Holding

The foreman is only entitled to the commission fixed in the Vaimpu and the auction discount forfeited by non‑prized subscribers must be distributed among the regular, prompt subscribers in proportion to their ticket share.

Summary

The plaintiff, a regular subscriber to a Cochin kuri, sued the State of Kerala and the foreman for the share of unpaid auction discount that he claimed was due to him. The trial court held that the foreman could only retain the commission expressly provided in the Vaimpu and that any forfeited auction discount of non‑prized subscribers must be distributed among the prompt, regular subscribers. The Kerala High Court Full Bench affirmed this view, interpreting clause 8(c) of the Vaimpu to require such distribution. On appeal, the Supreme Court examined the provisions of the Cochin Kuries Act and the Vaimpu, concluding that the foreman has no right to any amount beyond his commission and that the forfeited discount must be shared proportionately among regular subscribers. The Court dismissed the appeal, upholding the lower courts' decree.

Issues considered

Whether the foreman is entitled to any amount beyond the commission fixed in the Vaimpu.
Whether the auction discount forfeited by non‑prized subscribers is to be distributed among prompt and regular subscribers.
Whether the Vaimpu authorises distribution of the forfeited auction discount.

Legislation cited

Chit Funds Act, 1982

Subjects

Cochin Kuries Actforeman commissionauction discountVaimpuchit funddistribution of forfeited discountsubscriber rightscontract interpretation

Judgment

}
'

KERALA STATE FINANCIAL ENTERPRISES LTD. A
v.
JACOB ALEXANDER AND ANR.

MARCH 1, 1996

[K. RAMASWAMY AND G.B. PATTANAIK, JJ.] B

Cochin Kuries Act VII of 1107-Conduct of kuries-Amount of auction
discount to be distributed among all subscribers in proportion to their ticket
share-Forfeited discount of non prized subscribers-To be distributed among
subscribers who have remitted their subscriptions regularly. c
The plaintiff-respondent filed a suit for a direction to the State of
Kerala as well as the appellant to pay the amount due as the plaintill's
share from the unpaid auction discount with interest alleging that the
defendant no. 2 was conducting a kuri and the plaintiff was a subscriber
to Division A and Division B of the ticket and paid all the subscriptions D
promptly and regularly but even after the termination of kuri he was not
paid the proportionate share of unpaid auction discount.

The suit was decreed. The trial Court held that under the provision
of the Cochin Kuries Act VII of 1107, the foreman cannot claim anything E
more than what is specifically provided in the Vaimpu and that under the
Vaimpu the foreman can have commission only. Therefore, the amount of
forfeited discount in respect of the non-prized subscribers should have
been distributed among the prompt subscribers on the termination of the
kuri. In appeal, the Division Bench formulated the question whether the
discount forfeited by the non-prized subscribers is liable to be distributed F
among the prompt and regular ·subscribers and referred it to the full
Bench.

The full Bench while confirming the judgment and decree of the trial
court holding that the foremen has no right to retain any amount other
than the commission or remuneration fixed under the Act and the Vaimpu G
l\ and that the auction discount forfeited by the 'non-prized' subscribers also
will have to be distributed after the termination of the kuri in proportion
to the share of the ticket, to the subscribers who have remitted regularly
the instalment amount till the date. This appeal was filed against the full
Bench Judgment of the High Court. H
115
116 SUPREME COURT REPORTS [1996] 3 S.C.R.

A The appellant contended that the Vaimpu which determines the
rights of the parties, does not authorise distribution of the auction dis·
count forfeited by the 'non-prized' subscribers.

The respondent alleged that as the foreman is not entitled to get a
pie more than what is provided in the Vaimpu, the reasonable conclusion
B is that the auction discount forfeited by the 'non-prized' subscribers will
have to be distributed among the regular subscribers on the termination
of the kuri.

