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PETITIONER: K.P. SUBBARAMA SASTRI & ORS. ETC.

       Vs.

RESPONDENT: K.S. RAGHAVAN & ORS. ETC.

DATE OF JUDGMENT03/04/1987

BENCH: KHALID, V. (J) BENCH: KHALID, V. (J) OZA, G.L. (J)

CITATION:  1987 AIR 1257            1987 SCR  (2) 767  1987 SCC  (2) 424        JT 1987 (2)    53  1987 SCALE  (1)681

ACT:     Contract Act, 872:s. 74--Kuris and Chitties--Prized sub- scriber  executing bond--Provision for payment in  lump  sum with  12%  interest on default--Whether  unconscionable  and penal.     Kerala  Chitties Act, 1975: ss. 6, 7 &  28--Prized  sub- scriber   defaulting  to   pay   subscriptions--Consequences of--Whole  sum becoming payable in lump sum with 12%  inter- est--Such provision whether unconscionable and penal.

HEADNOTE:     The  respondents  who were subscribers to a  Kuri  (Chit Fund)  in 1962, committed default after they had prized  the tickets and realised the amounts. The bonds executed by them contained a provision that in case of default they would  be liable to pay all the future instalments in a lumpsum   with interest at 12% without giving any credit for the dividend.     The suit filed for realisation of the principal sum with interest  and the balance Kuri due was decreed by the  trial court  in 1965. In appeal before the High Court it was  con- tended for the defendant-respondents that the stipulation in the  agreement  that on default the Kuri  foreman  would  be entitled  to  recover  the entire balance  amount  with  12% interest  in  a lump sum without giving credit to  the  sub- scribers was unconscionable and penal and hence not enforce- able. The Division Bench took the view that the Kuri  trans- action  and  the contract between the Kuri foreman  and  the subscribers  burdened them with unconscionable interest  and were unreasonable. It, therefore, partly allowed the  appeal by modifying the decree refixing the interest.     Allowing  the appeal by appellants-plaintiffs  and  dis- missing  the appeal by other subscribers by  special  leave, the Court,     HELD: Where a contract provides for payment of money  in instalments and contains also a stipulation that on  default being  committed in paying any of the instalments the  whole sum  shall become payable at once, the true test for  deter- mining whether the said condition is in the 768 nature  of  a  penalty is to find out  whether  the  amounts referred  to in the agreement were debita in  praesenti  al-

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though solvenda in futuro or whether they were to become due to the promisee on the respective dates when the instalments were payable. [771E-G]     If  on  proper consideration of a contract it  is  found that the whole amount was on the date of the bond a debt due but  the creditor for the convenience of the debtor  allowed it to be paid by instalments then the stipulation would  not be  penal. If on the other hand the court comes to the  con- clusion  that  the debt becomes due only on  the  respective dates fixed for the instalments, the stipulation would be in the nature of a penalty. [771G-H; 772A-B]     In  the  instant case there was  nothing  unconscionable about the contract. A subscriber to a Kuri truly and  really becomes  a  debtor for the prized amount paid  to  him,  The facility of repayment in instalments is only a  concessional facility.  The stipulation enabling the foreman to  withdraw this facility on default of punctual payment of the  instal- ment  could  not, therefore, be said to be  penal.  [770G-H; 771A-B]     P.K.  Achuthan  v. State Bank  of  Travancore,  Calicut, [1974] K.L.T. 806 (F.B.), approved.

