M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. JOSE versus LISSA & ORS. on 6 November 2019

1. The issue which has arisen for consideration in the presentCivil Appeal is with respect to the jural relationship between a chit fundentity and the subscribers, created by a chitty agreement; and whether itis a debt in prasenti or a promise to discharge a contractual obligation.

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2. The present Appeal arises out of a Chit Fund conducted by theAppellant, a chit fund entity. The duration of the chit fund was from G

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A1978 to 1990. The Respondents were subscribers of the chit fund. Duringthe subsistence of the chit fund, the Respondents defaulted in the paymentof 12 installments from 24.11.1981 to 24.11.1984.

2.1 The Appellant – chit foreman instituted two Suits against theRespondent – subscribers before the Subordinate Judge, Thrissur, Kerala.BThe first Suit bearing O.S. No. 323/1984 was filed for recovery of 12installments for the period 24.11.1981 to 24.11.1984; and, the secondSuit bearing O.S. No. 548/1987 was filed for recovery of futuresubscriptions due under the chit fund after 24.11.1984.

C2.2 The Subordinate Judge, Thrissur, Kerala decreed both the Suitsin favour of the Appellant – Company on 09.04.1990.

In O.S. No. 323/1984, the Respondents were directed to pay theAppellant – Company a sum of Rs. 40,915/- with Interest @12% on thesum of Rs. 34,800/- from the date of filing the Suit till the date of decree,Dand thereafter Interest @6% per annum from the date of the decree tillthe date of realization.

In O.S. No. 548/1987, the Respondents were directed to pay theAppellant – Company a sum of Rs. 83,820.68/- with Interest @12% onEa sum of Rs. 63,800/- from the date of filing of the Suit till the date ofdecree, and thereafter Interest @6% per annum from the date of thedecree till the date of realization.

2.3 Aggrieved by the aforesaid Judgment and Decree dated09.04.1990 passed by the Subordinate Judge, Thrissur, the RespondentsFherein filed two Appeals bearing A.S. No. 326/1992 and A.S. No. 346/1992 before the Single Judge of the Kerala High Court.

The learned Single Judge of the High Court dismissed both theAppeals filed by the Respondents vide a common Judgment and OrderGdated 27.06.1994.

The Single Judge held that the Kerala Chitties Act, 1975 does notapply to the Chit Fund in question, since the same was started from H

Mangalore, Karnataka. The Appellant being a trading company, wasexempted under Section 13(1)(e) of the Companies Act, 1956 fromspecifying the States to which the objects would extend in theMemorandum and Articles of Association.

Reliance was placed by the Single Judge on the Full Bench decisionof the Kerala High Court in P.K. Achuthan and Anr. v. State Bank ofTravancore, Calicut,[1] wherein it was held that a chit fund is essentiallya debt in praesenti, but permitted to be paid in installments. The facilityof this debt is available to the debtor so long as the installments areregularly paid. The nature of the transactions under a chit fund areessentially that of a debtor-creditor relationship.

It was noted that the judgment in P.K. Achutan (supra) had beenaffirmed by the Supreme Court in K.P. Subbarama Sastri and Ors. v.K.S. Raghavan and Ors.[2]

2.4 Aggrieved by the common Judgment and Order dated27.06.1994 passed by the learned Single Judge, the Respondent filedtwo Second Appeals bearing AFA Nos. 84 of 1994 and 85 of 1994 beforethe Division Bench of the Kerala High Court.

The Division Bench vide the impugned Judgment and Order dated15.01.2009, allowed AFA No. 84 of 1994, and dismissed AFA No. 85 of1994.

The division bench noted that the decision of the full bench in P.K.Achutan (supra) had been over-ruled in Janardhana Mallan & Ors.v. Gangadharan & Ors.,[3] wherein a five-judge bench of the KeralaHigh Court held that future installments payable by a chit subscriber arenot a debt owed to the chit foreman, and therefore, could not be recoveredin case of default in payment of an installment.

1 AIR 1975 Ker 47.

2 (1987) 2 SCC 424.

3 AIR 1983 Ker 178.

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The subsequent larger bench decision of five judges in JanardhanaMallan (supra) was evidently not brought to the notice of the SupremeCourt in K.P. Subbarama Sastri (supra). The decision in Achutan’scase would no longer hold the field, since it had been over-ruled by thelarger bench in Janardhana Mallan’s case.