Dismissing the appeal, this Court

c HELD : A Foreman is only entitled to the commission as it is
provided in the Vaimpu and i' not entitled to anything more. In view of
the specific language used in Clause B(c) of the Vaimpu, the amount of
auction discount has to be distributed among all the subscribers in
proportion to their ticket share. The forfeited discount of non-prized
D subscribers will have to be distributed among the subscribers who have
remitted their subscriptions regularly. There is no specific provision in the
vaimpu but since under the Cochin Kuries Act and the vaimpu the entit·
lement of the foreman has been indicated and the foreman cannot take
anything more than what is provided for and therefore the amount bas to
be distributed among the regular subscribers. (124-A·CJ
E
Shriram Chits and Investment (P) Ltd. v. Union of India & Ors., (1993]
4 SCC Suppl. 226, relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4169 of
1996.
F
From the Judgment and Order dated 11.1.95 of the Kerala High
Court in A.S. No. 235 of 1987.

M.N. Krishnamani and C.N. Sreekumar for the Appellant.

G C. Sitaramiah and S.A. Syed for the Respondents.
)
The Judgment of the Court was delivered by

G. B. PATTANAIK, J. Leave granted.

H This appeal by the defendant no. 2 is directed against the Full Bench
)
KER.Al.A STATE FJNANClAL ETERPRISE'Sv. JACOB ALEXANDER [G.B. PATIANAIK, J.} 117

Judgment of Kerala High Court in A.S. No. 235 of 1987 arising out of 0.S. A
No. 120 of 1983.

The plaintiff filed the suit for a direction to the State of Kerala as
well as Kerala State Financial Enterprises Limited, Trichur to pay the
amount due as the plaintiffs share from the unpaid auction discount with B
interest. The plaintiffs case in nutshell is that the defendant no. 2 was
conducting a kuri which started on 17.3.1972 and terminated on 17.7.1980.
The kuri had 200 tickets each with four divisions, viz., A, B, C and D and
the total amount of a ticket was Rs. 50,000. The subscription for a ticket
per month was Rs. 500. In all (Rs. 200 for A Division, Rs. 150 for B
Division, Rs. 100 for C Division and Rs. 50 for D Division}. There were 100 C
such instalments and 1018 subscribers. On each instalment two tickets were
prized, one by lot and the other by auction. In case of prize by lot Rs. 5,000
will be deducted as fixed discount and Rs. 45000 will be paid to the prized
subscriber. Out of the fixed discount of Rs. 5,000, Rs. 2,500 would go as
commission for the foreman and balance Rs. 2,500 would be divided among D
the subscribers in proportion to their share. In case of auction, the sub-
scriber who bids for the maximum reduced amount would be prized and
he would get an amount of Rs. 45,000 less the auction deduction. The
auction discount of all the divisions will be pooled together and would be
divided among the subscribers. This auction discount is paid to those
subscribers who pay the subscriptions promptly. A prized subscriber looses E
the share of the discount on default of payment of even one instalment. A
non-prized subscriber would lose the share of auction discount if he
defaults three of more instalments consecutively. The conduct of kuries is
governed by the Cochin Kuries Act VII of 1107 (hereinafter referred to as
'the Act'). The plaintiff was a subscriber to Division A and Division B of F
the ticket and paid all the subscriptions promptly and regularly. But even
after the termination of kuri plaintiff was not paid the proportionate share
of unpaid auction discount, he filed the suit. Since _the entire information
remained with the foreman, the plaintiff expected to get Rs.4,000 and on
the said amount he also calculated interest @ 12% per annum and filed
~~ G
The defendant no. 2 contested the suit taking the stand that the kuri
Vaimpu stipulate that the auction discount lost by the subscriber is to be
divided among prompt subscribers and prompt subscribers are only en-
titled to the forfeited dividend as mentioned in clause 8(c) of the Vaimpu. H
118 SUPREME COURT REPORTS (1996] 3 S.C.R.

A According to defendant no. 2 the subscribers are entitled to get the amount
as per the Vaimpu and since the Vaimpu does not contain any provision
for distribution of the auction discount lost by a subscriber, the plaintiffs
claim is untenable. Defendant no. 1, State of Kerala filed written statement
stating that the State is not a necessary party and State has nothing to do
B with the kurics conducted by defendant no. 2. On these pleadings the
learned Trial Judge framed as many as six issues and on examining the
relevant provisions of the Act as well as the Vaimpu and on examining the
materials on record came to the conclusion that the foreman cannot claim
anything more than what is specifically provided in the Vaimpu and under
the Vaimpu the foreman can have commission as indicated. So far as
C amount of forfeited discount in respect of the non-prized subscribers is
concerned the learned Trial Judge came to the conclusion that in the
absence of any specific provision either in the Act or in the Vaimpu and
since the foreman cannot take or appropriate the amount more than what
is provided for in the Vaimpu, the same should be distributed among the
D prompt subscribers on the termination of the kuri.

