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 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 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 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 – 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 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 lump sum.
Allowing the appeal, the Court
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 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of effecting re-payment in installments; this is subject to the stipulation that the concession is liable to be withdrawn in the event of default being committed in payment of any of the installments.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 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. [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 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 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. [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 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 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] 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 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.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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