REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5401 OF 2009

M/s Oriental Kuries Ltd. represented by its  Chairman P.D. Jose                   …Appellant

versus

Lissa & Ors.                     …Respondents

J U D G M E N T

INDU MALHOTRA, J.

1. The issue which has arisen for consideration in the present

Civil Appeal is with respect to the jural relationship between

a chit fund entity and the subscribers, created by a chitty

agreement; and whether it is a debt in prasenti or a promise

to discharge a contractual obligation.

2. The present Appeal arises out of a Chit Fund conducted by

the Appellant,  a chit fund entity.  The duration of the chit

1

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

2

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,

3

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,1  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 debtor­creditor relationship.

It was noted that the judgment in  P.K. Achutan

(supra)  had  been  affirmed by the  Supreme Court in

1 AIR 1975 Ker 47.

4

K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and

Ors.2  

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 over­ruled

in Janardhana Mallan & Ors. v. Gangadharan & Ors.,3

wherein a five­judge 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.

2 (1987) 2 SCC 424. 3 AIR 1983 Ker 178.

5

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  Achutan’s

case would no longer hold the field, since it had been

over­ruled by the larger bench in Janardhana Mallan’s

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

6

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  Hon'ble  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

7

these circumstances, the present Appeal was pressed

for determination.

3. DISCUSSION AND ANALYSIS    

At the time when modern banking was not fully developed in

small towns and rural areas, chit fund institutions emerged

to cater to the financial needs of low­income households. A

conventional chit fund is an old indigenous financial

institution involving periodic subscriptions by a group of

persons. It is, in law, a contract between the subscribers and

the foreman, which provides that the subscribers shall

subscribe a certain sum by way of regular installments for a

specified period of time. Each subscriber in his turn, as

determined by lot, or auction, or in any other manner

specified, is entitled to the  prize amount. The  number of

subscribers in a chit fund would constitute the number of

installments, so that every subscriber is assured of receiving

the prize amount. As there is a mutuality of interest amongst

8

the subscribers to each chit fund, it constitutes a convenient

instrument which combines savings and borrowings.

The duties of the foreman of the chit fund include

enrolling subscribers, and drawing up the terms and

conditions of the scheme in the form of an agreement. For

these services, the foreman charges a commission, on which

a ceiling is fixed.  

Each prized subscriber must furnish acceptable

security against the remaining installments, so as to be

eligible to receive the lumpsum payment. The security is to

be furnished by the subscriber directly to the foreman. In the

event of default by a subscriber to pay his installments on

the due date, the chit fund scheme may provide for forfeiture

of dividend, 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

prized subscriber is allowed to draw the  kuri  amount is the

grant of loan to him from the common fund in the hands of

9

the foreman with the concessional facility of effecting re­

payment in installments, which is subject to the stipulation

that the said concession is liable to  be  withdrawn  in the

event of default being committed in payment of any of the

installments. It is a debt  in  praesenti,  but permitted to be

paid in installments, for the benefit of the debtor so long as

the installments are regularly paid. This being the true

nature of the, the stipulation for furnishing a security bond

which would enable the foreman to recover from the prized

subscriber, the whole of the balance amount due from him in

a lump sum when default occurs in payment of any of the

installments.  Such a stipulation cannot  be regarded  as a

penalty clause. It is necessary for the foreman of a chit who

occupies a special relationship with all the subscribers of the

chit fund, which would justify stringent provisions being

incorporated in the agreement for safeguarding the interest of

all the subscribers. Without punctual payments by the

individual subscribers, the foreman will not be in a position

to discharge  his  obligations  to the  other  subscribers. It is

10

therefore necessary that the foreman should reserve to

himself the power to recover in a lump sum, the entire

balance amount due in respect of future installments, on a

default being committed by a prized subscriber. In the

context of the special features  and incidents of chit fund

transactions, the incorporation of a stipulation in the chitty

hypothecation bond, cannot be regarded to be

unconscionable or penal in nature.

5. In  Janardhana Mallan  (supra), a five­judge bench of the

Kerala  High  Court overruled the  decision in  P.K.  Achutan

(supra), and held that it would not be possible to say that on

entering into the chitty agreement a debt is incurred by the

subscriber for the amount of all the future installments, and

in respect of such amount there is a debtor – creditor

relationship. The chitty variola embodies a promise to pay on

future dates. It is not a promise to repay an existing debt,

but in discharge of a contractual obligation. The prize

11

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 “the

1982 Act”) was enacted by Parliament, and came into force

on 19.08.1982. The issue of the applicability of the 1982 Act

to the State of Kerala was considered by a Constitution

Bench of this Court in  State of Kerala and Ors.  v.  Mar

Appraem Kuri Company Ltd. and Ors.4  The Constitution

Bench held  that  on the enactment of the Chit  Funds Act,

1982 which covered the entire field of “chits” under Entry 7

of List III of the Constitution, the Kerala Chitties Act, 1975

stood impliedly repealed. As a consequence, the Central Act

became applicable forthwith in the State of Kerala, even

though the Kerala legislature notified the 1982 Act on

30.04.2012.