On examining the documentary evidence on record the court came
to the conclusion that a sum of Rs. 1,81,033.35 remained outstanding with -~
the foreman as undivided auction discount and to this amount a sum of Rs.
2,232.87 was to be added and therefore the total amount which remained
E with the foreman by way of unpaid auction discount was Rs. 1,82,667.94
and the said amount has to be distributed among the prompt subscribers
including the plaintiff. On calculating the number of prompt subscribers
the court came to the conclusion that the plaintiff was entitled to Rs.
41,247.40. With this conclusion the suit having been decreed, defendant no.
F 2 preferred an appeal to the High Court of Kerala.

The Division Bench which initially heard the appeal being of the
opinion that it raises a substantial question of law, referred the matter to
a Full Bench. The question formulated by the Division Bench for being
answered by the Full Bench was ..Whether the discount forfeited by the
G non-prized subscribers is liable to be distributed among the prompt and
regular subscribers?.. The full Bench having considered the different
provisions of the Act as well as the Vaimpu and taking into account the
fact that the foreman has no right to retain any amount other than the
commission or remuneration fixed under the Act and the Vaimpu, came
H to hold that the auction discount forfeited by the "non- prized" subscribers
f
I

KERALA STATE FINANCIAL ETERPRISES "·JACOB ALEXANDER {G.B. PATIANAIK, J.] 119

also will have to be distributed after the termination of the kuri in propor- A
tion to the share of the ticket, to the subscribers who have remitted
regularly the instalment amounts till the dato. With the aforesaid finding
the appeal having been dismissed and the judgment and decree of the
Principal Subordinate ':Judge, Trichur having been confirmed, the present
appeal by special leave has been preferred.
B
Mr. Krishnamani, the learned senior counsel for the appellant placed
before us the relevant provisions of the Act and the Vaimpu aud contended
that the High Court committed error by misreading clause 8(c) of the
Vaimpu and by coming to the conclusion that the unpaid auction discount
t has to be distributed among the prompt and regularly paid subscribers. C
According to Mr. Krishnamani, it is the Vaimpu which determines the
rights of the parties and since Vaimpu does not authorise distribution of
the auction discount forfeited by the "non prized" subscribers, the con-
clusion of the High Court is erroneous in law.

Even though notice had been duly served on the plaintiff-respondent D
but since the plaintiff did not appear either in person or through counsel
and in view of the importance of the matter we thought it appropriate to
take the assistance of a counsel and Mr. Sitaramiah, learned senior counsel
agreed to render assistance to the court. We keep on record our deep
appreciation for the services rendered by Mr. Sitaramiah, learned senior. E
counsel. Mr. Sitaramiah placed before us the different provisions of the
Act as well as the Vaimpu and contended that the foreman is not entitled
to get a pie more than what is provided in the Vaimpu. In that view of the
matter the reasonable conclusion is that the auction discount forfeited by
the "non- prized" subscribers will have to be distributed among the regular
subscribers on the termination of the kuri. He placed on record similar F
provisions in the Central Act, Andhra Pradesh and Tamil Nadu Acts.

In view of the rival submissions at the bar, it will be appropriate for
us to examine different provisions of the Act as well as the relevant
provisions of the Vaimpu: G
"Kuri" has been defined in Section 3 of the Act, thus :

"Kuri" means a transaction by which one or more persons
hereinafter called the foreman or foremen enter into an agreement
with a number of persons that every one of the contracting parties H
120 SUPREME COURT REPORTS [1996] 3 S.C.R.

A shall subscribe a certain amount of money or quantity of grain by
periodical instalments for a certain definite period, and that each
in his turn as determined by lot or by auction or in such manner
as may be provided for in the vaimpu shall be entitled to the 'prize
amount'. •

B "Vaimpu" has been defined in Section 3(2) of the Act, thus :

"Vaimpu" is a document containing the terms of agreement be-
tween the foreman and the subscribers relating to the Kuri.