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The Division Bench held that by entering into a chitty agreement,a debt is not created at once by the subscriber in respect of payment ofall future installments, as the chitty variola only contains a promise topay, which is not a promise to repay an existing debt, but only to pay anddischarge a contractual obligation. The execution of the security bond isCto ensure fulfillment of the terms of the contract by the parties. If thesubscriber fails to pay future installments in terms of the contractualobligations, then the subscriber would become a defaulter, he would incura debt to the foreman, and would not be a liability to pay in future of anexisting liability.

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On the facts of the case, the division bench held that the Appellant– Company was entitled to recover 12 installments from the Respondentsfor the period from 24.11.1981 to 24.11.1984. However, future installmentscould not be recovered.

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2.5 Aggrieved by the judgment of the Division Bench, the Appellant– chit fund company filed the present Special Leave Petition. This Hon’bleCourt vide Order dated 10.08.2009 granted special leave to appeal. Thedispute between the parties got resolved during the pendency of thepresent appeal.

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This Court vide Order dated 13.11.2009 noted the submission madeby the Counsel for the Appellant that several suits had been filed by theAppellant – Company against the subscribers, which had been dismissedon the basis of the impugned judgment. In these circumstances, theGpresent Appeal was pressed for determination.

3. DISCUSSION AND ANALYSIS

At the time when modern banking was not fully developed insmall towns and rural areas, chit fund institutions emerged to cater tothe financial needs of low-income households. A conventional chit fundis an old indigenous financial institution involving periodic subscriptionsby a group of persons. It is, in law, a contract between the subscribersand the foreman, which provides that the subscribers shall subscribe acertain sum by way of regular installments for a specified period oftime. Each subscriber in his turn, as determined by lot, or auction, or inany other manner specified, is entitled to the prize amount. The numberof subscribers in a chit fund would constitute the number of installments,so that every subscriber is assured of receiving the prize amount. Asthere is a mutuality of interest amongst the subscribers to each chit fund,it constitutes a convenient instrument which combines savings andborrowings.

The duties of the foreman of the chit fund include enrollingsubscribers, and drawing up the terms and conditions of the scheme inthe form of an agreement. For these services, the foreman charges acommission, on which a ceiling is fixed.

Each prized subscriber must furnish acceptable security againstthe remaining installments, so as to be eligible to receive the lumpsumpayment. The security is to be furnished by the subscriber directly to theforeman. In the event of default by a subscriber to pay his installmentson the due date, the chit fund scheme may provide for forfeiture ofdividend, or levy of penal interest.

4. A full bench of the Kerala High Court in P.K. Achutan (supra),held that it is manifest that what actually transpires when a prizedsubscriber is allowed to draw the kuri amount is the grant of loan to himfrom the common fund in the hands of the foreman with the concessionalfacility of effecting re-payment in installments, which is subject to thestipulation that the said concession is liable to be withdrawn in the event A

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Aof default being committed in payment of any of the installments. It is adebt in praesenti, but permitted to be paid in installments, for the benefitof the debtor so long as the installments are regularly paid. This beingthe true nature of the, the stipulation for furnishing a security bond whichwould enable the foreman to recover from the prized subscriber, theBwhole of the balance amount due from him in a lump sum when defaultoccurs in payment of any of the installments. Such a stipulation cannotbe regarded as a penalty clause. It is necessary for the foreman of a chitwho occupies a special relationship with all the subscribers of the chitfund, which would justify stringent provisions being incorporated in theCagreement for safeguarding the interest of all the subscribers. Withoutpunctual payments by the individual subscribers, the foreman will not bein a position to discharge his obligations to the other subscribers. It istherefore necessary that the foreman should reserve to himself the power to recover in a lump sum, the entire balance amount due in respect ofDfuture installments, on a default being committed by a prized subscriber.In the context of the special features and incidents of chit fundtransactions, the incorporation of a stipulation in the chitty hypothecationbond, cannot be regarded to be unconscionable or penal in nature.

5. In Janardhana Mallan (supra), a five-judge bench of theEKerala High Court overruled the decision in P.K. Achutan (supra), andheld that it would not be possible to say that on entering into the chittyagreement a debt is incurred by the subscriber for the amount of all thefuture installments, and in respect of such amount there is a debtor –creditor relationship. The chitty variola embodies a promise to pay onFfuture dates. It is not a promise to repay an existing debt, but in dischargeof a contractual obligation. The prize amount is not received as a loan,but by virtue of the terms of the contract between the parties.

