not join in the fraud.

Preference is not fraud. A debtor who pays one creditor in full, even by transferring property to him, is not defeating creditors within section 53, though the others go unpaid: Musahar Sahu v. Hakim Lal (1915), Privy Council. The transfer must be designed to put the property out of reach of creditors generally, not merely to prefer one honest claim. Preference is dealt with by the insolvency law, not by section 53.

2. Section 53(2): transfer to defraud a subsequent transferee

Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee is voidable at the option of that transferee. No gratuitous transfer is deemed to be made with intent to defraud merely because a later transfer for consideration was made. The sub-section strikes at a gift made to keep the property out of the hands of an intended buyer, not at an honest gift followed by a later sale.

3. Section 53A: part performance

Section 53A protects a transferee who, under a contract to transfer immovable property for consideration, has taken possession and done his part, though no conveyance has been executed. It was added in 1929. The English equitable doctrine allowed the buyer to sue; the Indian section, as the Privy Council held in Probodh Kumar Das v. Dantmara Tea Co. (1939), gives only a defence.

Essentials.

• A contract to transfer for consideration any immovable property.
• The contract is in writing, signed by or on behalf of the transferor.
• The terms necessary to constitute the transfer can be ascertained with reasonable certainty from the writing.
• The transferee has, in part performance, taken possession of the property or any part of it, or, being already in possession, continues in possession in part performance and has done some act in furtherance of the contract.
• The transferee has performed or is willing to perform his part of the contract.
• Since 24 September 2001, the contract must be registered (see below).

Effect. The transferor and every person claiming under him are debarred from enforcing against the transferee and persons claiming under him any right in respect of the property, other than a right expressly provided by the terms of the contract, notwithstanding that the instrument of transfer has not been executed or registered as the law requires. The proviso protects a subsequent transferee for consideration who has no notice of the contract or of the part performance.

4. The 2001 amendment: registration

The Registration and Other Related Laws (Amendment) Act, 2001 made two changes, in force from 24 September 2001:

• In section 53A, the words that had allowed the protection even where the contract, though required to be registered, had not been registered, were omitted.
• Section 17(1A) was inserted in the Registration Act, 1908: documents containing contracts to transfer for consideration any immovable property for the purpose of section 53A, executed on or after that date, shall be registered, and if not registered they have no effect for the purposes of section 53A. Stamp duty must also be paid.

An unregistered agreement executed after 24 September 2001 therefore cannot found a section 53A defence, though under the proviso to section 49 of the Registration Act it may still be received as evidence of the contract in a suit for specific performance. In Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana, 2011 INSC 739, (2012) 1 SCC 656, the Supreme Court held that “sale agreement / general power of attorney / will” transactions do not convey title; immovable property can be transferred only by a registered deed of conveyance, and an agreement of sale, even with possession, gives at most the limited protection of section 53A.

5. Shield, not sword

Section 53A can be used only defensively. A transferee in possession can resist the transferor's suit for possession; he cannot himself sue to obtain title or possession on the strength of section 53A. His remedy for obtaining title is a suit for specific performance within limitation.

In Shrimant Shamrao Suryavanshi v. Pralhad Bhairoba Suryavanshi, 2002 INSC 40, (2002) 3 SCC 676, the Supreme Court held that a transferee in possession under part performance can defend his possession under section 53A even if a suit for specific performance has become barred by limitation. The section does not say the defence is lost when the remedy of specific performance is lost; the transferee may use it as a shield whenever the transferor or someone claiming under him tries to evict him.

6. Problem

In 2015 A agrees in writing to sell his flat to B for Rs. 40 lakh. The agreement is registered. B pays Rs. 38 lakh and is put in possession; the balance is payable on execution of the sale deed. A delays the sale deed. In 2020 A sues B for possession, calling him a licensee. B never filed a suit for specific performance, and the time for it has expired.

Issue. Whether B can resist A's suit under section 53A although his own remedy of specific performance is barred.

Law. Section 53A, as amended in 2001, debars the transferor from enforcing against a transferee in possession any right other than one under the contract, where the contract is in writing, signed, registered, its terms are certain, the transferee took possession in part performance and is willing to perform. The defence is available even if specific performance is time-barred (Shrimant Shamrao Suryavanshi).

Application. The agreement is in writing, signed by A, registered as section 17(1A) requires, and certain in its terms. B took possession under it and paid almost the whole price; he remains willing to pay the balance. All the essentials are met. Limitation for specific performance does not defeat the defence.

Conclusion. A's suit for possession fails. B keeps possession, though title stays with A until a sale deed is executed. Had the agreement been unregistered, B could not invoke section 53A, since it was made after 24 September 2001.

How this is examined

“Explain the doctrine of part performance” is a standard 10-mark question: text, essentials, effect, the 2001 amendment with section 17(1A), shield not sword, and Shrimant Shamrao Suryavanshi. “Fraudulent transfer” appears as a 10-mark question or short note: both sub-sections of section 53, the essentials, the badges of fraud and the preference point. The part-performance problem above is set often.