Doddakale Gowda, J.@mdashDivergent view expressed in
2. Both the Karnataka Debt Relief Act,1976 (Act No. 25 of 1976) ("the 1976 Act "for short) and the Karnataka Debt Relief Act, 1980 (Act No. 29 of 1980) ("the 1980 Act" for short), are in operation in the State of Karnataka.
3. "Debt", "debtor" and "exemption" clause in the said two Acts read thus;
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K.D.R. Act,1976 K.D.R. Act, 1980
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3(b) `Debt'' means any liability in 2. (b) `Debt'' means any
cash or in kind, whether decreed or liability in cash or in kind
not, and includes any amount which whether secured or unsecured
is in substance a debt; but does not and whether decreed or not and
include arrears of taxes due to the includes any interest due
Central or the State Government or on such debt;
a local authority.
3(c) `Debtor'' means,- 2 (6) `Debtor'' means a
(i) a small farmer; or person who is,
(ii) a landless agricultural (i) a landless agricultural
labourer ; or labourer ;
(iii) a person belonging to (ii) a person belonging to the
weaker sections of
the weaker sections of the people;
(iii) a small farmer, and from
whom a debt is due;
4. Relief from indebtedness;-
Notwithstanding anything in any 3. Relief from indebtedness;-
law for the time being in force Notwithstanding anything
or in any contract or instrument contained in any law for the time
having force by virtue of any such being in force or in any contract
law and save as otherwise expressly or instrument having force by
provided in this Act, with effect virtue of any law or otherwise
from the date of commencement of and save as otherwise expressly
this section,- provided in this Act, with
effect on and from the date of
commencement of this Act,
a) every debt advance before the (a) every debt incurred by a
commencement of this section debtor before the date of
including the amount of interest, commencement of this Act and
if any, payable by the debtor to the payable by him to his creditor
creditor shall be deemed to be wholly on such date shall be deemed
discharged; to be wholly discharged;
8) Certain debts and liabilities 10. Certain debts and
not to be affected. liabilities not to
be affected,- ......
(1) Any liability incurred or
arising under any chit the
bye-laws of which have been
registered;
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4. The question for consideration is; Whether the amount paid to a successful bidder (in the chit transaction) would amount to a "debt" within the definition is exempted from the provision?
5. In order to answer this issue, it is relevant to note the origin of chit fund business and the mechanism of the chit transactions.
6. There is no necessity to write a treatise on chit funds as it has been elucidated fairly in a good number of cases and, in addition, Parliament has enacted a law regarding the conduct of chits, chit funds and persons involved, except to recapitulate its origin for branding it as "chit" and the incidents there of relevant for deciding the issue.
7. As per the Raj Committee Report, it is the oldest indigenous financial institution in India more predominant in the rural parts of Southern India. At the inception, it started with periodical deposit (contribution) of foodgrains in fixed measures with a trustee and received back when a sufficiently large quantity was collected. Amongst subscribers, the need was determined by casting lots; names drawn on chit as in the case of a lottery. That is how it is branded as "chit". It was mainly founded on mutual help (co-operative basis) and as a sort of savings by making contributions in instalments and advancing the pooled savings to the members with facilities of repayment in instalments. Gradually it shifted to financial assistance with growing importance of commerce and industries. Under the later device/scheme, every subscriber has to pay a fixed subscription in regular instalments. The pooled money is auctioned after defraying the expenses, if any, and the person prepared to offer the highest discount will be declared as the prized subscriber; the discount would be distributed would be equal to the number of instalments, so that every member is assured of an opportunity of getting the pooled money. The prized subscriber is required to furnish security or execute bonds for prompt payment of the remaining instalments till the last man gets his chance of getting the pooled money, so that the stakeholder may be in a position to pay the pooled money to the successful bidder in succeeding instalments. "Chit" is thus described as a mutual recurring deposit scheme under which every member is entitled to receive the prized amount as loan from the chit-fund except for the last prized winner. These are the essential features of the business of "chit scheme" although there are any number of variants.
8. From the scheme of operation of chit funds, every subscriber will get the pooled money in turn by drawing lots and the subscriber who secures the pooled money earlier is required to execute a deed/bond to discharge his contractual obligation of repayment of subsequent subscription.
