what is 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 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.

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 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
    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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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
  13. 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.
  14. 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)
  15. 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.
  16. 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.
  17. 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.
  18. 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
  19. 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