Fraudulent Transfer and Attachment Before Judgment

Source: Supreme Court 

Why in News? 

The bench of Justices B.V. Nagarathna and R. Mahadevan in the case of L.K. Prabhu @ L. Krishna Prabhu (Died) Through LRs v. K.T. Mathew @ Thampan Thomas & Ors. (2025) held that attachment before judgment cannot extend to property already transferred prior to suit filing, and that allegations of fraudulent transfer must be determined through proceedings under Section 53 of the Transfer of Property Act rather than claim petition procedures. 

What was the Background of L.K. Prabhu @ L. Krishna Prabhu (Died) Through LRs v. K.T. Mathew @ Thampan Thomas & Ors. (2025) Case? 

• L.K. Prabhu (original applicant) entered into an agreement for sale on 10.05.2002 with V. Ramananda Prabhu (Defendant No. 3), who acknowledged liability of Rs. 17,25,000/-. 
• The agreement stipulated that in case of default, Defendant No. 3 would convey 5.100 cents of property with building in Ernakulam Village for Rs. 35 lakhs. 
• After partial payments (Rs. 3 lakhs cash and Rs. 2.5 lakhs by cheque on 25.06.2004), a registered sale deed was executed on 28.06.2004 in favor of the original applicant. 
• The original applicant took possession and used the property as 9 guest houses recognized by the Tourism Department. 
• On 18.12.2004, K.T. Mathew (plaintiff/Respondent No. 1) filed a suit for recovery of Rs. 43,82,767/- from Defendant Nos. 2-4. 
• Along with the suit, an application was filed under Order XXXVIII Rule 5 CPC seeking attachment before judgment of the property, claiming it belonged to Defendant No. 3. 
• The property was attached on 13.02.2005, nearly six months after the sale deed execution. 
• The original applicant learned of the attachment in 2007 and filed a claim petition under Order XXXVIII Rule 8 CPC seeking release of the property. 
• The plaintiff resisted, alleging the transfer was fraudulent and intended to defeat creditors. 
• The trial Court dismissed the claim petition on 24.02.2009, holding the transfer was fraudulent under Section 53 of the Transfer of Property Act, 1882. 
• The High Court of Kerala upheld this decision on 13.02.2023 while directing determination of any amount payable to the purchaser. 

What were the Court's Observations? 

On Scope of Attachment Before Judgment: 

• The Court held that Order XXXVIII Rule 5 CPC can only attach property belonging to defendant on the date of suit institution—property already transferred prior to suit cannot be attached. 
• Attachment before judgment is merely a protective measure and does not create any charge or ownership in favor of plaintiff. 
• Order XXXVIII Rule 10 protects pre-existing rights of non-parties, which remain unaffected by attachment. 

On Fraudulent Transfer and Procedural Limitations: 

• Allegations of fraudulent transfer require independent proceedings under Section 53 TPA, not claim petition procedures under Order XXXVIII Rule 8 CPC. 
• While Amendment Act 104 of 1976 enlarged scope of adjudication under Order XXI Rule 58, this mechanism cannot transform attachment procedure into substantive enquiry under Section 53 TPA. 
• The burden to establish fraudulent intent lies upon the party alleging fraud—mere suspicion, inadequacy of consideration, or relationship between parties cannot constitute proof. 

On Facts of Present Case: 

• The registered sale deed was executed on 28.06.2004, several months before suit filing on 18.12.2004, thus the essential condition for attachment was absent. 
• Documents did not demonstrate original applicant was party to any collusion—the sale was supported by antecedent agreement, payment endorsements, and registered deed with possession transfer. 
• Past liability under the 2002 agreement constituted valid consideration under Section 25 of Indian Contract Act. 
• Respondent No. 1 failed to produce cogent evidence showing transfer's dominant purpose was to defeat creditor rights—circumstances relied upon gave rise to suspicion but suspicion cannot substitute legal proof. 

On Protection of Prior Rights: 

• The Court reiterated that agreement for sale creates equitable obligation attached to property ownership. 
• Attaching creditor is entitled to attach only the right, title and interest of judgment-debtor—attachment cannot override contractual obligations from antecedent agreements. 
• Execution of sale deed, even if registration follows later, operates to transfer property prior to attachment.

What is Section 53 of TPA? 

About: 

• Section 53 of the Transfer of Property Act, 1882 (TPA), pertains to fraudulent transfers and principally concerns the intentional transfer of property with the aim of defrauding creditors.  
• As outlined in Section 53, a property transfer is considered voidable, allowing any defrauded creditor the option to void the transfer, unless the transferee acquired the property in good faith and for valuable consideration.  
• Additionally, the section outlines a procedure for nullifying such transfers. 
• The section also provides a mechanism for setting aside the transfer. 

Text of Section 53: 

• 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. 
  • For example:– When ‘A’ transfers his property to ‘B’ without giving him his ownership of the property with the intention to keep his assets out of reach of his creditor, such a transfer is called a fraudulent transfer. 
• A fraudulent transfer of property gives rise to a civil cause of action. The court may set aside a fraudulent transfer at the request of the defrauded creditor. 

Essentials: 

• The transferor carries out the conveyance of immovable property without receiving any consideration.  
• The purpose behind the transfer is to deceive a future transferee and hinder or postpone the rights of creditors.  
• This type of transfer can be void which means it is voidable at the discretion of the subsequent transferee. 

Exceptions: 

• Good Faith under Section 53(a):  
  • If the person receiving the property (transferee) acted in good faith and had no notice of the fraudulent intent of the transferor, the transfer is not voidable.  
  • Good faith here implies an honest belief and lack of knowledge about any fraudulent intention on the part of the transferor.  
  • If the transferee can prove that they acquired the property without any knowledge of the fraudulent intent, the transfer may be considered valid.   
• Insolvency of the Creditor under Section 53(b): 
  • Another exception is when the transferor was not rendered insolvent by the transfer, and the transfer was made for adequate consideration.  
  • If the transferor remains solvent even after the transfer, and the transfer was made for a legitimate purpose with adequate consideration, it may not be considered fraudulent even if it prejudiced the creditor. 

Framing of suit under fraudulent transfer: 

• Privity of contract is followed, which means that only the parties to the contract can sue. Hence, no third party can sue on the creditor’s behalf who is not a party to the suit.  
  • The suit is instituted by the creditor on the ground that the transfer is made to defeat or delay the creditors of the transferor. 
• The suit is instituted in the representative category or for the benefit of all creditors.  
  • This is to avoid a multiplicity of suits against the same opposite party/parties on the same subject. Dismissing a creditor’s lawsuit would be binding on all creditors. 

Case Laws 

• Karim Dad v. Assistant Commissioner (1999):  
  • If the whole transaction is based on fraud and misrepresentation, then no valid title can be passed to the transferee by using a forged and fabricated deed. 
• Musahar Sahu v. Lala Hakim Lal (1951): 
  • It will not be fraud if the debtor chooses to pay one creditor and leave others unpaid provided that he must not retain any benefit.