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 85 (N) of 1972.     From  the  Judgment and Order dated  27.11.1970  of  the Kerala High Court in A.S. No. 380 of 1965. WITH SPECIAL LEAVE PETITION (CIVIL) No. 2908of 1975. From  the Judgment and Order dated 15.1.1975 of  the  Kerala High Court in Second Appeal No. 390 of 1971.     T.S. Krishna Murthy lyer, A.S. Nambiar, G.N. Rao and Ms. Shanta  Vasudevan  for the Appellants in C.A. No.  85(N)  of 1972 and Respondents in SLP. No. 2908 of 1975.     N.M. Ghatate and S. Balakrishnan for the Respondents  in C.A. No. 85(N) of 1972 and Petitioners in S.L.P. No. 2908 of 1975. The Judgment of the Court was delivered by 769     KHALID, J. We will first deal with Civil Appeal 85/1972. The appellants were the plaintiffs in O.S. No. 78 of 1964 on the  files  of the Subordinate Judge’s Court,  Palghat.  The suit  was based on a Kuri transaction (Chit Fund).  The  re- spondents  were  subscribers  to the  Kuri.  They  committed default  after  they  had prized it and  realised  the  Kuri amounts.  Hence  the suit was filed for realisation  of  the principal sum with interest and the balance Kuri due.     The  suit  was decreed by the Subordinate Judge  by  his Judgment  dated 24th June, 1965. An appeal was filed  before the High Court. A Division Bench of the High Court heard the appeal and partly allowed it by modifying the decree of  the Trial Court refixing the interest, largely influenced by the fact that the Kuri transaction and the contract between  the foreman of the Kuri and the subscribers (defaulted) burdened the subscribers with unconscionable interest and were unrea- sonable.     To appreciate the reasoning of the Division Bench it  is necessary to set out the scheme of the Kuri. The respondents took two tickets in a Kuri (Chit Fund) started by the appel- lants  in  September, 1962. Under the scheme  of  the  Kuri, there  will be bidding at monthly intervals. The  subscriber bids and prizes the ticket depending upon his need. When  he does so, he voluntarily surrenders the benefit of  dividends

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which  is  distributed among the subscribers.  For  example, suppose the Kuri amount is Rs.5,000 consisting of 50 tickets valued at Rs.100. At the first bid the lowest bid is 3500 by A.  A  gets this amount and the balance of Rs.1500  will  be distributed  among  the other subscribers.  But  the  prized subscriber  has a duty to pay the entire amount  in  instal- ments  without default. Here the respondent bid  and  prized both the tickets; one on the third draw and the other at the th  and received the amounts. As per rules of the Kuri  they executed  bonds to secure future instalments. However,  they committed  default  in paying the future  instalments.  That resulted in the suit. The main contention which found favour with  the High Court, raised in defence, was that the  rules of  ’the  Kuri contained several  unconscionable  and  penal provisions  like the provisions relating to the  payment  of all  the future instalments in a lump with interest  at  12% ignoring  the claim of the defaulting subscribers  to  their share in the reduction (the dividend).     The Kuri system was in vogue in the erstwhile Travancore State  and  in the Cochin State, prior to the  formation  of Kerala  State and they were governed in those two  areas  by the Travancore Chit Act of 1945 (Act 26 of 1120-M.E.)  which came into force on 20-6-1945, and 770 the Cochin KUries Act 7 of 1106. There was no  corresponding Act  for  Malabar area from which area  the  present  appeal arises. After the formation of the Kerala State, Kuri trans- actions  in  the State are governed by the  Kerala  Chitties Act,  1975,  as amended by Act 19 of 1978.  The  High  Court after  taking into account the interest stipulated  observed that it was unconscionable and penal and reduced the  amount to  Rs.10,000  and modified the decree to that  extent.  The reason  that persuaded the High Court to do so was its  con- cern  at the unreasonableness of the terms of  the  contract and the High Court expressed it in the following words:               "Before  we leave this case, we wish to add  a               few words. In our experience, we have not  yet               come across such a kurivari which has so  many               unconscionable provisions. Ground No. 5 in the               memorandum  of  grounds of  appeal  shows  the               amount  payable by the appellants. the  amount               received by them, etc. to show the unconscion-               ableness.  The  appellants received  only  Rs.               16,185  (on both the tickets  together);  and,               all  told, they already paid back Rs.5,100  as               subscriptions.  The claim in the suit  towards               future instalments is Rs.21,000 with  interest               of Rs.1,785. And all this within less than two               years,  the date of commencement of  the  Kuri               being  20th  September, 1962 and the  date  of               suit being 2nd September, 1964 for receiving a               little  over Rs.16,000 the appellants have  to               pay  a  little  less than  Rs.28,000.  In  our               considered  opinion, such transactions  should               not  be allowed, and people who carry on  such               transactions are really unsocial elements.  We               are  told  that  the  same  stake-holders  are               carrying  on such kuries even now without  any               hindrance, because there is no law to  control               the  conduct of chit funds now in the  Malabar               area. It is time that the Government moved  in               the  matter  and brought some  legislation  to               control such unsocial activities."     A  full Bench of the Kerala High Court had  occasion  to consider  the  correctness of this view and  in  a  decision

