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PETITIONER: THE KERALA STATE FINANCIAL ENTERPRISE LTD.

       Vs.

RESPONDENT: JACOB ALEXANDER & ANR.

DATE OF JUDGMENT:       01/03/1996

BENCH: G.B. PATTANAIK (J) BENCH: G.B. PATTANAIK (J) RAMASWAMY, K.

CITATION:  1996 AIR 1552            1996 SCC  (3) 427  JT 1996 (3)   421        1996 SCALE  (2)790

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T G.B.PATTANAIK. J.      Leave granted.      This appeal  by the defendant no. 2 is directed against the Full Bench Judgment of Kerala High Court in A.S. No. 235 of 1987 arising out of D.S. No. 120 of 1983.      The plaintiff  filed the  suit for  a direction  to the State  of   Kerala  as   well  as   Kerala  State  Financial Enterprises Limited.  Trichur to  pay the  amount due as the plaintiff’s share  from the  unpaid  auction  discount  with interest. The  plaintiff’s case  in  nutshell  is  that  the defendant no.  2 was  conducting a  kuri  which  started  on 17.3.1972 and  terminated on  17.7.1980. The  kuri  had  200 tickets each  with four  divisions, viz.,  A, B, C and D and the total  amount  of  a  ticket  was  Rs.  50,  000/-.  The subscription for  a ticket  per month  was Rs. 500/-. In all (Rs. 200  for A Division, Rs. 150/- for Division) there were 100  such   instalments  and   1018  subscribers.   On  each instalment two tickets were prized, one by lot and the other by auction.  In case  of prize  by lot  Rs. 5,000/-  will be deducted as  fixed discount and Rs. 45,000/- will be paid to the  prized   subscriber.  Out  of  the  fixed  discount  of Rs.5,000/-, Rs.  2,500/- would  go  as  commission  for  the foreman and  balance Rs. 2,5000/- would be divided among the subscribers  in  proportion  to  their  share.  In  case  of auction, the  subscriber who  bids for  the maximum  reduced amount would  be prized  and he  would get  an amount of Rs. 45,000/- less the auction deduction. The auction discount of all the  divisions will  be pooled  together  and  would  be divided among the subscribers. This auction discount is paid to those  subscribers who  pay the subscriptions promptly. A prized subscriber loses the share of the discount on default of payment  of even  one instalment. A non-prized subscriber would lose  the share  of auction  discount if  he  defaults three or  more instalments  consecutively.  The  conduct  of

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kuries is  governed by  the Cochin  kuries Act  VII of  1107 (hereinafter referred  to as ’the Act’). The plaintiff was a subscriber to  Division A  and Division  B of the ticket and paid all  the subscriptions promptly and regularly. But even after the  termination of  kuri plaintiff  was not  paid the proportionate share of unpaid auction discount, he filed the suit.  Since   the  entire  information  remained  with  the foreman, the  plaintiff expected  to get  Rs. 4,000/- and on the said  amount he also calculated interest @ 12% per annum and filed the suit.      The defendant no. 2 contested the suit taking the stand that the  kuri Vaimpu  stipulate that  the auction  discount lost by  the  subscriber  is  to  be  divided  among  prompt subscribers and  prompt suscribers  are only entitled to the forfeited dividend  as  mentioned  in  clause  8(c)  of  the Vaimpu. According  to defendant  no. 2  the subscribers  are entitled to  get the  amount as per the Vaimpu and since the Vaimpu does  not contain  any provision  for distribution of the auction  discount lost  by a subscriber. The plaintiff’s claim is  untenable. Defendant  no. 1, State of Kerala filed written Statement  stating that the State is not a necessary party and  State has nothing to do with the kuries conducted by defendant  no. 2.  On these  pleadings the  learned Trial Judge framed  as many  as six  issues and  on examining  the relevant provisions  of the Act as well as the Vaimpu and on examining the  materials on  record came  to the  conclusion that the  foreman cannot  claim anything  more than  what is specifically provided in the Vaimpu and under the Vaimpu the foreman can  have commission  as indicated. So far as amount of  forfeited   discount  in   respect  of   the  non-Prized subscribers is concerned the learned Trial Judge came to the conclusion that  in the  absence of  any specific  provision either in  the Act  or in  the Vaimpu  and since the foreman cannot take  or appropriate  the amount  more than  what  is provided for  in the  Vaimpu, the same should be distributed among the prompt subscribers on the termination of the kuri.      On examining  the documentary  evidence on  record  the court came  to the  conclusion that a sum of Rs. 1,81,003.35 remained outstanding  with the  foreman as undivided auction discount and  to this amount a sum of Rs. 2.232.87 was to be added and therefore the total amount which remained with the foreman by way of unpaid auction discount was Rs.1,82,667.94 and the  said amount  has to be distributed among the prompt subscribers including  the  plaintiff.  On  calculating  the number  of   prompt  Subscribers   the  court  came  to  the conclusion that the plaintiff was entitled to Rs. 41,247.40. With this conclusion the suit having been decreed, defendant no. 2 preferred an appeal to the High Court of Kerala.      The Division  Bench which  initially heard  the  appeal being of  the opinion  that it raises a substantial question of law,  referred the  matter to  a Full Bench. The question formulated by  the Division  Bench for being answered by the Full Bench  was "Whether  the discount forfeited by the non- prized subscribers  is liable  to be  distributed among  the prompt and  regular  subscribers?"  The  Full  Bench  having considered the  different provisions  of the  Act as well as the Vaimpu and taking into account the fact that the foreman has no  right to retain any amount other than the commission or remuneration  fixed under the Act and the Vaimpu, came to hold that the caution discount forfeited by the "non-prized" subscribers also  will have  to  be  distributed  after  the termination of  the kuri  in proportion  to the share of the ticket. to  the subscribers  who have remitted regularly the installment amounts  till  that  date.  With  the  aforesaid finding the  appeal having  been dismissed  and the judgment

