Friday, April 19, 2024

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MODEL ANSWERTPA

INTEREST DETERMINABLE ON INSOLVENCY

Explain the principle laid down under section 12 TPA against a condition making interest determinable on Insolvency.

Section 12 provides that if the transferor includes a condition in the deed that the interest created in the transfer will be defeated if the transferee becomes insolvent, such condition would be void. The term ‘defeated’ implies that if the transferee becomes insolvent, the transfer would be treated as cancelled and the property would revert back to the transferor. Such a condition may deprive not only an owner a right of alienation, but also defeat, at the same time, the rights of his creditors, who may want to enforce their claim against this property on his attaining insolvency. Where a person becomes insolvent, his property vests in the official receiver, and a condition that his interest in it will cease, will prevent it from vesting it in the official receiver.

This section invalidates two types of conditions
(i) Condition which limits any attempted transfer by the transferee
(ii) Conditions which provide that the interest of the transferee shall cease to exist when the transferee becomes insolvent.

The object underlying this section is to protect the interest of the creditors. It is unjust to lay down a condition restricting transferee from disposing of his property, it would be equally unjust if such transferee is allowed to defeat the interest of his creditor who had advanced money only on the basis of property. In the absence of this section, the transferee may incur debts and is then become insolvent. The result would be that creditor can never recover his money because the property would already cease to be the property of the debtor.

Section 12 is applicable whether the interest transferred is absolute or partial interests. Thus in the transfer or settlement of an interest for life the condition that it shall cease to exist upon transferee becoming an insolvent would be a void condition under this section.
This section does not apply to a condition on a lease for the benefit of the lessor or those claiming benefit under him.

In the case of Shiba Prasad v. Lekhraj AIR 1945 Pat 162, A transfers the property absolutely to B, with a condition that if B becomes insolvent or attempts to transfer it, his interest in the property will come to an end, B is entitled to ignore this condition without affecting the validity of the transfer. This property can be attached by the court or he himself may alienate it according to his wishes. Thus, a condition in the grant that if such property is sold in auction for the grantee’s debt the grant will come to an end, is void

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