Fraudulent diversion of loan funds and benami law: Delhi HC found such claims not barred and fit for trial.

A claim alleging fraudulent diversion of loan funds to acquire properties in others' names was distinguished from a pure benami claim by a real owner seeking recovery of property held benami. The Delhi HC noted that section 4 of the Benami Transactions (Prohibition) Act, 1988 does not bar a suit founded on alleged fraudulent transfer or diversion of funds where the defendants are said to have acquired assets out of those diverted monies. It also accepted that the principle underlying section 53 of the Transfer of Property Act, 1882 may apply to fraudulent transfers of movable property and to creditor claims against transfers made to defeat them. The statutory-bar applications were rejected and the allegations were directed to trial.

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Issues: Whether the suit, as pleaded against defendants Nos. 2, 3 and 5, was barred by the Benami Transactions (Prohibition) Act, 1988 on the footing that the properties were held benami, and whether the pleadings disclosed a claim based on fraudulent diversion of loan funds falling outside that prohibition.

Analysis: The pleadings were read as alleging that defendant No. 1 obtained loans from the plaintiff for purchasing immovable property, but diverted those funds to the other defendants and caused properties to be acquired in their names to defeat the plaintiff. The Court distinguished such a claim from a pure benami claim by a real owner to recover property held benami. It held that section 4 of the Benami Transactions (Prohibition) Act, 1988 did not bar a suit founded on alleged fraudulent transfer or diversion of funds, particularly where the plaintiff asserted that the defendants were being pursued for assets acquired out of those diverted funds. The Court also accepted that the principle underlying section 53 of the Transfer of Property Act, 1882 could apply to fraudulent transfers of movable property and to cases where creditors seek relief against transfers made to defeat them.

Conclusion: The applications for dismissal on the plea of statutory bar were rejected, and the allegations were held to require trial on their merits.

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