Case: M/S. ORIENTAL KURIES LTD. REP. BY ITS CHAIRMAN P. D. JOSE Vs. LISSA

2. The present Appeal arises out of a Chit Fund conducted by the Appellant, a chit fund entity. The duration of the chit fund was from 1978 to 1990. The Respondents were subscribers of the chit fund. During the subsistence of the chit fund, the Respondents defaulted in the payment of 12 installments from 24.11.1981 to 24.11.1984.  2.1 The Appellant – chit foreman instituted two Suits against the Respondent – subscribers before the Subordinate Judge, Thrissur, Kerala. The first Suit bearing O.S. No. 323/1984 was filed for recovery of 12 installments for the period 24.11.1981 to 24.11.1984; and, the second Suit bearing O.S. No. 548/1987 was filed for recovery of future subscriptions due under the chit fund after 24.11.1984.  2.2 The Subordinate Judge, Thrissur, Kerala decreed both the Suits in favour of the Appellant – Company on 09.04.1990.  In O.S. No. 323/1984, the Respondents were directed to pay the Appellant – Company a sum of Rs. 40,915/- with Interest @12% on the sum of Rs. 34,800/- from the date of filing the Suit till the date of decree, and thereafter Interest @6% per annum from the date of the decree till the date of realization.  In O.S. No. 548/1987, the Respondents were directed to pay the Appellant – Company a sum of Rs. 83,820.68/- with Interest @12% on a sum of Rs. 63,800/¬ from the date of filing of the Suit till the date of decree, and thereafter Interest @6% per annum from the date of the decree till the date of realization.  2.3 Aggrieved by the aforesaid Judgment and Decree dated 09.04.1990 passed by the Subordinate Judge, Thrissur, the Respondents herein 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 the Appeals filed by the Respondents vide a common Judgment and Order dated 27.06.1994.  The Single Judge held that the Kerala Chitties Act, 1975 does not apply to the Chit Fund in question, since the same was started from Mangalore, Karnataka. The Appellant being a trading company, was exempted under Section 13(1)(e) of the Companies Act, 1956 from specifying the States to which the objects would extend in the Memorandum and Articles of Association.  Reliance was placed by the Single Judge on the Full Bench decision of the Kerala High Court in P.K. Achuthan and Anr. v. State Bank of Travancore, Calicut, AIR 1975 Ker 47  wherein it was held that a chit fund is essentially a debt in praesenti, but permitted to be paid in installments. The facility of this debt is available to the debtor so long as the installments are regularly paid. The nature of the transactions under a chit fund are essentially that of a debtor-creditor relationship.  It was noted that the judgment in P.K. Achutan (supra) had been affirmed by the Supreme Court in K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and Ors.(1987) 2 SCC 424.   2.4 Aggrieved by the common Judgment and Order dated 27.06.1994 passed by the learned Single Judge, the Respondent filed two Second Appeals bearing AFA Nos. 84 of 1994 and 85 of 1994 before the Division Bench of the Kerala High Court.  The Division Bench vide the impugned Judgment and Order dated 15.01.2009, allowed AFA No. 84 of 1994, and dismissed AFA No. 85 of 1994.  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., AIR 1983 Ker 178  wherein a five-judge bench of the Kerala High Court held that future installments payable by a chit subscriber are not a debt owed to the chit foreman, and therefore, could not be recovered in case of default in payment of an installment..  The subsequent larger bench decision of five judges in Janardhana Mallan (supra) was evidently not brought to the notice of the Supreme Court in K.P. Subbarama Sastri (supra). The decision in Achutans case would no longer hold the field, since it had been over-ruled by the larger bench in Janardhana Mallans case.  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 of all future installments, as the chitty variola only contains a promise to pay, which is not a promise to repay an existing debt, but only to pay and discharge a contractual obligation. The execution of the security bond is to ensure fulfillment of the terms of the contract by the parties. If the subscriber fails to pay future installments in terms of the contractual obligations, then the subscriber would become a defaulter, he would incur a debt to the foreman, and would not be a liability to pay in future of an existing liability.  On the facts of the case, the division bench held that the Appellant – Company was entitled to recover 12 installments from the Respondents for the period from 24.11.1981 to 24.11.1984. However, future installments could not be recovered.  2.5 Aggrieved by the judgment of the Division Bench, the Appellant – chit fund company filed the present Special Leave Petition. This Honble Court vide Order dated 10.08.2009 granted special leave to appeal. The dispute between the parties got resolved during the pendency of the present appeal.  This Court vide Order dated 13.11.2009 noted the submission made by the Counsel for the Appellant that several suits had been filed by the Appellant – Company against the subscribers, which had been dismissed on the basis of the impugned judgment. In these circumstances, the present Appeal was pressed for determination.

Reasoning: 8. Where a contract provides for payment of money in installments, and contains a stipulation that on default being committed in paying any of the installments, the whole sum shall become payable at once, such a stipulation would not be in the nature of a penalty9. The division bench in the impugned Judgment dated 15.01.2009, held that by entering into a chitty agreement, a debt is not created at once by the subscriber with respect to the amount of all the future installments. The chitty agreement embodies a promise to pay and discharge a contractual obligation, and not a promise to repay an existing debt10. 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 in the nature of a grant of a loan to him from the common fund in the hands of the foreman, with the concessional facility of effecting re-payment in installments; this is subject to the stipulation that the concession is liable to be withdrawn in the event of default being committed in payment of any of the installmentsThe chit subscriber at the time of subscription, incurs a debt which is payable in installments. If a subscriber is permitted to withdraw the collected sum on his turn, without being bound to pay the future installments, it would jeopardize the interest of all other subscribers, and the entire mechanism of the chit fund system would collapse11. A perusal of the provisions of Chapter V of the 1982 Act makes it clear that if a prized subscriber defaults in making payment of an installment, the chit foreman has the right to recover the amount covering all future subscriptions from the defaulting subscriber as a consolidated amount12. The object is to empower the foreman to recover the amount in a lump sum from a defaulting subscriber, so as to secure the interest of the other subscribers, and ensure smooth functioning of the Chit Fund. Such a provision would not amount to a penalty13. The relationship between the foreman and the subscribers in a chit fund transaction is of such a nature that there is a necessity and justification for making stringent provisions to safeguard the interest of the other subscribers, and the foreman. If a prized subscriber defaults in payment of his subscriptions, the foreman will be obliged to obtain the equivalent amount from other sources, to meet the obligations for payment of the chit amount to the other members, who prize the chit on subsequent draws. For raising such an amount, the foreman may be required to pay high rates of interest14. The stipulation of empowering the foreman to recover the entire balance amount in a lump sum, in the event of default being committed by a prized subscriber, is to ensure punctual payment by each of the individual subscribers of the chit fund. Without punctual payments, the system would become unworkable, and the foreman would not be in a position to discharge his obligations to the other members of the chit fund15. In view of the aforesaid discussion, the relationship between a chit subscriber and the chit foreman is a contractual obligation, which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum.