Holding

A preference of one creditor over others does not render a transfer void under s.53 of the Transfer of Property Act if the debtor retains no benefit and the consideration is adequate.

Summary

The Union of India sued Rajeswari & Co. for a declaration that the sale of movable and immovable assets of Krishna Oil Mills and Industries Ltd. to Rajeswari & Co. was void under section 53 of the Transfer of Property Act, alleging that the transfer was intended to defeat the Union's tax claim. The company, which was loss‑making, transferred its assets to Rajeswari & Co. and used the proceeds to pay various creditors, leaving no funds for the tax arrears. The Madras High Court held that the transfer was not void because the proceeds were applied to genuine debts and the consideration was adequate, even though the transferee was not a creditor. On appeal, the Supreme Court affirmed that a debtor may prefer one creditor over others without attracting s.53, provided the debtor retains no benefit and the consideration is adequate. The Court found no material evidence of undervaluation or personal benefit to the directors, and held that the factual issues raised could not be reopened. Consequently, the appeal was dismissed with costs.

Issues considered

Whether a transfer of assets to a person who is not a creditor, with proceeds used to pay other creditors, is voidable under s.53 of the Transfer of Property Act.
Whether the mere preference of one creditor over others, without the debtor retaining any benefit, constitutes fraud within s.53.
Whether allegations of undervaluation of assets and personal benefit to directors raise a question of fact that can be revisited on appeal.

Legislation cited

Subjects

Transfer of propertySection 53Creditor preferenceFraudulent transferTax arrearsAsset valuationDirectors' benefitPartnershipIncome tax

Judgment

A

UNION OF INDIA
v.
RAJESWARI AND CO, & ORS.
B
JULY 15, 1986

I [R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.]

Transfer of Property Act, 1882-s. 53-Applicability of-Pro-
ceeds arising upon transfer of assets of an assessee company employed
fully in paying off some creditors-Transaction whether invalid and
c
inoperative-Transfer in favour of a person not a creditor-validity of.

Constitution of India, Art. 136--Questions of fact-Whether could be
raised before the Court.
D
A public limited company, working at a loss, having come to know
of the proposal of the Department to reopen its income-tax assessments
for the previous years, disposed of its assets to the respondent firm,
with which it had a partnership business, and employed the proceeds in
paying off the debts dne to various creditors, with the result that no-
thing was left for paying off the tax arrears of the company. E

A suit under s. 53 of the Transfer of Property Act, 1882 was
instituted by the Union of India-appellant for a declaration that the sale
i deed in favour of the respondent firm was invalid, inoperative and not
binding on the appellant and other creditors of the transferor company
and alleging fraudulent intent to defeat legitimate claims, which was F
decreed by the trial court. The High Court, however, allowed the ap-
peal holding that the appellant had failed to satisfy the provisions. of s. 53
inasmuch as the evidence showed that the company had utilised the
proceeds arising upon the transfer of its assets in paying off all its other
creditors, and that even if the company had done so in order to avoid
payment of its income tax dues no relief could be granted to the G
appellant.

In this appeal by special leave it was urged for the appellant that
the transfer was effected in favour of a person who was not a creditor,
that the assets had been undervalued and that there was evidence to
show that the benefit of the sale proceeds was enjoyed by the directors H
176 SUPREME COURT REPORTS [1986] 3 S.C.R.

A ·of the company, who were also partners of the respondent firm.

Dismissing the appeal, the court,

HELD: It is open to a debtor to prefer one or more creditors over
the others in the payment of his debts, and so long as he retains no
B
benefit in' the property the mere circumstance that some creditors stand
paid while others remain unpaid, does not attract the provision of s. 53
oftheTramferof Property Act. [180A-B]

Musahar Sahu and Another v. Hakim Lal and another, L.R. 43
I
Indian Appeals 104, In re Moroney, [1888] L.R. 21 Ir. 27, 62, Middle-
C ton y. Pollock, [1876] 2 Ch.D. 104, 108 and MA PWA MAY and
another v. S.R.M.M.A. Chettyar Firm, 56 Indian Appeals 379, referred
to.
In the instant case, there was no finding by the High Court in
support of the contention that some of the debts discharged were owed
D to persons who were also directors of the company or that the consid-
eration which passed for the sale of the assets was inadequate and that
the assets had been undervalued. This Court will not permit such ques-
tions of fact to be raised unless there is material evidence which has
been ignored by the High Court or the finding reached by the Court is
perverse. [180B-C]
E
It has been found by the High Court that the sale was effected for
the purpose of discharging genuine debts payable by the company and
that the sale proceeds were really employed for paying off the creditors
of the company. Once it was also fonnd that the consideration was not
inadequate, it was immaterial that the transfer was effected in favour of
F apersonwhowasnotacreditor. [1800-E]
r
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1689
Of 1974

From the Judgment and Order dated 31st August, 1972 of the
G Madras High Court in Appeal No. 357 of 1965.

