All NotesCivil LawTransfer of Property Act (TPA)

Transfer of Property Act (TPA)

TPA Interest Determinable on Insolvency Section 12

Condition Making an Interest Determinable on Insolvency or Attempted Alienation under Section 12, and the Lease Exception

A transferor who has been told by section 10 that he cannot forbid his transferee to sell may try a different route: he may give the property on terms that the interest shall simply cease if the transferee becomes insolvent or attempts to transfer. Section 12 closes that route. A condition or limitation of that kind is void, and the interest continues as though it had never been written. The section protects two things at once — the transferee's power of alienation, and the creditors who would otherwise find the property vanishing at the moment they came for it.

Figure 1: The two triggers the section disarms, the drafting device it forecloses, and the one exception it preserves

1. The Section

Section 12, TPA

'Where property is transferred subject to a condition or limitation making any interest therein, reserved or given to or for the benefit of any person, to cease on his becoming insolvent or endeavouring to transfer or dispose of the same, such condition or limitation is void.'

'Nothing in this section applies to a condition in a lease for the benefit of the lessor or those claiming under him.'

2. The Elements

  1. A transfer of property. As with sections 10 and 11, the section governs what the parties attach to a transfer.
  2. A condition or limitation. Both words appear, and the pairing is deliberate. A transferor cannot escape the section by drafting the fetter as a limitation on the interest — 'to B until he becomes insolvent' — rather than as a condition defeating an interest already given. Whichever form is used, the provision is void.
  3. Any interest reserved or given. The section reaches an interest reserved to the transferor himself as well as one given to another, and an interest given 'to or for the benefit of' a person, so a trust cannot be used to achieve indirectly what the section forbids directly.
  4. The trigger: insolvency, or an endeavour to transfer or dispose. Either event, or both, will do.
  5. The consequence: the condition is void; the transfer stands. The transferee keeps the interest and keeps it unencumbered by the provision.

3. The Two Triggers

Trigger

What the condition tries to achieve

Why the law refuses

Insolvency of the holder

That the interest shall end the moment the holder's estate would otherwise pass to his creditors

It would let a settlor provide property enjoyed in prosperity and withdrawn in adversity, defeating the insolvency law and the creditors' expectations

An endeavour to transfer or dispose

That the interest shall end if the holder tries to alienate

This is the prohibition in section 10 achieved by another route: the transferee is not forbidden to sell, he is merely ruined if he does

4. The Lease Exception

The section does not apply to a condition in a lease for the benefit of the lessor or those claiming under him. The justification is the same as under section 10: the lessor has not parted with everything. He retains the reversion, and he has a legitimate interest both in who occupies his property and in the solvency of the person who has covenanted to pay him rent.

  1. A condition determining the lease on the lessee's insolvency is good, and is expressly recognised by section 111(g), under which a lease determines by forfeiture where the lessee is adjudicated insolvent and the lease provides that the lessor may re-enter on that event.
  2. A condition determining the lease on assignment without consent is good, and forfeiture follows the same course — subject to waiver under section 112 and to the notice requirement in section 111(g).
  3. The condition must be for the lessor's benefit. A provision inserted for some other purpose does not come within the exception.

5. Sections 10, 11 and 12 Side by Side

Section 10

Section 11

Section 12

The device used

A prohibition on alienating

A direction as to enjoyment

A defeasance on insolvency or attempted alienation

Interest required

Any transferred interest

An absolute interest

Any interest, reserved or given

Does a partial version survive?

Yes

No

No

Exception

Lease for the lessor's benefit; married-woman proviso

Direction protecting the transferor's other land

Lease for the lessor's benefit

Result

Condition void; transfer good

Direction void; transfer good

Condition void; transfer good

6. Worked Illustrations

The clause in the deed

Effect

'A settles property on B, but B's interest shall cease if he is adjudicated insolvent'

Void under section 12; B's interest continues and passes to his assignee in insolvency

'… to B until he attempts to transfer it, and thereafter to C'

Void — a limitation is caught as squarely as a condition

'A settles property on trustees to pay the income to B, the trust to determine on B's insolvency'

Void — the section covers an interest given 'to or for the benefit of' a person

'A reserves a life interest to himself, to cease on his own insolvency'

Void — the section covers an interest reserved as well as one given

'A leases to B for ten years, with a proviso for re-entry if B is adjudicated insolvent'

Valid — a lease condition for the lessor's benefit, and forfeiture under section 111(g)

'A leases to B, the lease to determine if B assigns without A's consent'

Valid, for the same reason; subject to waiver under section 112

7. Why the Rule Matters Beyond the Deed

  1. It keeps property within the reach of creditors. An interest that can be settled so as to disappear on insolvency would allow a debtor to enjoy wealth that his creditors could never touch.
  2. It prevents indirect restraints. Without section 12, section 10 could be evaded in every conveyancer's office by a change of wording.
  3. It marks a difference from English law. English law permits the protective trust, under which a determinable life interest ends on alienation or bankruptcy and a discretionary trust arises — a device that Indian law, through section 12, does not admit in that form, except as the lease exception allows.

Retention aid

Condition or limitation, reserved or given, insolvency or attempt. Each pair is there to stop an evasion. And the only escape is the lease, because a lessor still owns something and is entitled to protect it.

8. Related Topics and Provisions

  • Restraints on Transfer, Sections 10 to 12 — the chapter scheme in which section 12 sits
  • Condition Restraining Alienation, Section 10 — the prohibition that section 12 stops being evaded
  • Section 10 vs Section 11 — the neighbouring comparison
  • Section 111(g), TPA — forfeiture of a lease on insolvency or breach of a covenant against assignment
  • Sections 112 and 113, TPA — waiver of forfeiture and of the notice
  • Section 53, TPA — transfers made to defeat or delay creditors