IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE C.T.RAVIKUMAR THURSDAY, THE 15TH JANUARY 2009 / 25TH POUSHA 1930 AFA.No. 84 of 1994() -------------------- AGAINST THE JUDGEMENT & DECREE IN AS.346/1992 OF THE HIGH COURT OS.548/1987 of PRL.SUB COURT,THRISSUR .................... APPELLANTS:APPELLANTS 1 TO 3, 6 & 8 TO 10: -------------- DFENDANTS 1 TO 3, 6 & 8 TO 10: *1. C.J.JOHN, S/O.CHALISSERRY JOSEPH, VELATHUR VILLAGE AND DESOM, THRISSUR TALUK. 2. LISSA, W/O.C.J.JOHN, DO. DO. 3. JOSEPH, S/O. DO. DO. 4. ANNIE, D/O. DO. DO. 5. ALOSHIUS, S/O.C.J.JOHN, DO. DO. 6. LONACHAN, S/O.DO DO. 7. CLARAMMA GRACE, DO. DO. *1ST APPELLANT DIED AND APPELLANTS 2 TO 7 ARE RECORDED AS HIS LEGAL HEIRS VIDE MEMO DATED 24TH SEPTEMBER, 2000. BY SR. ADV. SRI K.P.DANDAPANI RESPONDENTS:RESPONDENT/APPELLANTS 4, 5 AND 7-PLAINTIFF: --------------- DEFENDANTS 4, 5 AND 7: 1. ORIENTAL KURIES LIMITED, REPRESENTED BY THE CHAIRMAN P.D.JOSE, THRISSUR VILLAGE, THRISSUR TALUK. 2. PEYUS, S/O.C.J.JOHN, VELATHUR VILLAGE AND DESOM, THRISSUR TALUK. 3. ALPHONSA, D/O.C.J.JOHN, DO. DO. 4. MARTIN, S/O.C.J.JOHN, DO. DO. ADV. SRI N.SUBRAMANIAM SMT.DEEPU THANKAM THIS APPEAL FROM FIRST APPEAL HAVING BEEN FINALLY HEARD ON 15/01/2009 ALONG WITH AFA NO. 85 OF 1994, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ORDER ON CMP NO.3649 OF 1994 IN AFA NO.84 OF 1994 DISMISSED 15.1.2009 SD/- P.R.RAMAN, JUDGE. SD/- C.T.RAVIKUMAR, JUDGE. P.R.RAMAN & C.T.RAVIKUMAR, JJ. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - A.F.A.Nos.84 and 85 of 1994 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated: 15th January, 2009 JUDGMENT P.R.Raman,J. Both the above appeals arising out of the common judgment rendered by the learned Single Judge in A.S.Nos.326 and 346 of 1992. The two appeals were preferred by the common defendants in the suit O.S.No.323/84 and 548/87 respectively on the files of the Subordinate Judge's Court, Trichur. The respondent-Company is a company incorporated under the Companies Act. They started the kuri (chits). The suit O.S.No.323/84 was for recovery of 12 instalments due for the period from 24.11.1981 to 24.11.1984 and the suit O.S.No.548/87 was for recovery of the entire future subscriptions due under the transaction other than the period covered by the earlier suit. The trial court decreed the suit O.S.No.323/84 for an amount of Rs.40,915/- with 12% interest on the sum of Rs.34,800/- from the date of suit till date of decree and thereafter at the rate of 6% per annum from the date of decree and suit O.S.No.548/87 was decreed for Rs.83,820.68 with 12% interest on the sum of Rs.63,800/- from the date of suit till date of decree and 6% interest per annum thereafter. Preliminary decree for sale charged on the plaint schedule property was passed in AFA NOS.84 & 85/94 2 both the suits. Challenging the decree the defendants preferred appeals. Before the learned Singe Judge three questions were raised. The first question was that the decree passed in an equitable mortgage as granted by the trial court is not sustainable since there is no subsisting relationship of debtor and creditor between the defaulting subscriber and the foreman of the chit and hence the decree to that extent is bad. Though specifically this contention was not raised before the trial court, the learned Single Judge permitted the said question to be raised and considered in the light of the full bench decision of this court in P.K.Achuthan v. State Bank of Travancore (AIR 1975 Ker. 47), the larger bench decision of this court in Janardhana Mallan v. Gangadharan (AIR 1983 Ker. 178) and the decision of the Supreme Court in K.P.Subbarama Sastri v. K.S.Raghavan (AIR 1987 SC 1257) and took the view that in view of the decision of the Supreme Court in Subbarama Sastri's case (AIR 1987 SC 1257) as having approved the decision in Achuthan's case, the decision in in Janardhana Mallan's case cannot be taken to lay down the correct law and overruled the contention of the appellant. We will revert to this question after we dispose of the other contentions in this appeal. 2. The second contention urged on behalf of the appellant was that the plaintiff has violated the Kerala Chitties Act, 1975 and contended that there was no previous sanction of the Government as required under Section 3(1) of the Kerala Chitties Act and that the AFA NOS.84 & 85/94 3 same is not registered. In the light of the penal provision under Section 60 for contravention of the provisions, the suit could not be maintained by the plaintiff. The learned Single Judge after referring to the pleadings and evidence in the case and also the decision of the trial court, held that the kury price book shows that the foreman of the kury is the Mangalore Branch of the plaintiff-company. Reference was made to Exts.A51 and A52 in support of the above finding. Reliance was also made to the evidence of P.W.1. It was found that the appellant had no case in the written statement that the foreman of the kury was not in the Mangalore Branch. Even though a contention was raised that the foreman of the chity was really in the head office at Trichur, the same was not accepted. The learned Single Judge held that the court below referred to the relevant documents produced in the case and in the light of the relevant documents coupled with the statement contained in