9. It is the nature of liability of the prized subscriber that has given rise to a conflict of views, viz., whether the amount drawn by him tantamounts to a "debt" (money advanced) or undertaking to discharge the existing contractual obligation of making periodical subscriptions (instalments)?
10. This court in
11. One other redeeming feature to be noticed is that after the decision of this court in
12. Salient features of the Act are;
13. "Chit" is defined to mean a transaction where a group of persons agree to subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite, period and that each such subscriber shall, in his turn, as determined lots, be entitled to the prize amount.
14. "Chit amount" means the difference between the chit amount and the discount.
15. "Discount" is defined to mean the sum of money or the quantity of grain which a prized subscriber is, under the terms of the chit agreement, required to forgo and which is set apart under the said agreement to meet the expenses of running the chit or for distribution among the subscribers or for both.
16. "Dividend" means the share of the subscriber in the amount of the count available under the chit agreement for rateable distribution among the subscribers at each instalment of the chit.
17. The non-prized subscribers will have an opportunity of offering their bids to get the pooled money in succeeding instalments as every one of the subscriber is entitled to get the pooled money in turn. The foreman conducting the chit transaction is required to register before the Registrar with full particulars of names of subscribers, amount, furnished, etc., as contemplated in Chapter II
18. A duty is cast on the foreman, be it a firm, company or association of individuals by whatever name known, to respect the obligation owed towards a subscriber flowing from the chit agreement, vide section 25.
19. Chapters IV and V deal with the rights and liabilities of a non-prized subscriber and a prized subscriber.
20. As per section 31 of the Act, every prized subscriber shall, unless 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. Section 32 enjoin on every prized subscriber to pay his subscriptions regularly on the dates and the time and 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 subscription forthwith. Section 33 provides a machinery for adjudication of disputes, if any, between the prized subscriber and the foreman. One of the modes of termination, as provided u/s 40 of the Act, is the expiry of the period specified in the chit agreement provided payment of dues to all the subscribers has been completed. u/s 42, every non-prized subscriber, unless otherwise provided for in the Act or in the chit agreement, is entitled to get back his subscription at the termination of the chit without any deduction for dividend, if any, earned by him.
21. So, the nature of liability of a prized subscriber will have to be considered in the light of the enunciation by various High Courts and the rights and liabilities of subscribers vis-a-vis the foreman as enjoined under the Chit Funds Act.
22. The consistent view of the Kerala High Court starting from Bhagawati Ammal Lekshmi Ammal v. M. Vencatasubba Iyen (15 Trav LR 133 ) till pronouncement in
"Even when he is a prized subscriber he has the same obligation to pay future subscriptions arising. not by any reason of the fact that he has prized the kuri, but because of the contract entered into by him with the foreman to pay such subscription whether the kuri is prized or not. Subscription paid by the prized subscribers are not in discharge of the liability for the prized amount because the prized amount is received by the subscriber as of right and not as a loan. The liability to pay future subscriptions in terms of the kuri variyola is only reinforced by the execution of the security bond..... Quite often the amount of the security bond may bear no relation to the prize amount. The security bond is only for securing future subscription. It is more appropriate to treat the obligation to pay the future instalments as an obligation arising under the contract or kuri.... In this view, it cannot be said that there is a debt owing from the subscriber to the foreman because of the execution of the security bond. It cannot be said that the prize amount received by him is a debt due from him to the foreman. The debt would arise only as and when the instalment falls due and remains unpaid."