B.B. Ahuja and Ms. A. Subhashini for the Appellant. \
/

A.T.M. Sampath and P.N. Ramalingam for the Respondents.

H The Judgment of the Court was delivered by
U.0.1. v. R. &CO. [PATIIAK,J.] 177

,.. PATIIAK, J, This appeal by special leave arises out of a suit
instituted by tbe appellant for a declaration that a sale-deed of im·
A
' moveable properties and the transfer of moveables belonging to the
respondent limited company in favour of the respondent firm are in-
valid, inoperative and not binding on the appellant and other creditors
of the respondent limited company.
B
A suit was instituted by the Union of India, the appellant before
us, alleging that the Krishna Oil Mills and Industries Ltd., a public

I limited company registered under the Indian Companies Act, 1913 was
carrying on business in the manufacture and sale of tin cans and
aerated water. It entered into a partnership in September 1952 with
Rajeswari and Co., which was carrying 0n business in the pressing of
cotton bales. Under the partnership agreement Rajeswari & Co. was c
to install a cotton baling press in the buildings of the Company and the
business would be carried on under the name Rajapalayam Cotton
Pressing Factory, with the profits being divided between the Company
and Rajeswari & Co. in the ratio of 7 to 9 respectively. This was
replaced by another agreement in 1954, but the business was carried D
on in the same name and the profits divided in the same shares. It was
alleged that the Company incurred losses in its own business year after
year and from 1954 the only income derived by it flowed from the
shares held by it in the partnership business. It was alleged that the
Company had in fact ceased to carry on its own business, but in com-
puting the income of the Company from the assessment year 1956·57 E
to the assessment year 1959-60 the losses suffered during the previous
years from the Company's own business were allowed to be carried
forward and set off against its share of income from the partnership
Firm. Subsequently the Income-tax authorities decided to reopen the
) assessment proceedings under s. 34 of the Indian Income-tax Act, 1922
and, it is said, this was communicated to the Company. The processing F
of the case took time and the notices under s. 34 were issued for the
\ different assessment years on March 6, 1961 and March 7, 1961. It was
alleged that meanwhile, the Company, having come to know of the
proposed re-opening of its income-tax assessments, began to dispose
of its moveable and immoveable assets with a view to defeat the claim
of the Union of India and to place the properties beyond the reach of G
the creditors of the company. The assets of the company were transfer-
rnd in favour of Rajeswari & Co. and the sale proceeds were employed
for paying off the debts due to various creditors who, it is said, inc-
luded also the close relations and friends of the Directors of the Com-
pany. In the result, there was nothing left for paying off the tax arrears
of the Company. H
178 SUPREME COURT REPORTS [1986] 3 S.C.R.

A The suit was resisted by the Company, which in its written state-
ment, admitted that it was working at a loss for some years and was
obliged to replace its original business of seed crushing and oil extrac-
tion by a more modest business activity, and in its circumstances it
entered into a partnership with Rajeswari & Co. for carrying on the
B business of pressing cotton bales. It denied that when disposing of its
assets it was aware of the intention of the income-tax authorities to
reopen its assessments. It pleaded that because of action threatened by
the Registrar of Joint Stock Companies in 1959 it was compelled to
consider its position and to decide in a General Body meeting in June
1960 to dispose of the assets of the company. It was also stated that the
_I
partnership agreement of 1954 between the Company and Rajeswari I
c & Co. stipulated that Rajeswari & Co., should have first preference if
the Company proposed to sen its assets. The right of pre-emption was
pressed by Rajeswari & Co. and, therefore, a resolution was passed in
February 1961 at another Extraordinary Meeting of the Company to
sen the lands and buildings at a valuation to be fixed by expert opi- '·
D nion. It was asserted that the assets were sold to Rajeswari & Co. and
the sale proceeds were distributed to the creditors so that all tile
creditors were paid off.

Rajeswari & Co. also filed a written statement in opposition to
the suit and besides asserting that it had installed cotton bale presses in
the buildings of the Company pursuant to the partnership agreement
E
between them it denied any fraudulent intent in purchasing the assets
of the Company. It asserted that it acted in good faith and paid value
for the properties.