the written statement and the memorandum of appeal, it is not possible to accept the contention of the counsel for the appellant that the foreman of the chit is the head office at Trichur and not the Mangalore Branch of the plaintiff company. The learned Single Judge further held that the Kerala Chitties Act has no application to kury in the present case since it was started from Mangalore Branch in Karnataka State. On a consideration of all relevant matters, the learned Single Judge concurred with the view expressed by the trial court and held that the suit on the basis of the chitty transaction is AFA NOS.84 & 85/94 4 maintainable. Though a ground is raised in the present appeal reiterating the contention, no acceptable argument was raised to take a different view as expressed by the learned Single Judge. We have gone through the judgment of the trial court and the reasoning given thereunder and the positive findings of fact rendered by the Sub Court on the basis of the materials on record that the chitty transaction was actually done from the Mangalore Branch of the company in Karnataka State with which the learned Single Judge agreed even after reappreciating the evidence on record. we do not find any reason to take a different view, this point is decided against the appellant confirming the view of the learned Single Judge. 3. It was then contended that the suit was not maintainable as the Memorandum of Association of the plaintiff company and its articles of association do not empower it to start a kuri from Manglore in Karnataka State. This argument was also repelled after referring to the relevant provisions contained in the Memorandum of Association and Articles of Association of the company and also to the relevant provisions under the Companies Act. The view taken by the court below that the clause contained in the memorandum of association of the company and the object clause contained is to establish, promote and carry on any other business in State of Kerala or anywhere in India and the expression “anywhere in India” includes any place within or outside the State of Kerala and the fact that the State of AFA NOS.84 & 85/94 5 Karnataka or Mangalore is not specifically mentioned in the object clause is immaterial. The learned Single Judge agreed with the said view. The plaint averments more particular in paragraph 8 clearly states that the plaintiff company is registered under the Indian Companies Act and a company registered under the Companies Act is a Corporation as held by the Supreme Court in Hakam Singh v. Gammon (AIR 1971 SC 740). In State of Punjab v. M/s.Bajaj Electricals Ltd. (AIR 1968 SC 739) it has been held that the trade in its primary meaning is exchanging of goods for goods or goods for money and in its secondary meaning it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile as distinguished from literal arts or modern profession or agriculture. The object of the company is to start and conduct kuries as can be seen from clause 3(j) of the Memorandum of Association. It is therefore clear from the objects of the company that it can start any business with a view to earn profits. So it cannot be held that the plaintiff company is not a trading corporation and hence Section 13(1)(e) of the Companies Act has no application. Therefore the view taken by the learned Single Judge that the plaintiff company is a trading company coming within the exemption contained in Section 13(1)(e) of the Companies Act is perfectly correct. Hence the contention as advanced in this appeal lacks merit in this regard also. 4. Now we shall come back to the main point that arises for AFA NOS.84 & 85/94 6 consideration in this appeal, namely, as to whether the relationship between the subscriber and foreman is that of a debtor and creditor or it is only a contractual in nature- on the mere execution of a bond stipulating the condition for payment? No doubt the Full Bench decision of this court in P.K.Achuthan's case (supra) held that default clause in the chit fund transaction is a special necessity and justified that the stringent provisions contained therein are for the protection of the interests of the foreman. It considered whether it is in the nature of a penal provision and held that it will depend upon a true construction of the terms contained in the agreement. In para 6 and 7 the court discussed the principle as follows: “The question whether a particular stipulation 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 stipulation was incorporated in the contract was that by reason of its burdensome or oppressive character it may operate in terrorem AFA NOS.84 & 85/94 7 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. 