6. The Chits Funds Act, 1982 (hereinafter referred to as “theG1982 Act”) was enacted by Parliament, and came into force on19.08.1982. The issue of the applicability of the 1982 Act to the State ofKerala was considered by a Constitution Bench of this Court in State ofKerala and Ors. v. Mar Appraem Kuri Company Ltd. and Ors.[4]

H4 (2012) 7 SCC 106.

The Constitution Bench held that on the enactment of the Chit FundsAct, 1982 which covered the entire field of “chits” under Entry 7 of ListIII of the Constitution, the Kerala Chitties Act, 1975 stood impliedlyrepealed. As a consequence, the Central Act became applicable forthwithin the State of Kerala, even though the Kerala legislature notified the1982 Act on 30.04.2012.

7. The constitutional validity of the Chit Funds Act, 1982 waschallenged before this Court in Shriram Chits & Investment (P.) Ltd.v. Union of India & Ors.[5] The challenge to the vires of the variousprovisions under the 1982 Act was repelled. This Court held that all theprovisions under the 1982 Act are relevant and material to protect theinterest of the subscribers. The three-judge bench held that :

“15. We were referred to the decision of this Court in K.P.Subbarama Sastri and Ors. v. K.S. Raghavan and Ors. :[1987]2SCR767 wherein a contract providing for paymentof money in installments and stipulating that on default inpayment of any of the installments all the future installmentsshall be payable at a time with interest was held not penal innature in the case of kuri transaction under the Kerala ChittiesAct, 1975.While upholding the transaction a Bench of thisCourt approved the decision of the earlier Full Bench decisionof the Kerala High Court in the case P.K. Achuthan (supra)wherein the Kerala High Court had upheld such a transactionand held it, to be of not a penal nature.In this context Eradi,J. (as His Lordship then was) speaking for the Full Benchobserved that a subscriber truly and really becomes a debtorfor the prized amount paid to him. It will be noticed that thelater Full Bench decision of the Kerala High Court inJanardhana Mallan and Ors. (supra) was not brought to the-notice of this Court and the Court was referred to the overruled decision of the Kerala High Court.The fact remainsthat the question involved before us as to the true nature oftransaction for the purpose of finding out the relevant entry A

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Ain the Constitution into which it may fall, was not involved inthat case.

16. It appears to us, but for the discordant note struck by theother Full Bench of the Kerala High Court in the aforesaidcase of P.K. Achuthan (Supra), the consistent view of all theBHigh Courts has been that it is not a moneylending transactionand that there is no relationship of debtor and creditor forthe purpose of it being treated as a money lendingtransaction.”

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(emphasis supplied)

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The reference made to the judgment in P.K. Achutan (supra) andJanardhana Mallan (supra) was in passing, and this Court did not eitheraffirm, or reject the ratio laid down in either of these cases.

8. Where a contract provides for payment of money in installments,and contains a stipulation that on default being committed in paying anyof the installments, the whole sum shall become payable at once, such astipulation would not be in the nature of a penalty.

E9. The division bench in the impugned Judgment dated 15.01.2009,held that by entering into a chitty agreement, a debt is not created atonce by the subscriber with respect to the amount of all the futureinstallments. The chitty agreement embodies a promise to pay anddischarge a contractual obligation, and not a promise to repay an existingdebt.F

10. We do not agree with the view expressed by the division bench.When a prized subscriber is allowed to draw the chit amount, which is inthe nature of a grant of a loan to him from the common fund in the handsof the foreman, with the concessional facility of effecting re-payment inGinstallments; this is subject to the stipulation that the concession is liableto be withdrawn in the event of default being committed in payment ofany of the installments.

The chit subscriber at the time of subscription, incurs a debt whichis payable in installments. If a subscriber is permitted to withdraw thecollected sum on his turn, without being bound to pay the futureinstallments, it would jeopardize the interest of all other subscribers, andthe entire mechanism of the chit fund system would collapse.

11. A perusal of the provisions of Chapter V of the 1982 Actmakes it clear that if a prized subscriber defaults in making payment ofan installment, the chit foreman has the right to recover the amountcovering all future subscriptions from the defaulting subscriber as aconsolidated amount.