"Kuri amount" has been defined in Section 3(3) of the Act, thus :
c
"Kuri amount" means the sum total of the contributions payable by
the subscribers for any instalment without any deduction for dis-
count as defined in clause (4).

D "Discount" has been defined in Section 3(4) of the Act, thus :

"Discount" means the amount of money or quality of grain which
a prize-winner has, under the terms of the vaimpu, to forgo for the
payment of veethapalisa, foreman's commission and other expen-
ses.
E
"Prize amount" has been defined in Section 3(6) of the Act, thus :
11
Prize amount11 means the Kuri amount less the discount; it includes
in the case of the fraction of a ticket the difference between the
proportionate Kuri amount and the discount on the particular
F fraction of the ticket.

"Foreman" has been defined in Section 3(7) of the Act, thus :
11
Foreman 11 is the person who under the vaimpu is responsible for
the conduct of the Kuri.
G
"Veethapalisa" has been defined in Section 3(9) of the Act, thus : )

"Veethapalisa" is the share of a subscriber in the discount available
under the vaimpu for rateable distribution among the subscribers
H at each instalment of the Kuri.
}
KERAlA STA'IE FINANCJALETERPRJSES v. JACOB ALEXANDER [G.8. PATIANAIK, J.] 121

Section 6{6) of the Act provides that in every Kuri there shall be a A
vaimpu in duplicate and such vaimpu shall contain the mode and propor-
tion in which the discount is distributed by way of veethapalisa, foreman's
commission and other allowances, if any. Under Section 14 of the Act the
foreman is entitled to obtain his prize at the instalment specified in the
vaimpu without any deduction for discount and to such commission or B
remuneration as may be fixed by the vaimpu for the conduct of Kuri.
Section 15 stipulate the duties of a foreman. Under Section 17 a foreman
remains liable to subscribers for the amount due to them. Under Section
19 non-prized subscribers are required to pay their subscription in accord-
ance with the provisions contained in the vaimpu, within a period of a 10
days grace from the due date to pay the subscription and in default of such C
payment then he is liable to such consequences as may be provided for in
the vaimpu. Section 20 of the Act empowers the foreman to remove a
non-prized subscriber from the list of subscribers and to substitute any
other person in his place if the non-prized subscriber defaults to pay his
contribution in accordance with Section 19. Under Section 21 even a D
defaulting non-prized subscriber is entitled to recover from the foreman
his contributions subject to such deductions as may be provided for in the
vaimpu. Section 22 deals with prized subscribers. Section 23 deals with the
manner in which a prized subscriber is required to pay his subscription in
accordance with vaimpu. English translation of Clauses 8 and llb of the
Vaimpu, which was produced before us by Mr. Krishnamani, may be E
quoted hereinbelow in extenso :

"S(a) Out of the amount of Rs. 10,000 realised by the company as
fixed discount from the two scratched numbers, one prized and
the other auctioned, at every instalment, Rs. 5,000 will be ap- F
propriated as the Foreman's commission for the management of
the Kuri by the company and the balance Rs. 5,000 will be dis-
tributed as dividend to the subscribers in two divisions, who have
not been prized or who have not bid and auctioned the ticket.

(b) Since the company does not take a forman's ticket all sub- G
scribers are entitled to the dividend from ~he first instalment and
it is sufficient if they pay only the balance amount after such
. deduction (dividend).

(c) Auction discount will be distributed to all subscribers in H
\
122 SUPREME COURT REPORTS [1996] 3 S.C.R.

A proportion to their ticket share irrespective of whether prized, non
prized, auctioned or non auctioned. But prized and auctioned
subscribers will not be eligible for the auction discount if they do
not pay the instalments within the due date. The auction discount,
so forfeited by the prized and auctioned subscribers will be dis-
tributed after the termination of the kuri, in proportion to the share
B
of the ticket, to the subscribers who have remitted regularly the
instalment amount till that date.