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and decree  of  the  Principal  Subordinate  Judge,  Trichur having been  confirmed, the  present appeal by special leave has been preferred.      Mr. Krishnamani,  the learned  senior counsel  for  the appellant placed  before us  the relevant  provisions of the Act and  the  Vaimpu  and  contended  that  the  High  Court committed error  by misreading clause 8(c) of the Vaimpu and by coming to the conclusion that the unpaid auction discount has to  be distributed  among the  prompt and regularly paid subscribers. According  to Mr. Krishnamani, it is the Vaimpu which determines  the rights of the parties and since Vaimpu does not  authorize distribution  of  the  auction  discount forfeited by the "non prized" subscribers, the conclusion of the High Court is erroneous in law.      Even  though   notice  had  been  duly  served  on  the plaintiff respondent  but since the plaintiff did not appear either in  person or  through counsel  and in  view  of  the importance of  the matter  we thought it appropriate to take the assistance  of a  counsel and  Mr.  Sitaramiah,  learned senior counsel  agreed to render assistance to the court. We keep on  record  our  deep  appreciation  for  the  services rendered by  Mr. Sitaramiah,  learned  senior  counsel.  Mr. Sitaramiah placed  before us the different provisions of the Act as  well as the Vaimpu and contended that the foreman is not entitled  to get a pie more than what is provided in the Vaimpu. In that view of the matter the reasonable conclusion is that  the auction  discount forfeited by the "non-prized" subscribers will  have to  be distributed  among the regular subscribers on  the termination  of the  kuri. He  placed on record similar provisions in the Central Act, Andhra Pradesh and Tamil Nadu Acts.      In View of the rival submissions at the bar, it will be appropriate for  us to  examine different  provisions of the Act as well as the relevant provisions of the Vaimpu: "Kuri" has been defined in Section 3 of the Act. thus :      "Kuri" means a transaction by which      one  or   more  person  hereinafter      called the foreman or foremen enter      into an  agreement with a number of      persons  that   every  one  of  the      contracting parties shall subscribe      a  certain   amount  of   money  or      quantity  of  grain  by  periodical      instalments for  a certain definite      period, and  that each  in his turn      as determined  by lot or by auction      or  in   such  manner   as  may  be      provided for in the Vaimpu Shall be      entitled to the prize amount’. "Vaimpu" has been defined in Section 3(2) of the Act. thus :      "Vaimpu" is  a document  containing      the terms  of agreement between the      foreman   and    the    subscribers      relating to the Kuri. "Kuri amount"  has been  defined in Section 3(3) of the Act, thus :      "Kuri amount"  means the  sum total      of the contributions payable by the      subscribers  for   any   instalment      without any  deduction for discount      as defined in clause (4). "Discount" has  been defined  in Section  3(4) of  the  Act, thus:      "Discount"  means   the  amount  of      money or  quality of  grain which a