Section 32 of the 1982 Act empowers the foreman to recover theconsolidated payment of all future subscriptions forthwith in the case ofa default.

Chapter V of the Chit Funds Act, 1982 prescribes the rights andduties of prized subscribers. Section 31 to 33 in Chapter V read as follows :

“31. Prized subscriber to furnish security.— Every prizedsubscriber shall, if he has not offered to deduct the amountof all future subscriptions from the prize amount due to him,furnish, and a foreman shall take, sufficient security for thedue payment of all future subscriptions and, if the foreman isa prized subscriber, he shall give security for the due paymentof all the future subscriptions to the satisfaction of theRegistrar.

32. Prized subscriber to pay subscriptions regularly.— Everyprized subscriber shall pay his subscriptions regularly on thedates and times and at the place mentioned in the chitagreement and, on his failure to do so, he shall be liable tomake a consolidated payment of all the future subscriptionsforthwith.

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33. Foreman to demand future subscriptions by writtennotice.— A foreman shall not be entitled to claim aconsolidated payment from a defaulting prized subscriberunder Section 32 unless he makes a demand to that effect inwriting.

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(2) Where a dispute is raised under this Act by a foreman fora consolidated payment of future subscriptions from adefaulting prized subscriber and if the subscriber pays to theforeman on or before the date to which the dispute is postedfor hearing the arrears of subscriptions till that date togetherCwith the interest thereon at the rate provided for in the chitagreement and the cost of adjudication of the dispute, theRegistrar or his nominee hearing the dispute shall,notwithstanding any contract to the contrary, make an orderdirecting the subscriber to pay to the foreman the futureDsubscriptions on or before the dates on which they fall due,and that, in case of any default of such payments by thesubscriber, the foreman shall be at liberty to realise, inexecution of that order, all future subscriptions and interesttogether with the costs, if any, less the amount, if any, alreadyEpaid by the subscriber in respect thereof:

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Provided that if any such dispute is on a promissory note, noorder shall be passed under this sub-section unless suchpromissory note expressly states that the amount due underFthe promissory note is towards the payment of subscriptionsto the chit.

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(3) Any person who holds any interest in the property furnishedas security or part thereof, shall be entitled to make thepayment under sub-section (2).

(4) All consolidated payments of future subscriptions realisedby a foreman shall be deposited by him in an approved bankmentioned in the chit agreement before the date of the H

succeeding instalment and the amount so deposited shall notbe withdrawn except for payment of future subscriptions.

(5) Where any property is obtained as security in lieu of theconsolidated payment of future subscriptions, it shall remainas security for the due payment of future subscriptions.”

(emphasis supplied)

12. The object is to empower the foreman to recover the amountin a lump sum from a defaulting subscriber, so as to secure the interestof the other subscribers, and ensure smooth functioning of the Chit Fund.Such a provision would not amount to a penalty.

13. The relationship between the foreman and the subscribers ina chit fund transaction is of such a nature that there is a necessity andjustification for making stringent provisions to safeguard the interest ofthe other subscribers, and the foreman. If a prized subscriber defaults inpayment of his subscriptions, the foreman will be obliged to obtain theequivalent amount from other sources, to meet the obligations for paymentof the chit amount to the other members, who prize the chit on subsequentdraws. For raising such an amount, the foreman may be required to payhigh rates of interest.

14. The stipulation of empowering the foreman to recover theentire balance amount in a lump sum, in the event of default beingcommitted by a prized subscriber, is to ensure punctual payment by eachof the individual subscribers of the chit fund. Without punctual payments,the system would become unworkable, and the foreman would not be ina position to discharge his obligations to the other members of the chitfund.

15. In view of the aforesaid discussion, the relationship betweena chit subscriber and the chit foreman is a contractual obligation, whichcreates a debt on the day of subscription. On default taking place, theforeman is entitled to recover the consolidated amount of futuresubscriptions from the defaulting subscriber in a lump sum.

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A16. The impugned judgment dated 15.01.2009 passed by theDivision Bench of the High Court in AFA No. 85 of 1994 is set aside.The Civil Appeal is allowed in the aforesaid terms. All pendingApplications, if any, are accordingly disposed of.

Ordered accordingly.B

Devika Gujral

Appeal allowed.

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