TMI Blog2019 (11) TMI 1818X X X X Extracts X X X X X X X X Extracts X X X X ..... cessity 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. 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 passed by the Division Bench of the High Court in AFA No. 85 of 1994 is set aside - Appeal allowed. - INDU MALHOTRA AND SANJIV KHANNA, JJ. For the Appellant : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.1994. 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 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, AIR 1975 Ker 47 wherein it was held that a chit fund is essentially a debt in prasenti, 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 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. (1987) 2 SCC 424. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment. In 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 low-income 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 agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), 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. 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. (2012) 7 SCC 106 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment of money in installments, and contains a stipulation that on default being committed in paying any of the installments, the whole sum shall become payable at once, such a stipulation would not be in the nature of a penalty. 9. The division bench in the impugned Judgment dated 15.01.2009, held that by entering into a chitty agreement, a debt is not created at once by the subscriber with respect to the amount of all the future installments. The chitty agreement embodies a promise to pay and discharge a contractual obligation, and not a promise to repay an existing debt. 10. We do not agree with the view expressed by the division bench. When a prized subscriber is allowed to draw the chit amount, which is in the nature of a grant of a loan to him from the common fund in the hands of the foreman, with the concessional facility of effecting 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 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 Sub-section 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 Sub-section (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 subscriptions. 12. The objec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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