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
Lissa & Ors. …Respondents
J U D G M E N T
INDU MALHOTRA, J.
- 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.
- 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
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
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
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,
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.
K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and
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.,
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.
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
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
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
these circumstances, the present Appeal was pressed
- 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
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.
- 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 facility of effecting repayment 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
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.
- 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
amount is not received as a loan, but by virtue of the terms
of the contract between the parties.
- 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
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
4 (2012) 7 SCC 106.
- 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. : 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.
finding out the relevant entry in the Constitution into
which it may fall, was not involved in that case.
- 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
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.
- 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.
- 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
- 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
jeopardize the interest of all other subscribers, and the
entire mechanism of the chit fund system would collapse.
- 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
- 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.
- 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
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
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
- 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 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 interest.
- 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.
- 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.
- 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.
November 6, 2019.