(d) Those subscribers who are eligible for the dividend as above
stated, need remit at each instalment only the amount after deduc-
c tion of dividend, as their share. But if the dividend amount exceeds
the instalment amount, such excess will be paid in cash to the
subscribers.

ll(b) If the non prized and non auctioned subscribers do not remit
the instalment amount within ten days of the due date, they can
D
pay the said amount together with 12% interest on or before the
next, due date. If it is· not so done, grace period (10 days) will not
be allowed for the next and succeeding instalments and such
subscribers will forfeit the discounts (dividend, auction discount)
of the three defaulted instalments if they default continuously two
E instalments along with the interest and fail to remit the third
instalment, unless otherwise permitted by the company, the tickets
of subscribers, who have defaulted continuously three instalments,
will be scratched and they will automatically lose their right to be
subscribers. The company will have the right to remove their names
F from the kuri list and will have the power to transfer to itself or
enroll fresh subscribers instead. But non-removal from the list of
subscribers or non-substitution of another in such cases shall not
be construed as having allowed the continuous defaulter to con-
tinue as a subscriber."

G The provisoins of Chit Funds Act, 1%1 and its constitutional validity
came up for consideration before this Court in the case of Shriram Chits
and Investment (P) Ltd. v. Union of India and Others, SCC [1993) 4 Suppl.
226. The said Act is pari materia with the Act now under consideration.
This Court considered the role of foreman in the chit transactions and
H came to hold and indicated the manner in which unscrupulous foreman
)
KERALA STATE FINANCIAL E1ERPRJSE5Y. JACOB ALEXANDER [G.B. PATIANA!K, J.) 123

resorted to unfair methods to secure illegal gains, thus : A
"The foreman derives his income in different ways, both legal and
illegal. In the former category can be included items such as
admission fee from members, penal interest or penalty fee from
defaulting members and forfeiture of their dividend, interest on
loans to non-prized chit holders, fees for transfer of shares in the B
chit, deduction from the subscription paid by .a member who wants
to resign, dividends on the chit reserved for himself interest on the
chit prize taken without deduction, interest on the chit prize which
the prized member may not be in a position to collect immediately,
and subscriptions paid by members who discontinue in the middle C
of the scheme but do not care to claim refund.

The unscrupulous among the foremen resort to so many unfair
methods to secure illegal gains. A few of these methods are briefly
mentioned below :
D
(i) Enrolment of fictitious members to complets the required
number of members in a chit series. If a real and needy non-prized
member is not able to come forward to offer a high discount at
the auction, one of these benami members is shown to get the prize
thereby depriving the real members of the opportunity, (ii) Similar- E
ly, it is possible to exploit needy non-prized member or a new
member so that he gets the prize only at the maximum discount.
(iii) The prized member is supposed to get the amount soon after
the draw or auction is over of course on furnishing the security.
But the foreman adopts tactics which delay the actual payment for
a considerable time, meanwhile he uses the money interest-fee. If F
he succeeds in delaying the payment till the succeeding draw, the
earlier prize winner is given the prize out of the collections of the
succeeding draw. Thus, one instalment is perpetually in the hands
of the foreman to be utilised in any way he likes.

The above are only examples to illustrate the way in which some G
foremen maximise their profits. They do not take into account the
cases where .the forman and his associates disappear from the
scene and are untraceable. The police have many such cases on
their record. During 1962-66, as many as 255 chitties collapsed in
several districts of Kerala on account of such malpractices." H
124 SUPREME COURT REPORTS [1996] 3 S.C.R.

A Bearing in mind what has been stated by this Court in the aforesaid
case with regard to the manner in which the foreman exploits the sub-
scribers and on examining the provisions of the Act and the vaimpu
referred to earlier, we have no hasitation to come to the conclusion that a
forman is only entitled to the commission as it is provided in the vaimpu
and is not entitled to anything more. In view of the specific language used
B
in clause B(c) of the vaimpu, the amount of auction discount has to be
distributed among all the subscribers in proportion to their ticket share.
We arc further of the view that the foreited discount of non-prized sub-
scribers \Viii have to be distributed among the subscribers who have
remitted their subscriptions regularly. It is true that there is no specific
C provision in the vaimpu but since under the Act and the vaimpu the
entitlement of the foreman has been indicated and the forman cannot take
anything more than what is provided for and therefore the amount has to
be distributed among the regular subscribers. In our considered opinion,
the Full Bench of the Kerala High Court rightly answered the question and
D we do not find any legal infirmity in the same. This appeal is accordingly
dismissed but in the circumstances without any order as to costs.

R.A. Appeal dismissed.