Kallubandi Nanjamma vs Kethe Rangappa and Others

Venkatarama Ayyar, J.—This is an appeal by the plaintiff against the judgment and decree in A. S. No. 26 of 1948 on the file of the District

Court, Anantapur, which confirmed the decree of the District Munsif, Penukonda, in O. S. No. 238 of 1946. Defendants 6 and 7 are brothers and

they owned items 1 and 2 and a half share in item 3 as co-sharers, each being entitled to a moiety thereof. On 5-8-1932 they executed a deed of

gift Ex. A, 1 settling the said properties along with others on the plaintiff who is the daughter of defendant 7. At that time defendant 6 was indebted

to defendant 4 under pro-notes dated 15-3-1932 and 25-7-1932. On 20-7-1935 defendant 6 agreed to sell item 3 to defendant 4 in discharge of

the promissory note dated 25-7-1932; and he having defaulted in executing a sale deed in pursuance of the agreement, defendant 4 filed O. S. No.

78 of 1937 on the file of the District Munsif''s Court, Penukonda for specific performance of the agreement and that was decreed with costs on 3-

3-1937. In execution of this decree, a sale deed was executed by the Court in favour 01 defendant 4 under Order 21, Rule 34, Civil P. C. and

possession was also obtained under the sale deed.

Defendant 4 then filed O. S. No. 232 of 1933, District Munsif''s Court, Penukonda, for a declaration that the gift deed Ex. A. 1 was in fraud of

creditors and not binding on them and that was decreed on 17-9-1940. There was an appeal against that decree, A. S. No. 161 of 1940, District

Court, Anantapur, and therein the decree in O. S. No. 232 of 1938 was confirmed

with the clarification that the decree does not affect the half share of Kamam Ramaswami (defendant 7) in the properties gifted, but only the half

share of defendant 1 (present defendant 6).

This decision was affirmed on appeal to the High Court in S. A. No. 858 of 1942. Defendant 4 then applied in execution to recover the costs

decreed in O. S. No. 78 of 1937 and in E. P. No. 310 of 1943 items 1 and 2 were sold on 5-6-1944 and purchased by defendant 3. Thereupon,

the appellant instituted the suit out of which the present appeal arises for establishing her title to items 1 to 3 on the basis of the gift deed Ex. A. 1.

Both the Courts have held that by reason of the decree in O. S. No. 232 of 1938 her title cannot prevail as against that of defendants 3 and 4 and

dismissed her action. The plaintiff prefers this second appeal.

Mr. A. Bhujanga Rao, the learned advocate for the appellant, urged that the decree in O. S. No. 232 of 1938 declared Ex. A. 1 void only as

against the creditors of defendant 6; that the right now claimed by defendant 4 is not as a creditor of defendant 6 but as his transferee under an

agreement dated 20-7-1935 and perfected by conveyance in execution of the decree in O. S. No. 78 of 1937, District Munsif''s Court,

Penukonda, and that Ex. A. 1 is not void as against such a transferee. It was further contended that the court sale of items 1 and 2 in execution of

the decree in O. S. No. 78 of 1937 could not confer greater rights than the transfer in pursuance of that decree in favour of defendant 4 and that

defendant 3 who is a purchaser of those items cannot set up his title as against the plaintiff, as he is neither a creditor of defendant 6 nor

It is undoubted law that when a transfer is declared void as against creditors u/s 53, T. P. Act, the result is not to annul it altogether, but only to

render it inoperative as against creditors and that too only to the extent necessary to satisfy their claims; and subject to their claims, the transaction

is valid and enforceable. In Story on ""Equity Jurisprudence

Section 371, the law is thus stated: ""A conveyance of this sort (it has been said, with great truth and force) is void only as against creditors; and

then only to the extent in which it may be necessary to deal with the conveyed estate for their satisfaction. To this extent, and to this only, it is

treated as if it had not been made. To every other purpose it is good. Satisfy the creditor, and the conveyance stands.

The effect of the declaration made in O. S. No. 232 of 1938 that the gift deed was void as against creditors is, therefore, not to extinguish the title

of the appellant under Ex. A. 1, but to render it subject to the claims of the creditors. The contention of the Advocate for the appellant thus far is

unexceptionable.

