vil Appeal No 85 N of 1972
From the Judgment and Order dated 27111970 of the Kerala High Court in AS No 380 of 1965
WITH SPECIAL LEAVE PETITION CIVIL No 2908of 1975
From the Judgment and Order dated 1511975 of the Kerala High Court in Second Appeal No 390 of 1971
TS Krishna Murthy lyer AS Nambiar GN Rao and Ms Shanta Vasudevan for the Appellants in CA No 85N of 1972 and Respondents in SLP
No 2908 of 1975
NM Ghatate and section Balakrishnan for the Respondents in CA No 85N of 1972 and Petitioners in SLP No 2908 of 1975
The Judgment of the Court was delivered by 769 KHALID J
We will first deal with Civil Appeal 851972
The appellants were the plaintiffs in OS No 78 of 1964 on the files of the Subordinate Judge s Court Palghat
The suit was based on a Kuri transaction Chit Fund
The re spondents were subscribers to the Kuri
They committed default after they had prized it and realised the Kuri amounts
Hence the suit was filed for realisation of the principal sum with interest and the balance Kuri due
The suit was decreed by the Subordinate Judge by his Judgment dated 24th June 1965
An appeal was filed before the High Court
A Division Bench of the High Court heard the appeal and partly allowed it by modifying the decree of the Trial Court refixing the interest largely influenced by the fact that the Kuri transaction and the contract between the foreman of the Kuri and the subscribers defaulted burdened the subscribers with unconscionable interest and were unrea sonable
To appreciate the reasoning of the Division Bench it is necessary to set out the scheme of the Kuri
The respondents took two tickets in a Kuri Chit Fund started by the appel lants in September 1962
Under the scheme of the Kuri there will be bidding at monthly intervals
The subscriber bids and prizes the ticket depending upon his need
When he does so he voluntarily surrenders the benefit of dividends which is distributed among the subscribers
For example suppose the Kuri amount is Rs5000 consisting of 50 tickets valued at Rs100
At the first bid the lowest bid is 3500 by A A gets this amount and the balance of Rs1500 will be distributed among the other subscribers
But the prized subscriber has a duty to pay the entire amount in instal ments without default
Here the respondent bid and prized both the tickets one on the third draw and the other at the th and received the amounts
As per rules of the Kuri they executed bonds to secure future instalments
However they committed default in paying the future instalments
That resulted in the suit
The main contention which found favour with the High Court raised in defence was that the rules of the Kuri contained several unconscionable and penal provisions like the provisions relating to the payment of all the future instalments in a lump with interest at 12 ignoring the claim of the defaulting subscribers to their share in the reduction the dividend
The Kuri system was in vogue in the erstwhile Travancore State and in the Cochin State prior to the formation of Kerala State and they were governed in those two areas by the Travancore Chit Act of 1945 Act 26 of 1120 ME which came into force on 20 6 1945 and 770 the Cochin KUries Act 7 of 1106
There was no corresponding Act for Malabar area from which area the present appeal arises
After the formation of the Kerala State Kuri trans actions in the State are governed by the Kerala Chitties Act 1975 as amended by Act 19 of 1978
The High Court after taking into account the interest stipulated observed that it was unconscionable and penal and reduced the amount to Rs10000 and modified the decree to that extent
The reason that persuaded the High Court to do so was its con cern at the unreasonableness of the terms of the contract and the High Court expressed it in the following words Before we leave this case we wish to add a few words
In our experience we have not yet come across such a kurivari which has so many unconscionable provisions
Ground No 5 in the memorandum of grounds of appeal shows the amount payable by the appellants
the amount received by them etc
to show the unconscion ableness
The appellants received only Rs 16185 on both the tickets together and all told they already paid back Rs5100 as subscriptions
The claim in the suit towards future instalments is Rs21000 with interest of Rs1785
And all this within less than two years the date of commencement of the Kuri being 20th September 1962 and the date of suit being 2nd September 1964 for receiving a little over Rs16000 the appellants have to pay a little less than Rs28000
In our considered opinion such transactions should not be allowed and people who carry on such transactions are really unsocial elements
We are told that the same stake holders are carrying on such kuries even now without any hindrance because there is no law to control the conduct of chit funds now in the Malabar area
It is time that the Government moved in the matter and brought some legislation to control such unsocial activities
 A full Bench of the Kerala High Court had occasion to consider the correctness of this view and in a decision reported in  such Kuri transactions were upheld and the decision of the Division Bench was reversed
According to the full Bench there was nothing unconscion able about the contract
Before the full Bench it was con tended that this stipulation in the agreement where a sub scriber prized his chit providing that on default the Kuri foreman would be entitled to recover the entire balance amount with 12 interest in a lump sum without giving credit to the subscribers is penal 771 in nature and held in terrorem for securing due performance of their promise and hence not enforceable