4 (2012) 7 SCC 106.

12

7. The constitutional validity of the Chit Funds Act, 1982 was

challenged before this Court in  Shriram Chits & Investment

(P.) Ltd.  v. Union of India & Ors.5 The challenge to the vires of

the various provisions under the 1982 Act was repelled. This

Court held that all the provisions under the 1982 Act are

relevant and material to protect the interest of the

subscribers. The three­judge 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 payment of money in installments and stipulating that on default in payment of any of the installments all the future installments shall be payable at a time with interest was held not penal in nature in the case of kuri transaction under the Kerala Chitties Act, 1975.  While upholding the transaction a Bench of this Court approved the decision of the earlier Full Bench decision of the Kerala High Court  in the case P.K. Achuthan (supra) wherein  the  Kerala High Court  had upheld such a transaction and held it, to be of not a penal nature. In this context Eradi, J. (as His Lordship then was) speaking for the Full Bench observed that  a subscriber truly and really becomes a debtor for the prized amount paid to him. It will be noticed that the later Full Bench decision of the Kerala High Court in Janardhana 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 remains that the question involved before us as to the true nature of transaction for the purpose of

5 AIR 1993 SC 2063.

13

finding out the relevant entry in the Constitution into which it may fall, was not involved in that case.

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

(emphasis supplied)

The reference  made to  the judgment in  P.K.  Achutan

(supra) and Janardhana Mallan (supra) was in passing, and

this Court did not either affirm, 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 any of the installments, the whole sum

shall become payable at once, such a stipulation would not

be in the nature of a penalty.

9. The division bench in the impugned Judgment dated

15.01.2009, held that by entering into a chitty agreement, a

14

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

debt.

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 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 re­payment 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 installments.  

The 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

15

jeopardize the interest of all other subscribers, and the

entire mechanism of the chit fund system would collapse.

11. 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 amount.

Section 32 of the 1982 Act empowers the foreman to recover

the consolidated payment of all future subscriptions

forthwith in the case of a default.  

Chapter V of the Chit Funds Act, 1982 prescribes the rights

and duties of prized subscribers. Section 31 to 33 in Chapter

V read as follows :

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

16

32. Prized subscriber to pay subscriptions regularly. — Every prized subscriber shall pay his subscriptions regularly on  the  dates  and  times and at the  place mentioned in the chit agreement and, on his failure to do so, he shall be liable to make a consolidated payment of all the future subscriptions forthwith.

33. Foreman to demand future subscriptions by written notice.—  A foreman shall  not  be entitled  to claim a consolidated payment from a defaulting prized subscriber under Section 32 unless he makes a demand to that effect in writing. (2)  Where  a  dispute is raised  under this  Act  by  a foreman for a consolidated payment of future subscriptions from a defaulting prized subscriber and if the subscriber pays to the foreman on or before the date to which the dispute is posted for hearing the arrears  of  subscriptions till that  date together  with the interest thereon at the rate provided for in the chit agreement and the cost of adjudication of the dispute, the Registrar or his nominee hearing the dispute shall,  notwithstanding any contract  to  the contrary, make an order directing the subscriber to pay to the foreman the future subscriptions on or before the dates on which they fall due, and that, in case of any default of such payments by the subscriber, the foreman shall be at liberty to realise, in execution of that order, all future subscriptions and interest together  with  the  costs, if  any, less the amount, if any, already paid by the subscriber in respect thereof: Provided that if any such dispute is on a promissory note, no order shall be passed under this sub­section unless such promissory note expressly states that the amount due under the promissory note is towards the payment of subscriptions to the chit. (3) Any person who holds any interest in the property furnished as security or part thereof, shall be entitled to make the payment under sub­section (2). (4) All consolidated payments of future subscriptions realised by a foreman shall be deposited by him in an approved bank mentioned in the chit agreement

17

before the date of the succeeding instalment and the amount so deposited shall not be withdrawn except for payment of future subscriptions. (5) Where any property is obtained as security in lieu of the consolidated payment of future subscriptions, it shall remain as security for the due payment of future subscriptions.”

(emphasis supplied)

12. 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 penalty.

13. 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

18

members, who prize the chit on subsequent draws. For

raising such an amount, the foreman may be required to pay

high rates of interest.

14. 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 fund.

15. 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.

19

16. The impugned judgment dated  15.01.2009 passed  by the

Division Bench of the High Court in AFA No. 85 of 1994 is set

aside. The Civil Appeal is allowed in the aforesaid terms. All

pending Applications, if any, are accordingly disposed of.

Ordered accordingly.

.....................................J. (INDU MALHOTRA)

.…...............………………J. (SANJIV KHANNA)

New Delhi, November 6, 2019.

20