The next step in his argument is that though defendant 4 was a creditor of defendant 6 at the time of Ex. A. 1, he shed that character when he

agreed on 20-7-1935 to purchase item 3 from him in satisfaction of his debt and obtained a conveyance in enforcement of that agreement through

Court in execution of the decree in O. S. No. 78 of 1937 and that in consequence he can claim no benefit under the declaration granted in O. S.

No. 232 of 1938 which ensures only for the benefit of the creditors and not transferees. The assumption underlying this contention is that where

there is a transfer in fraud of creditors the only right which the creditor has is to institute an action for its avoidance and that if he takes a transfer in

satisfaction of his debt that will not be protected u/s 53, T. P. Act. That, however, is not the true position. It is well-settled that a creditor having

the right to avoid a transfer u/s 53, T. P. Act can do so by any act which shows clearly and unambiguously an intention to avoid it. In -- ''Oakesf v.

Turquand and Harding'', (1867) LR 2 HL 325 (A) it was held that voidable transactions may be avoided by any open or unequivocal declaration

of an intention to avoid them.

In -- ''Kingston Cotton Mills Co. v. Mouatt'', (1899) 1 Ch 831 (B) in discussing the rights of creditors with reference to two assignments which

were impeached as in fraud of creditors under 13 Eliz. C. 5, Stirling J. observed as follows:

The effect of the statute appears to be this: that, as against creditors, an assignment which is within the statute is void both at law & in equity; &

the property which is the subject-matter of the assignment is to be treated as being the property of the testator at the time of his death.........

According to the law which has been laid down in the cases I have just cited, the assignments became void the moment the creditors claimed to

treat them as such; and thereupon the property which was comprised in those assignments ceased, as against the creditors to be the property of

the assignee, and became assets for the payment of the creditors in such a way that they had a legal right to be paid out of those assets.

In -- ''Ramaswami Chettiar v. Mallappa Reddiar'', AIR 1920 Mad 748 (C), it was held by a Full Bench of this Court that a decree-holder is

entitled to avoid a fraudulent transfer of the properties by the judgment-debtor by simply attaching those properties in execution of the decree.

Wallis C. J. after referring to the decision of the House of Lords in -- ''(1867) LR 2 HL 325 (A)'' observed as follows: ""I am of opinion that it is

open to the judgment-creditor by virtue of Section 53, T. P. Act to attach as the property of the judgment-debtor property which has been

fraudulently transferred to the claimant with intent to defeat or delay creditors. If he knows of the transfer when he applies for attachment the

application is sufficient evidence of his intention to avoid it; if he only hears of the transfer when a claim petition is preferred under Order 21, Rule

58 and still maintains his right to attach, that again is a sufficient exercise of his option to avoid."" In -- ''Sami Asari v. Ashagiya Pillar'', AIR 1921

Mad 657 (D), the facts were that on 9-4-1911 one Subramania Asari sold certain properties to the appellant and in August 1912 he sold some of

the same properties to the defendant who was a creditor. The defendant having got into possession of the properties, the appellant sued to eject

him relying on the sale deed dated 9-4-1911. Both the Courts below had found that that sale deed was in fraud of creditors and, on that finding,

dismissed the action. In second appeal two contentions were raised on behalf of the plaintiff:

(1) That the defendant was not entitled to plead by way of defence that the sale deed in favour of the plaintiff was in fraud of creditors as the same

had not been set aside in an action u/s 53, T. P. Act and (2) that as the debt due to the defendant had become discharged when he took a sale

deed, he was not entitled to relief as a creditor u/s 53, T. P. Act.

On the first question it was held following the decision in -- ''AIR 1920 Mad 748 (C)'' that it was sufficient if there was an open and unequivocal

declaration by the creditor of his intention to avoid the transfer and that the taking of the sale deed was ""an unequivocal expression of an intention

by the defendant to avoid the alienation to the plaintiff."" On the second question, Sadasiva Ayyar J. observed: ""The next question is, when did the

defendant so avoid the sale of the 44 cents? If he avoided it after he became the transferee under Ex. I and after his debt was thereby extinguished

by the purchase money under the transfer, he cannot of course rely on Section 53 so far as it says that a creditor can avoid a transfer intended to

defeat him because he ceased to be a creditor on the transfer. But his intention to avoid had in my opinion, clearly been made and expressed by

conduct before (it may be only just before) he obtained the transfer under Ex. I and therefore there is nothing in the contention of the appellant that

the avoidance by the defendant was made as transferee and not as creditor.