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 agreement were debits in praesenti although solvenda in future 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 instalment he would withdraw the concession, then the stipulation as to the whole amount of the balance becoming payable 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 stipulation that on default being made in the payment of any instalment the AFA NOS.84 & 85/94 8 whole of the balance should become due and payable would be in the nature of a penalty.” After referring to the decision of the House of Lords in John Wallingford v. The Directors & Co. of the Mutual Society and the Official Liquidator thereof [ (1880) 5 AC 685] and other decisions it was held that it is manifest that what actually transpires when a prized subscriber is allowed to draw the kuri amount is the grant of a loan to him from the common fund in the hands of the foreman (emphasis supplied) with the concessional facility of effecting the repayment in instalments subject to a stipulation that the said concession is liable to be withdrawn in the event of default being committed in payment of any of the instalments. Thus, it is really a debt in praesenti but permitted to be paid by instalments, the benefit of the said facility being available to the debtor only so long as the instalments are regularly paid. Such being the true nature of the transaction it is evident that on a correct application of the test laid down by House of Lords in John Wallingford's case, the stipulation contained in the kuri security bond entitling the foreman to recover from the prized subscriber the whole of the balance amount due from him in a lump sum on his committing default in payment of any of the instalments cannot be regarded as a penalty clause. The court expressed this opinion in the context of the special features and incidents of the chit fund transactions such a stipulation in a kuri vari or chitty AFA NOS.84 & 85/94 9 hypothecation bond cannot be regarded as unconscionable or penal. In that view of the matter, the Full Bench observed that to the extent to which any of the observations in Raghavan v. Subbrama Sastrigal (1971 KLT 231) are inconsistent with the principles enunciated under that judgment and those observations cannot be regarded as laying down the correct law. The correctness of the above Full Bench decision however was doubted by a subsequent bench and ultimately the matter came up for consideration before a larger bench of this court in Janardhana Mallan's case(supra). The question which arose for consideration was as to whether a prized subscriber in a chitty receives the price amount executing a security bond to secure payment of future subscriptions which he is bound to pay under the terms of the chitty variola and when the payment of future subscriptions are not defaulted, nevertheless can it be said that a debt due to the foreman arises by reason of the receipt of the price amount from the foreman on the execution of the security bond for securing future subscriptions? The question arose in the second appeal filed by the plaintiff in a suit for setting aside a sale deed executed by their father and elder brother in favour of the first defendant. The plaintiffs sued for partition of 6/8 shares in the properties and also sought setting aside of the sale deed on the ground that it was not supported by consideration and necessity and the debts recited in the deed were not antecedent debts of the father. One of the debts so recited was the obligation to pay future AFA NOS.84 & 85/94 10 subscriptions by a prized subscriber who had received the price money and had executed a chitty security bond. Whether the amount of the future instalments could be said to constitute a debt before the instalments had fallen due is the controversy in the Second appeal. When a priced subscriber in a chitty receives the price money and executes a security bond to secure the payment of future subscriptions in accordance with the obligations under the contract embodied in the chitty variola, does the priced subscriber become a debtor to the foreman, was the question posed for answer. The larger bench referred to the full bench decision of the Travancore High Court in Sundaram Pillai Easwaramoorthiya Pillai v. Vallithavi Narayana Vadivu [ (1926) 16 Trav LJ 143) wherein the Travancore High Court expressed the view that the obligation of the prized subscriber to pay future subscriptions arises under the contract embodied in the chitty variola and consequently the debt could arise only on the date the future instalment falls due and not on the date of the execution of the security bond (emphasis supplied). The same view was expressed by the Division Bench of the Kerala High Court in Varkey Thomas v. Travancore Forward Bank Ltd. (1962 KLT 383) where the Division Bench preferred to follow the earlier view after noticing the different views expressed in the questions raised. The larger bench in Janardhana Mallan's case observed that the Division Bench in Achuthan's case (supra) has not noticed the earlier Division Bench AFA NOS.84 & 85/94 11 decisions of this court and the earlier Full Bench decision of the Travancore High Court referred to above. The earlier Full Bench in Achuthan's case was persuaded to follow the House of Lords decisions, but the larger bench pointed out that the reliance on the theory of mutual fund or a common fund would not be justified as it was not founded on any sound legal principle and was conceived at a time when there was no statutory regulation of chitties. Therefore whatever might have been the earlier view as to the incidents of a chitty the rights and liabilities of the parties stand crystallized by the statutory regulations made as early as in 1094 in Travancore area and 1107 in Cochin area. It was also noticed that the decision of the Full Bench in Achuthan's case was mainly based on the