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    prize-winner has,  under the  terms      of the  vaimpu, to  forego for  the      payment of  Veethapalisa, foreman’s      commission and other expenses. "Prize amount"  has been defined in Section 3(6) of the Act, thus:      "Prize  amount"   means  the   Kuri      amount  less   the   discount;   it      includes  in   the  case   of   the      fraction of a ticket the difference      between  the   proportionate   Kuri      amount  and  the  discount  on  the      particular fraction of the ticket. "Foreman" has been defined in Section 3(7) of the Act, thus:      "Foreman" is  the person  who under      the Vaimpu  is responsible  for the      conduct of the Kuri. "Veethapalisa" has  been defined in Section 3(9) of the Act, thus.      "Veethapalisa" is  the share  of  a      Subscriber    in    the    discount      available  under   the  vaimpu  for      rateable  distribution   among  the      subscribers at  each instalment  of      the Kuri.      Section 6(6)  of the  Act provides  that in  every Kuri there shall  be a  Vaimpu in duplicate and such vaimpu shall contain the  mode and  proportion in  which the  discount is distributed by way of veethapalisa, foreman’s commission and other allowances,  if any.  Under Section  14 of the Act the foreman is  entitled to  obtain his  prize at the instalment specified in  the vaimpu  without any deduction for discount and to  such commission  or remuneration  as may be fixed by the vaimpu for the conduct of Kuri. Section 15 stipulate the duties of  a foreman.  Under Section  17 a  foreman  remains liable to  subscribers for  the amount  due to  them.  Under Section 19  non-prized subscribers are required to pay their subscription in  accordance with the provisions contained in the Vaimpu,  within a  period of  10 days grace from the due date to  pay the subscription and in default of such payment then he  is liable  to such  consequences as may be provided for in  the Vaimpu.  Section 20  of  the  Act  empowers  the foreman to  remove a  non-prized subscriber from the list of subscribers and  to substitute any other person in his place if  the   non-prized  subscriber   defaults   to   pay   his contribution in accordance with Section 19. Under Section 21 even a  defaulting  non-prized  subscriber  is  entitled  to recover from  the foreman  his contributions subject to such deductions as  may be provided for in the Vaimpu. Section 22 deals with  prized subscribers.  Section 23  deals with  the manner in  which a  prized subscriber is required to pay his subscription in  accordance with vaimpu. English translation of Clauses  8 and  11b of  the Vaimpu,  which  was  produced before us  by Mr.  Krishnamani, may be quoted hareinbelow in extenso:      "8(a) Out  of  the  amount  of  Rs.      10,000/- realised by the company as      fixed   discount   from   the   two      scratched numbers.  One prized  and      the  other   auctioned,  at   every      instalment,  Rs   5,000/-  will  be      appropriated   as   the   Foreman’s      commission for  the  management  of      the Kuri  by the  company  and  the      balance   Rs.   5,000/-   will   be

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    distributed  as   dividend  to  the      subscribers in  two divisions,  who      have not  been prized  or who  have      not bid and auctioned ticket.      (b) Since the company does not take      a forman’s  ticket all  subscribers      are entitled  to the  dividend from      the  first  instalment  and  it  is      sufficient if  they  pay  only  the      balance amount after such deduction      (dividend).      (c)  Auction   discount   will   be      distributed to  all subscribers  in      proportion to  their ticket  share,      irrespective of whether prized, non      prized, auctioned or non auctioned.      But    prized     and     auctioned      subscribers will  not  be  eligible      for the auction discount if they do      not pay  the instalments within the      due date.  The auction discount, so      forfeited   by   the   prized   and      auctioned   subscribers   will   be      distributed after  the  termination      of the  Kuri, in  proportion to the      share  of   the  ticket.   To   the      subscribers   who   have   remitted      regularly  the   instalment  amount      till that date.      (d)  Those   subscribers  who   are      eligible for  the dividend as above      stated,   need    remit   at   each      instalment only  the  amount  after      deduction  of  dividend,  as  their      share. But  if the  dividend amount      exceeds the instalment amount, such      exceeds the instalment amount, such      excess will  be paid in cash to the      subscribers.      11(b) If  the non  prized  and  non      auctioned subscribers  do not remit      the instalment  amount  within  ten      days of  the due date, they can pay      the said  amount together  with 12%      interest on  or before the next due      date. If  it is  not so done, grace      period  (10   days)  will   not  be      allowed for the next and succeeding      instalments  and  such  subscribers      will    forfeit    the    discounts      (dividend, auction  discount)of the      three defaulted instalments if they      default      continuously       two      instalments along with the interest      and  fail   to  remit   the   third      instalment,    unless     otherwise      permitted  by   the  company,   the      tickets of  subscribers,  who  have      defaulted    continuously     three      instalments, will  be scratched and      they will  automatically lose their      right  to   be   subscribers.   The      company  will  have  the  right  to      remove their  names from  the  kuri      list and  will have  the  power  to