The trial court decreed the suit on Appril 27, 1965. Rejeswari & \
Co. appealed to the High Court of Madras, and the High Court
F
allowed the appeal, set aside the trial court decree and dismissed the
suit. The High Court held in substance that the Union of India had t
failed to satisfy the provisions of s. 53 of the Transfer of Property Act
inasmuch as the evidence showed that the Company had utilised the
sale proceeds arising upon the transfer of its assets in paying off an its
other creditors, and that even if the Company had done so in order to
G
avoid payment of its income-tax dues no relief could be granted to the
Union of India.
\,
In this appeal it is urged for the Union of India that the transfer
of assets was effected in favour of a person who was not a creditor, that
H the assets had been under-valued and that there was evidence to show
U.0.1. v. R. & CO. [PATHAK, l.] 179

r that the benefit of the sale proceeds was enjoyed by the Directors of
the Company who were also partners of Rajeswari & Co.
A

Section 53 of the Transfer of Property Act provides that every
transfer of immoveable property made with intent to defeat or delay
the creditors of the transferor shall be voidable at the option of any B
creditor so defeated or delayed. A long line of cases has held that the
preference by a debtor of one creditor over the others is not ipso facto

I deemed fraudulent, and reference may be made to Musahar Sahu and
Another v. Hakim Lal and Another, L.R. 43 Indian Appeals 104 where
the Judicial Committee of the Privy Council quoted Palles C.B., who
said in In re Moroney [1888) L.R. 21Ir. 27, 62:
c
'The right of the creditors, taken as a whole, is that all the
property of the debtor snould be applied in payment of
demands of them or some of them, without any portion of
it being parted with without consideration or reserved or
retained by the debtor to their prejudice. Now it follows D
from this that security given by a debtor to one creditor
upon a portion of or upon all his property (although the
effect of it, or even the interest of the debtor in making it,
may be to defeat an expected execution of another ere-
ditor) is not a fraud within the statute; because notwith-
''f standing such an act, the entire property remains available
for the creditors or some or one of them, and as the statute
E
gives no right to rateable distribution, the right of the ere-
di tors by such act is not invaded or affected."

The Judicial Committee explained that "the transfer which de-
feats or delays creditors is not an instrument which prefers one ere- F
ditor to another; but an instrument which removes property from the
creditors to the benefit of the debtor. The debtor must not retain a
benefit for himself. He may pay one creditor and leave another un-
paid: Middleton v. Pollock. [1876) 2 Ch. D. 104, 108. So soon as it is
found that the transfer here impeached was made for adequate consi-
deration in satisfaction of genuine debts, and without reservation of any G
benefit to the debtor, it follows that no ground for impeaching it lies in
the fact that the plaintiff who also was a creditor was a loser by pay-
I
~ ment being made to this preferred creditor-there being in the case no
question of bankruptcy." This proposition of law was re-affirmed by
the Judicial Committee subsequently in MA PWA MAY and another v.
S. R.M. M.A Chettyar Firm, 56 Indian Appeals 379. H
180 SUPREME COURT REPORTS [1986] 3 S.C. R.

A It seems clear that it is open to a debtor to prefer one or more
creditors over the others in the payment of his debts, and so long as he
'r <

retains no benefit in the property the mere circumstance. that some
creditors stand paid while others remain unpaid does not attract the
provisions of s. 53 of the Transfer of Property Act. It is not disputed
B that the debts satisfied by payment of the sale proceeds are genuine. A
faint attempt was made to show that some of the debts discharged were
owed to persons who were also Directors of the Company. There is no ~

findings by the High Court in support of that contention. It was also
urged that the consideration which passed for the sale of the assets was
inadequate and that the assets had been undervalued. Here again I
there is no finding to support the submission. The questions raised are I
c questions of fact, and this Court will not permit such questions to be
raised unless there is material evidem:e which has been ignored by the
High Court or the finding reached by the Court is perverse.

A point was sought to be made by learned counsel for the appel-
D !ant that the transfer of the assets was effected in favour of Rajeswari
& Co. which was not one of the creditors. It has been found by the
High Court that the sale was effected for the purpose of discharging
the debts payable by the Company. Once it is also found that the
consideration was not inadequate it is immaterial, as the High Court
has observed, that the transfer was effected in favour of a person who
E was not a creditor. It has been clearly found that the sale proceeds were
employed for paying off the creditors of the Company.
r-
It appears that in consequence of the impugned transfer effected
by the Company the appellant has been unable to recover a sum of
Rs.28,240 assessed as income-tax in October 1961. It rested its suit on \
F s. 53 of the Transfer of Property Act. Having regard to the findings
rendered by the High Court on the consideration of material on the
record and upon an interpretation of s. 53 which that provision has
uniformly received this appeal cannot be sustained.

The appeal fails and is dismissed with costs.
G
P.S.S. Appeal dismissed.
\
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