It is true that notwithstanding such unilateral expression of intention to avoid the transfer, it would be necessary for the creditor to establish when

the transferee insists on his title and seeks to enforce it, that the transfer was in fraud of creditors and liable to be set aside u/s 53, T. P. Act. But

the right to avoid does not depend on the ability to establish fraud in a Court of law, though its practical worth will be nothing without it. Applying

these principles to the facts of the present case, it must be held that when defendant 4 agreed on 20-7-1935 to take a sale deed in respect of item

3 in discharge of the amount due to him under the promissory note dated 25-7-1932 he had avoided the gift deed in favour of the plaintiff and that

as at that time and indeed till 1937 when the sale deed was actually executed, he was a creditor, the requirements of Section 53, T. P. Act are

satisfied. His title therefore to item 3 must prevail as against that of the appellant. In this view, it is unnecessary to discuss whether defendant 4

could claim relief u/s 53(2), T. P. Act as a subsequent transferee.

The claim of defendant 3 to items 1 and 2 has next to be considered. It is common ground that he was at no time a creditor of defendant 6. Nor

is he a transferee from him, he having purchased the properties in court auction in execution of the decree for costs obtained by defendant 4 in O.

S. No. 78 of 1937. The question is whether such a person can claim the benefit of Section 53, T. P. Act. In -- Vasudeo Raghunath Oka Vs.

Janardhan Sadashiv Apte, , certain properties were attached and sold in execution of a decree and purchased by the defendant in the action in

1909. In 1906 the judgment-debtor had conveyed the property to the plaintiff. In a suit by him to recover possession of the property from the

auction-purchaser the latter pleaded that, the sale deed of 1906 in favour of the plaintiff was in fraud of creditors. It was held that such a plea was

not open to him as he was-neither a creditor nor a transferee.

Shah J. with whom Heaton J. agreed observed as follows:

It is quite clear that the defendant is not a creditor and that as he does not seek to avoid the document for the benefit of any creditors. It was

suggested, however, that the defendant would be a subsequent transferee or a person having an interest in the property within the meaning of

Section 53, para. 1. But the defendant is an auction purchaser at a court sale, and not a transferee by any act of the original owner. Having regard

to the preamble as well as Section 5 of the Act, it seems to be clear that a person who steps in by operation of law and not by any act of the

owner is not a subsequent transferee within the meaning of Section 53. He is clearly not a person having an interest in the property within the

meaning of the section, which apparently refers to interest, which exists in fact at the time of the transfer objected to. It is clear, therefore, that the

deed is not voidable at the option of the defendant.

In -- '' Bai Hakimbu Vs. Dayabhai Rugnath, , the facts were similar with this difference that the decree-holder himself became the purchaser in

court sale. While agreeing with the observations of Shah J. in -- Vasudeo Raghunath Oka Vs. Janardhan Sadashiv Apte, '' already quoted that an

auction-purchaser is as such neither a creditor nor a transferee within the meaning of Section 53, T. P. Act, Lokur J. held that the decree-holder

who had the right to avoid, the transfer under that section did not lose it by becoming in addition the purchaser of the properties.

If the law as laid down in these two decisions is to be accepted as sound, then the claim of the appellant to items 1 and 2 must prevail as against

defendant 3. This Court, however, has consistently taken the view that when a decree-holder who has the right to avoid a transfer as in fraud of

creditors brings the properties covered by the deed of transfer to sale in execution of the decree, that itself is sufficient avoidance u/s 53 of the Act

and that the auction-purchaser is entitled to the benefit of the avoidance by the decree-holder. In -- ''AIR 1921 Mad 657 (D)'' dissenting from the

view taken in -- Vasudeo Raghunath Oka Vs. Janardhan Sadashiv Apte, '', Sadasiva Aiyar J. observed as follows:

If, however -- Vasudeo Raghunath Oka Vs. Janardhan Sadashiv Apte, '' intended to hold that, notwithstanding that a suit to set aside the sale by

a creditor was unnecessary and the creditor could set it aside by an unequivocal expression of intention, the auction purchaser could not take

advantage of the acts of the decree-holder, I must, with great respect, say that the decision is, in my opinion erroneous because the protection

given to him to recover his debt by bringing the property to court auction sale notwithstanding the prior fraudulent purchase by another would be

made of no effect and become purely illusory right if the court-auction-purchaser is not to get a clear title overriding the fraudulent purchase. The

very object of allowing the creditor or decree-holder to take advantage of his avoidance of a fraudulent transaction is to give the auction purchaser

in the sale brought about by the creditor a clear title.