23. In
"In this context it is necessary to remember that in the case of a stakeholder (foreman) of a chit, his relation to the subscribers is of such a special nature that a special necessity exists justifying stringent provisions being incorporated in the agreement for the protection of his interest Without punctual payments by the individual subscribers, the foreman will not be in a position to discharge his obligation to those who prize the kuri from time to time and hence it is necessary that he should reserve to him-self powers to enforce such payments, It is in furtherance of this objective of ensuring prompt payments that a stipulation is incorporated in the bond empowering the foreman to recover in a lump sum the entirety of the balance amount due in respect of the future instalments on default being committed by a prized subscriber in prompt payment of any of the instalments. We are clearly of the opinion that in the context of the special features and incidents of the chit fund transactions, such a stipulation in a kuri vari or chitty hypothecation bond cannot be regarded as unconscionable or penal.
declared that the principles enunciated in
The Andhra pradesh High Court in Margadarsi Chit Fund (P.) Ltd. v. Jogi Krishna Murthy [1981] 51 Comp Cas 399, has held thus (head-note):
"The function of the foreman or stake-holder, by whatever name he is called under the chit fund scheme is only to organise the chit fund transaction. The money lent to the subscriber in the course of the transaction is not the foreman''s money. The relationship that exists between the foreman and the subscriber is not that of creditor and debtor; consequently, the provision of the Andhra Pradesh Agricultural Indebtedness (Relief) Act (which provides for abatement of certain debts due from small farmers, agricultural labourers and rural artisans) do not apply to the amounts due from the subscribers to the chit fund organisation."
The Madras High Court in
"In our opinion, it is not a case of borrowing at all at the auction, the person bidding the highest discount is regarded as a purchaser of the subject - matter of the auction.... The highest bidder purchases the chit by offering (i) the highest discount, (2) a bond for the future payments of instalments and these two things together constitute the consideration that he gives for the right which he buys immediately, the subject matter of the chit.... The auction purchaser of a chit fund executed a bond whereby the undertook to pay the future instalments as they became due and also provided that if he failed to pay any instalment on the due date he would pay the same within 15 days from the date of default with interest....
In
"The question is one of some difficulty not the least part of which arises from the somewhat conflicting decisions dealing with these peculiar kuri transactions which are so common in some parts of this presidency."
It further held that the observation of
"It seems to me only reasonable to hold that in cases like the present the security bond must be interpreted in the light of the rules, and the obligation undertaken by it is not repayment of the benefit already received as if it were a debt-but the payment of future subscriptions whether the continuance of the chit was a condition precedent or not will not depend merely on the terms of the bond but must be decided with reference to the surrounding circumstances, including the rules of the chit fund."
Cannot be taken as an enunciation of law as it cannot be said that the learned judge was making a definite pronouncement on the question whether or not such obligation was "debited in praesenti solvendum in futuro."
24. The object of the Debt Relief Act is to relieve a debtor from indebtedness. It necessarily implies the existence of relationship of a creditor and debtor and debt. The definition of "debt". connotes return of money advanced. The purpose of a chit fund is based on mutual help/co-operative basis. Every subscriber will be a creditor to the other and every subscriber will be a debtor of the other in the conventional sense. The conduct of a chit fund does not involve exploitation by dominant persons of a vulnerable class. Members get together by consent. The discount offered by a prized subscriber for receipt of the pooled money in turn. From the scheme of operation of a chit fund, it is very difficult to spell out the existence of relationship of a creditor and a debtor, except that there is an undertaking by the prized subscriber by execution of a bond/deed to pay future instalment and in case of default, the entire amount would be recovered. The nature of the liability of a debtor to his creditor has no resemblance to the nature of liability of a non-prized subscriber for his default to pay subscription and the liability of a prized subscriber in case of default to pay future instalments. Further, no security bond is obtained from the person to whom the pooled money is paid in the last. The pooled money advanced to a prized subscriber. Pooled money paid to the subscriber is neither gratis nor money advanced, but money to which he is entitled under the terms of the contract. It is, having regard to this peculiar feature, that Varadachariyar J. stated that the liability will not be decided merely on the terms of the bond but must be decided with reference to the surrounding circumstances including the rules of the chit fund. There is no reference to these distinguishing features in
25. The decision in C. R. P. No 3750 of 1981 (Economic Chit Funds P. Ltd. v. P. S. Krishnoji [1985] 58 Comp Cas 838 (Kar) proceeds on the premises that the principles enunciated in
26. For the reasons stated above, we hold that pooled money paid to the prized subscribers of a chit fund does not constitute a "debt" within the meaning of the Act and the judgment-debtor cannot claim the benefit of the Debt Relief Act in respect of such transactions. Consequently, this civil revision petition is dismissed.