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    transfer to  itself or enroll fresh      subscribers   instead.   But   non-      removal   from    the    list    of      subscribers or  non-substitution of      another in  such cases shall not be      construed  as  having  allowed  the      continuous defaulter to continue as      a subscriber."      The  provisions   of  chit  Funds  Act.  1961  and  its constitutional validity  came up  for  consideration  before this court  in the  case of Shriram Chits and Investment (P) Ltd. v.  Union of  India and  others. S.C.C.  1993(4) Suppl. 226. The  said Act  is pari  materia with  the Act now under consideration. This  court considered the role of foreman in the chit  transactions and  came to  hold and  indicated the manner in  which unscrupulous  foreman  resorted  to  unfair methods to secure illegal gains, thus:      "The foreman  derives his income in      different  ways,   both  legal  and      illegal. In the former category can      be included items such as admission      fee from members, penal interest or      penalty fee from defaulting members      and forfeiture  of their  dividend,      interest  on  loans  to  non-prized      chit holders.  fees for transfer of      shares in  the chit, deduction from      the subscription  paid by  a member      who wants  to resign,  dividends on      the  chit   reserved  for   himself      interest on  the chit  prize  taken      without deduction,  interest on the      chit prize  which the prized member      may not be in a position to collect      immediately, and subscriptions paid      by members  who discontinue  in the      middle of  the scheme  but  do  not      care to claim refund.      The unscrupulous  among the foremen      resort to so many unfair methods to      secure  illegal  gains.  A  few  of      these methods are briefly mentioned      below:      (i)   Enrollment    of   fictitious      members to  completes the  required      number of members in a chit series.      If  a  real  and  needy  non-prized      member is  not able to come forward      to offer  a high  discount  at  the      auction.  One   of   these   benami      members is  Shown to  get the prize      thereby depriving  the real members      of the opportunity, (ii) Similarly,      it is  possible  to  exploit  needy      non-prized member  or a  new member      so that  he gets  the prize only at      the  maximum  discount.  (iii)  The      prized member  is supposed  to  get      the amount  soon after  the draw or      auction  is   over  of   course  on      furnishing the  security.  But  the      foreman adopts  tactics which delay      the   actual    payment    for    a      considerable  time,   meanwhile  he      uses the money interest-free. If he

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    succeeds in  delaying  the  payment      till  the   succeeding  draw,   the      earlier prize  winner is  given the      prize out of the collections of the      succeeding    draw.    Thus,    one      instalment is  perpetually  in  the      hands of the foreman to be utilized      in any way he likes.      The  above  are  only  examples  to      illustrate the  way in  which  some      foremen  minimize   their  profits.      They do  not take  into account the      cases where  the  foreman  and  his      associates disappear from the scene      and  are  untraceable.  The  police      have  many   such  cases  on  their      record. During  1962-66, as many as      255 chitties  collapsed in  several      districts of  Kerala on  account of      such malpractices."      Bearing in  mind what  has been stated by this court in the aforesaid  case with  regard to  the manner in which the foreman  exploits  the  subscribers  and  on  examining  the provisions of the Act and the Vaimpu referred to earlier, we have no  hesitation to come to the conclusion that a foreman is only  entitled to  the commission  as is  provided in the vaimpu and  is not entitled to anything more. In view of the specific language  used in  clause 8(c)  of the  vaimpu, the amount of  auction discount  has to be distributed among all the subscribers  in proportion to their ticket share. We are further of  the view  that the  forfeited discount  of  non- prized subscribers  will have  to be  distributed among  the subscribers who have remitted their subscriptions regularly. It is true that there is no specific provision in the vaimpu but since  under the  Act and  the vaimpu the entitlement of the foreman  has been  indicated and the foreman cannot take anything more  than what  is provided  for and therefore the amount has  to be distributed among the regular subscribers. In our considered opinion, the Full Bench of the Kerala High Court rightly  answered the  question and we do not find any legal infirmity  in the  same. This  appeal  is  accordingly dismissed but  in the  circumstances without any order as to costs.