adoption of the view expressed in Bhagavathi Ammal Lakshmi Ammal v. Vengatasubba Iyer and others (15 TLR 133) that in a chitty there is a common fund out of which loans are advanced to subscribers, a view no doubt once expressed by the Travancore High Court. The validity of this view has been eroded and the attention of the Full Bench was not drawn to the decisions of the Full Bench of the Travancore High Court in Sundaram Pillay Easwaramoorthiya Pillay v. Vallithavi Narayana Vadivu and others (1926-16 TLJ 143), thel decision in Janaki Amma Devaki Amma v. Uma Valliapoti Amma Raja Avl (1943 TLR 902) and the two Division Bench decisions of the Kerala High Court which had specifically considered this question. Therefore AFA NOS.84 & 85/94 12 there was no occasion for the Full Bench to examine the logic or the reasonableness of the approach made in those cases. The court noticed the view expressed by T.M.Krishnaswami Iyer, C.J. in Devaki Amma's case (1943 TLR 902) that an obligation to pay future subscription in chitty undertaken under the original contract continues to be the same whether the price is drawn or not or the price amount is received or not. For the purpose of solvency of the chitty certain provisions are incorporated in the statute as additional obligations of the subscribers but for such obligations, there will be no difference between the liability of the priced subscriber and the non-priced subscriber and both arise out of the same contract. It was observed that the three views as to the nature of the liability of the prized subscriber who had received price money on the execution of chitty security bond are (a) such liability arises on the terms of the chitty variola, a debtor-creditor relationship arising on the very date the chitty variola is subscribed to since by agreeing to the terms of the variola the subscriber undertakes to pay in future instalments and such undertaking amounts to a debt on the very date he becomes a subscriber (b) a debt arises on the execution of the chitty security bond by the prized subscriber and ( c ) a debt arises on the date of default of future subscriptions. If there would be no justification to assume any relationship between parties other than that specified by the terms of the contract and the provisions of the state. it was held AFA NOS.84 & 85/94 13 that there is no reason to say that any other rights and obligation should be read into relationship of the parties. The larger bench proceeded to hold that it cannot be envisaged the obligation to pay subscriptions as obligations undertaken by the subscriber under the contract. Even after pricing and receiving the amount, the same obligation continues. In the case of one who does not prize his ticket he too has the obligation to pay in instalments on agreed dates. If the amounts are paid on the due dates no liability would arise. When once default of payment of any instalment is made that becomes a debt. That is by reason of the contract. The obligation to pay on future dates is supported by consideration, the subscriber being allowed to bid and price his ticket whereupon the whole price amount has to be paid. The price amount is the whole amount of the ticket less the discount and commission irrespective of at what instalment it is bid. There is no incurring of a fresh obligation to pay the future subscriptions, for, the obligation is there and held “we therefore find that there is a promise to pay in future and the obligation arises by reason of such promise.” In paragraph 21 it was held that “an obligation is a legal tie and gives rise to a legal relationship. When an obligation arises out of a contract its nature depends on the terms of the contract. When the obligation concerns payment of money that may mature into a debt when such debt is incurred. All such obligations need not be debts though they may result in the incurring of debts depending on the terms of the AFA NOS.84 & 85/94 14 contract. Till such debts are incurred the relationship of the parties bound by the legal tie or obligation arising under the contract would not be that of debtor and creditor. That status would arise only on the debt coming into existence which, as we pointed out, need not be simultaneous with the emergence of the obligation between the parties under the terms of the contract.”. In paragraph 22 it was also held that “when under the terms of a contract there is a provision to pay on a future date not in repayment of an existing debt but by way of discharge of the obligation arising from the terms of that contract no debt would arise merely by reason of the promise to pay. An obligation would arise on the terms of the contract that obligation being to perform what was undertaken namely the promise to pay. A distinction has necessarily to be drawn between a case where parties agree upon discharge of an existing debt on a future date and a case where though there is no existing debt one party undertakes to pay to the other party specified sums of money on future dates and such contract is supported by consideration. In the former case liability to pay would arise only on the future dates specified though the relationship of debtor and creditor exists all along while in the later where there is only a promise to pay only on non-payment on the date specified