Eradi J as he then was speaking for the full Bench held that a subscriber truly and really becomes a debtor for the prized amount paid to him that the facility of repayment in instalments is only a concessional facility and that stipulation enabling the foreman to withdraw the concessional facility on default of punctual payment of the instalments would not be penal or unconscionable
We quote below the observations made by the full Bench in paragraphs 6  7 6
The question whether a particular stipula tion in a contractual agreement is in the nature of a penalty has to be determined by the court against the background of various relevant factors such as the character of the transaction and its special nature if any the relative situation of the parties the rights and obligations accruing from such a transaction under the general law and the intention of the parties in incorporating in the contract the particular stipulation which is contended to be penal in nature
If on such a comprehensive consideration the court finds that the real purpose for which the stipula tion was incorporated in the contract was that by reason of its burdensome or oppressive character it may operate in terrorem over the promiser so as to drive him to fulfil the contract then the provision will be held to be one by way of penalty 7
Where a contract provides for payment of money in instalments and contains also a stipulation that on default being committed in paying any of the instalments the whole sum shall become payable at once the true test for determining whether the said condition is in the nature of a penalty is to find out whether the amounts referred to in the agree ment were debita in praesenti although solven da in futuro or whether they were to become due to the promisee only on the respective dates when the instalments were payable
If on a proper construction of a contract it is found that the real agreement between the parties was to the effect that the whole amount was on the date of the bond a debt due but the creditor for the convenience of the debtor allowed it to be paid by instalments intimating that if default should be made in the payment of any instalments he would with draw the concession then the stipulation as to the whole amount of the balance becoming payable 772 would not be penal if on the other hand on a proper consideration of the terms of the contract the court comes to the conclusion that the debt itself arises or becomes due and payable by the debtor only on the respective dates fixed for the instalments the stipula tion that on default being made in the payment of any instalment the whole of the balance should become due and payable would be in the nature of a penalty
 We agree with the law so laid down by the full Bench
The result is that the appeal has to be allowed
Accord ingly we set aside the Judgment of the High Court and allow this appeal but in the circumstances of the case without costs
Special leave granted in SLP Civil 290875
Here the Judgment of the High Court is challenged by a subscriber putting forth the arguments that found favour with the Division Bench in the earlier appeal
We adopt the reasoning of the full Bench in  which was followed by the Division Bench in the Judgment under appeal in this case
The appeal therefore has to fail and is dismissed
However with no order as to costs
PSS Appeal dis missed


Summary:
The respondents who were subscribers to a Kuri Chit Fund in 1962 committed default after they had prized the tickets and realised the amounts
The bonds executed by them contained a provision that in case of default they would be liable to pay all the future instalments in a lumpsum with interest at 12 without giving any credit for the dividend
The suit filed for realisation of the principal sum with interest and the balance Kuri due was decreed by the trial court in 1965
In appeal before the High Court it was con tended for the defendant respondents that the stipulation in the agreement that on default the Kuri foreman would be entitled to recover the entire balance amount with 12 interest in a lump sum without giving credit to the sub scribers was unconscionable and penal and hence not enforce able
The Division Bench took the view that the Kuri trans action and the contract between the Kuri foreman and the subscribers burdened them with unconscionable interest and were unreasonable
It therefore partly allowed the appeal by modifying the decree refixing the interest
Allowing the appeal by appellants plaintiffs and dis missing the appeal by other subscribers by special leave the Court HELD Where a contract provides for payment of money in instalments and contains also a stipulation that on default being committed in paying any of the instalments the whole sum shall become payable at once the true test for deter mining whether the said condition is in the 768 nature of a penalty is to find out whether the amounts referred to in the agreement were debita in praesenti al though solvenda in futuro or whether they were to become due to the promisee on the respective dates when the instalments were payable
771E G If on proper consideration of a contract it is found that the whole amount was on the date of the bond a debt due but the creditor for the convenience of the debtor allowed it to be paid by instalments then the stipulation would not be penal
If on the other hand the court comes to the con clusion that the debt becomes due only on the respective dates fixed for the instalments the stipulation would be in the nature of a penalty
771G H 772A B In the instant case there was nothing unconscionable about the contract
A subscriber to a Kuri truly and really becomes a debtor for the prized amount paid to him The facility of repayment in instalments is only a concessional facility
The stipulation enabling the foreman to withdraw this facility on default of punctual payment of the instal ment could not therefore be said to be penal
770G H 771A B PK Achuthan vs State Bank of Travancore Calicut  approved