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reported  in  1974 K.L.T. 806, such Kuri  transactions  were upheld and the decision of the Division Bench was  reversed. According  to the full Bench, there was nothing  unconscion- able  about the contract. Before the full Bench it was  con- tended  that this stipulation in the agreement where a  sub- scriber prized his chit, providing that on default the  Kuri foreman  would  be entitled to recover  the  entire  balance amount with 12% interest in a lump sum without giving credit to the subscribers, is penal 771 in nature and held in terrorem for securing due  performance of their promise and hence not enforceable. Eradi, J. as  he then was, speaking for the full Bench held that a subscriber truly and really becomes a debtor for the prized amount paid to  him,  that the facility of repayment in  instalments  is only  a concessional facility and that stipulation  enabling the foreman to withdraw the concessional facility on default of punctual payment of the instalments would not be penal or unconscionable. We quote below the observations made by  the full Bench in paragraphs 6 & 7:               "6. The question whether a particular stipula-               tion  in  a contractual agreement  is  in  the               nature  of a penalty has to be  determined  by               the  court against the background  of  various               relevant factors, such as the character of the               transaction  and its special nature,  if  any,               the  relative  situation of the  parties,  the               rights  and obligations accruing from  such  a               transaction  under  the general  law  and  the               intention  of the parties in incorporating  in               the contract the particular stipulation  which               is contended to be penal in nature. If on such               a comprehensive consideration, the court finds               that  the real purpose for which the  stipula-               tion was incorporated in the contract was that               by  reason  of its  burdensome  or  oppressive               character it may operate in terrorem over  the               promiser  so  as to drive him  to  fulfil  the               contract,  then the provision will be held  to               be one by way of penalty."               "7.  Where a contract provides for payment  of               money  in  instalments  and  contains  also  a               stipulation that on default being committed in               paying  any of the instalments the  whole  sum               shall  become payable at once, the  true  test               for determining whether the said condition  is               in  the  nature of a penalty is  to  find  out               whether the amounts referred to in the  agree-               ment were debita in praesenti although solven-               da  in futuro or whether they were  to  become               due  to  the promisee only on  the  respective               dates when the instalments were payable. If on               a  proper  construction of a  contract  it  is               found  that  the real  agreement  between  the               parties  was  to  the effect  that  the  whole               amount was on the date of the bond a debt  due               but  the creditor for the convenience  of  the               debtor  allowed it to be paid  by  instalments               intimating  that if default should be made  in               the payment of any instalments he would  with-               draw  the concession, then the stipulation  as               to  the whole amount of the  balance  becoming               payable               772               would not be penal; if, on the other hand,  on

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             a  proper  consideration of the terms  of  the               contract  the  court comes to  the  conclusion               that the debt itself arises or becomes due and               payable  by the debtor only on the  respective               dates  fixed for the instalments the  stipula-               tion that on default being made in the payment               of  any  instalment the whole of  the  balance               should become due and payable would be in  the               nature of a penalty." We agree with the law so laid down by the full Bench.     The result is that the appeal has to be allowed. Accord- ingly, we set aside the Judgment of the High Court and allow this  appeal but in the circumstances of the  case,  without costs.     Special  leave granted in S.L.P. (Civil)  2908/75.  Here the Judgment of the High Court is challenged by a subscriber putting  forth  the  arguments that found  favour  with  the Division Bench in the earlier appeal. We adopt the reasoning of the full Bench in 1974 KLT 806, which was followed by the Division Bench in the Judgment under appeal in this case.     The  appeal,  therefore, has to fail and  is  dismissed. However, with no order as to costs. P.S.S.                                         Appeal   dis- missed. 773