Supreme Court of India
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. JOSEversusLISSA & ORS.
- Citation
- 2019 INSC 1211
- Decided
- 6 November 2019
- Disposal
- Amount Awarded
Holding
A chitty agreement creates a contractual debt at the time of subscription, and under Section 32 of the Chit Funds Act, 1982 the foreman may recover the consolidated future instalments in lump sum on default, a provision that is not a penalty.
Summary
The appeal concerned a chit fund operated by Oriental Kuries Ltd., where the respondents defaulted on twelve instalments. The lower courts had allowed recovery of the past instalments but barred recovery of future instalments, holding that a chitty agreement creates only a promise to pay, not a debt. The Supreme Court examined whether the stipulation that the whole amount becomes payable on default is a penalty and whether Section 32 of the Chit Funds Act, 1982 empowers the foreman to recover a lump‑sum of future instalments. It held that a chitty agreement creates a contractual debt at the time of subscription and the foreman’s right to recover the consolidated amount is not penal. Accordingly, Section 32 authorises such recovery, and the division‑bench judgment was set aside. The appeal was allowed, confirming the appellant’s right to recover the defaulted instalments in lump sum.
Issues considered
- The nature of the jural relationship between a chit fund subscriber and the foreman – whether it creates a debt in praesenti or merely a promise to pay future instalments
- Whether a clause making the whole sum payable on default constitutes a penalty
- Whether Section 32 of the Chit Funds Act, 1982 empowers the foreman to recover a consolidated amount of future instalments
- The applicability of the Chit Funds Act, 1982 to the facts of the case
Legislation cited
- Chit Funds Act, 1982s. 31, s. 32, s. 33
- Companies Act, 1956s. 13
Subjects
chit funddebt in praesentiinstallment paymentpenalty clauseSection 32foremancontractual obligationChit Funds Act 1982
Judgment
258 [2019]REPORTS
SUPREME COURT 15 S.C.R. 258 [2019] 15 S.C.R.
A M/S ORIENTAL KURIES LTD. REPRESENTED
BY ITS CHAIRMAN P. D. JOSE
v.
LISSA & ORS.
B
(Civil Appeal No. 5401 of 2009)
NOVEMBER 06, 2019
[INDU MALHOTRA AND SANJIV KHANNA, JJ.]
C
Chits Funds Act, 1982: s.32 – Jural relationship between a
chit fund entity and subscribers created by chitty agreement –
Whether 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
instalments – Held: Where a contract provides for payment of money
D
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 is not in the nature of
penalty – The provisions of Chapter V of the 1982 Act clearly
stipulate that if a prized subscriber defaults in making payment of
E
an installment, the chit foreman has the right to recover the amount
covering all future subscriptions from the defaulting subscriber as
a consolidated amount – 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
F
functioning of the Chit Fund – Such a provision would not amount
to a penalty – 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 –
G 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 – Thus, the
relationship between a chit subscriber and the chit foreman is a
H
258
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 259
JOSE v. LISSA & ORS.
contractual obligation, which creates a debt on the day of A
subscription – On default taking place, the foreman is entitled to
recover the consolidated amount of future subscriptions from the
defaulting subscriber in lump sum.
Allowing the appeal, the Court
B
HELD: 1. 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. When a prized subscriber is allowed to draw C
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 D
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
jeopardize the interest of all other subscribers, and the entire E
mechanism of the chit fund system would collapse. [Paras 8, 10]
[268-D-E, G-H; 269-A-B]
2. Section 32 of the 1982 Act empowers the foreman to
recover the consolidated payment of all future subscriptions
F
forthwith in the case of a default. Chapter V of the 1982 Act
prescribes the rights and duties of prized subscribers. 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. The G
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
H
260 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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.
B For raising such an amount, the foreman may be required to pay
high rates of interest. [Paras 11-13][269-C-D; 271-C-E]
3. 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
C
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.
The relationship between a chit subscriber and the chit foreman
D
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. [Paras 14-15][271-F-H]
E P.K. Achuthan and Anr. v. State Bank of Travancore,
Calicut AIR 1975 Ker 47; K.P. Subbarama Sastri and
Ors. v. K.S. Raghavan and Ors. (1987) 2 SCC 424 :
[1987] 2 SCR 767 ; Janardhana Mallan & Ors. v.