In -- K.P. Ramaswami Naick Vs. Lakshmana Kudumban and Another, , the facts were that a judgment-debtor sold some properties to the

defendant on 3-1-1927. The decree-holder then attached those properties on 12-3-1927 and in the court auction which was held on 17-11-1927

and 4-1-1928 the plaintiffs became purchasers. In a suit by them to establish their title, they contended that the sale deed dated 3-1-1927 in

favour of the defendant was in fraud of creditors and could not prevail as against their title under the auction purchase. One of the defences to the

action was that the auction purchasers themselves were not creditors and that the right which the decree-holder had to avoid the transfer u/s 53 of

the Act did not pass to them.

In rejecting this contention Venkataramana Rao J. observed as follows:

If it is the law that a suit is not necessary and that by an open declaration or unequivocal conduct as aforesaid a creditor can avoid the transaction

and thereupon the transaction becomes avoided and void from the beginning, there is no necessity for the auction purchaser to avoid the

transaction again though he may be a subsequent transferee as stated in -- Vasudeo Raghunath Oka Vs. Janardhan Sadashiv Apte, ''. The

transaction having been avoided the property in the language of Stirling J. was the asset of the judgment-debtor available for satisfaction of the

decree-holder''s debts, and the auction purchaser gets a clear title and his suit is based upon that title. The only question in that suit is, whether the

transaction has been avoided as being in fraud of creditors, and if that is found, the auction purchaser''s right for a declaration cannot be

questioned. The decision in -- Vasudeo Raghunath Oka Vs. Janardhan Sadashiv Apte, '' has been rightly dissented from by Sadasiva Aiyar J. in --

'' AIR 1921 Mad 657 (D)''.

It is thus well settled in this Court that when a decree-holder entitled to avoid a transfer of property u/s 53, T. P. Act has elected to do so by

bringing the properties to sale in execution of his decree, that avoidance enures for the benefit of the auction purchaser, notwithstanding that he is

not himself a creditor or transferee.

It was next contended that the sale under which defendant 3 claims was in execution of a decree for costs passed in favour of defendant 4 in O.

S. No. 78 of 1937 on 3-3-1937, that that was not a debt which was in existence on the date of the gift in favour of the appellant on 5-8-1932 and

that, therefore, defendant 4 was not himself entitled to avoid the deed of gift u/s 53 and that the auction purchaser succeeding to his rights could not

claim higher rights. But the decree for costs was passed in an action for specific performance of the agreement dated 20-7-1935 which in turn was

for the discharge of the promissory note dated 25-7-1932. The decree can, therefore, be ultimately traced to a debt which was in existence on the

date of the deed of gift. Apart from that u/s 53, T. P. Act it is not merely the creditors who are in existence at the date of the transfer but also

subsequent creditors that are entitled to avoid it. In --''Stileman v. Ashdown'', (1742) 2 Atk. 477 (H) Lord Hardwick observed:

It is not necessary that a man should actually be indebted at the time he enters into a voluntary settlement, to make it fraudulent; for if a man does

it with a view to his being indebted at a future time it is equally fraudulent, and ought to be set aside.

In -- ''Thomas Pillai v. Muthurama Chettyar'', 33 Mad 205 (I) it was held that subsequent creditors are also within the rule enunciated in the first

clause of Section 53, T. P. Act and that a settlement could be avoided at the instance of subsequent creditors. In -- Rajagopala Chetty Vs.

Sivagami Ammal and Another, , it was again held that u/s 53, T. P. Act it was not necessary that the creditor impugning the alienation should have

been a creditor at the time of the alienation and that it was open to a subsequent creditor to avoid a deed of settlement as in fraud of creditors. On

these authorities, it must be held that defendant 4 was, in respect of the decree for costs in O. S. No. 78 of 1937 a creditor who was entitled to

avoid the gift deed dated 5-8-1932 in favour of the appellant and that in consequence the title of defendant 3 as the auction purchaser in execution

of the decree in O. S. No. 73 of 1937 prevails over that of the appellant under Ex. A. 1.

In the result, the second appeal fails and is dismissed with costs. No leave.