Gangadharan & Ors., AIR 1983 Ker 178 ; State of
F Kerala and Ors. v. Mar Appraem Kuri Company Ltd.
and Ors. (2012) 7 SCC 106: [2012] 4 SCR 448 ;
Shriram Chits & Investment (P.) Ltd. v. Union of India
& Ors. AIR 1993 SC 2063 : [1993] 1 Suppl. SCR 54 -
referred to.
G
H
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 261
JOSE v. LISSA & ORS.
Case Law Reference A
AIR 1975 Ker 47 referred to Para 2.3
[1987] 2 SCR 767 referred to Para 2.3
AIR 1983 Ker 178 referred to Para 2.4 B
[2012] 4 SCR 448 referred to Para 6
[1993] 1 Suppl. SCR 54 referred to Para 7
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5401
C
of 2009.
From the Judgment and Order dated 15.01.2009 of the High Court
of Kerala at Ernakulam in AFA No. 84 of 1994.
Raghenth Basant, Ms. Mahamaya Chatterjee, Sajith P. Warrier,
D
Ravi Kumar Tomar, R. Chandrachud, Advs. for the Appellant.
M. T. George, Mrs. Susy Abraham, Johns George, Ms. Kavitha
K.T., Romy Chacko, Shakti Chand Jaidwal, Chandan Kumar Mandal,
Advs. for the respondents.
E
The Judgment of the Court was delivered by
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 F
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 fund was from
G
H
262 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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.
B
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.
C 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,
D
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
E 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
F
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
G 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
H
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 263
JOSE v. LISSA & ORS. [INDU MALHOTRA, J.]
Mangalore, Karnataka. The Appellant being a trading company, was A
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
B
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
C
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.2
D
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 E
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.
F
v. Gangadharan & Ors.,3 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.
G
1
AIR 1975 Ker 47.
2
(1987) 2 SCC 424.
3
AIR 1983 Ker 178.
H
264 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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 over-ruled by the
larger bench in Janardhana Mallan’s case.
B
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
C
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.
D
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.
E
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.
F
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
G present Appeal was pressed for determination.
H
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 265
JOSE v. LISSA & ORS. [INDU MALHOTRA, J.]
3. DISCUSSION AND ANALYSIS A
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 low-income households. A conventional chit fund
is an old indigenous financial institution involving periodic subscriptions
B
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
C
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 the subscribers to each chit fund,
it constitutes a convenient instrument which combines savings and
borrowings.
D
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.
E
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
F
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 the foreman with the concessional G
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
H
266 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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
B 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
C 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
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
D 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 five-judge bench of the
E 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
F future dates. It is not a promise to repay an existing debt, but in discharge
of a contractual obligation. The prize 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
G 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
4
H (2012) 7 SCC 106.
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 267
JOSE v. LISSA & ORS. [INDU MALHOTRA, J.]
The Constitution Bench held that on the enactment of the Chit Funds A
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. B
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
C
provisions under the 1982 Act are relevant and material to protect the
interest of the subscribers. The three-judge 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 D
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 E
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 F
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 over- G
ruled 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 finding out the relevant entry
5
AIR 1993 SC 2063. H
268 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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
B
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.”
C (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.
D 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.
E 9. 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
debt.
F
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 re-payment in
G 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.
H
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 269
JOSE v. LISSA & ORS. [INDU MALHOTRA, J.]
The chit subscriber at the time of subscription, incurs a debt which A
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 collapse.
B
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.
C
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
D
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, E
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. F
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
G
make a consolidated payment of all the future subscriptions
forthwith.
H
270 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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.
B
(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
C
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
D
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
E 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 sub-section unless such
promissory note expressly states that the amount due under
F 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 sub-section (2).
G
(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 before the date of the
H
M/S ORIENTAL KURIES LTD. REPRESENTED BY ITS CHAIRMAN P. D. 271
JOSE v. LISSA & ORS. [INDU MALHOTRA, J.]
succeeding instalment and the amount so deposited shall not A
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.”
B
(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. C
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 D
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 interest. E
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,
F
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 G
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.
H
272 SUPREME COURT REPORTS [2019] 15 S.C.R.
A 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.
B
Devika Gujral Appeal allowed.
C
D
E
F
G
H
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