Angammal vs R. Sankaranarayanan

V. Ratnam, J.—The plaintiff in O.S. No. 901 of 1976, District Munsif Court, Coimbatore, who succeeded before the trial Court and lost

before the lower appellate Court, is the appellant in this second appeal. The circumstances giving rise to this second appeal are briefly as under:

The appellant was a subscriber to a Rs. 5,000 chit conducted by M/s. Uma Investments (P) Ltd., Coimbatore (hereinafter referred to as Uma

Investments for short). The subscription payable was Rs. 125 per month for 40 months and the chit commenced on 23.12.1971. The appellant

subscribed towards that chit, inclusive of dividends earned, a sum of Rs. 4,452.19 and she took the chit in the auction held on 3.6.1974 for Rs.

4,500. Before the amount could be paid to the appellant, the Foreman appears to have encountered some financial difficulties. The respondent was

a subscriber to another chit for Rs. 5,000 conducted by the same Foreman. Uma Investments, through its branch at Palani. The monthly

subscription payable by him was Rs. 250 and the chit was for 20 months. The respondent became the prized subscriber at the auction held on

9.7.1973 for Rs. 4,000 and received the amount. On 21.9.1973, the respondent executed a promissory note for Rs. 4,250 in favour of Uma

Investments for the balance of the amounts payable by him to it, On 20.8.1974, Uma Investments assigned the promissory note executed by the

respondent for Rs. 4,250 in its favour on 21.9.1973, in favour of the appellant for Rs. 3,000 towards portion of the amount payable to her by

Uma Investments. On the strength of the assigned pronote, the appellant sued for the recovery of a sum of Rs. 3,750 together with interest at 12%

p.a. on Rs. 3,000 from 21.9.1976 till the date of decree and thereafter at 6% p.a. till the date of realisation and for costs.

In the written statement filed by the respondent, he stated that he had been subscribing for three chits with Uma Investments and that with

reference to one of such chits for Rs. 5,000, he bid at the auction held on 9.7.1973 for Rs. 4,000 and received the amount and also executed a

promissory note for Rs. 4,250 in favour of Uma Investments. Alleging that Uma Investments ceased to continue its business and claiming that the

Foreman is bound to refund the chit subscriptions paid by the respondent, the respondent pleaded that if the amount paid by him towards the other

chits is adjusted, no amount will be due to the appellant. It was also the further plea of the respondent that without making the adjustments, Uma

Investments is not entitled to assign the pronote in favour of the appellant. An objection that the appellant will have to rank as a creditor of Uma

Investments, was also raised. The respondent also took the objection that without impleading Uma Investments and the co-executants of the

promissory note assigned in favour of the appellant, the suit is not maintainable.

Before the trial Court, on behalf of the appellant. Exs. A-1 to A-8 were marked and the appellant and another gave evidence as P.Ws. 1 and 2,

while, on behalf of the respondent, Exs. B-1 to B-6 were filed and the respondent examined himself as D.W. 1. On a consideration of the oral as

well as the documentary evidence, the trial Court found that the appellant is a holder in due course, that Uma Investments is entitled to assign the

promissory note executed by the respondent in its favour to the appellant, that the suit laid without impleading the Foreman and the co-executants

of the promissory note is in order, as they are not necessary parties to the suit and that taking into account the payments made by the respondent in

a sum of Rs. 2,450, the respondent was still liable to pay the balance of Rs. 2,550 to Uma Investments and that amount could be recovered by the

appellant. In view of the aforesaid conclusions, the trial Court granted a decree in favour of the appellant for the recovery of a sum of Rs. 2,550,

with interest at 12% p.a. from the date of assignment (20.8.1974) till the date of decree (17.1.1978) and thereafter at 6% p.a. till the date of

payment. Aggrieved by this, the respondent preferred an appeal in A.S. 73 of 1978, Sub Court, Coimbatore. The lower appellate Court however,

took the view that the promissory note executed by the respondent under Ex. A-3 was as a security in respect of the future instalments of the chit

for which the respondent was a subscriber and it cannot be assigned by the Chit company in favour of a third party, and therefore, the appellant

cannot derive rights to recover the amount due under the promissory note from the respondent. In addition, the lower appellate Court also found

that even the Foreman is not entitled to claim a consolidated payment of the future subscriptions from a defaulting subscriber without issuing a

notice and inasmuch as Uma Investments did not issue any notice to the respondent, the assignee from it, viz., the appellant cannot have a better

right and therefore, the appellant cannot call upon the respondent to pay the future instalments in one lump sum. The assignment by Uma

Investments was also held to have been effected in contravention of Section 26 of the Tamil Nadu Chit Funds Act, 1961 (hereinafter referred to as

the Act). Holding that the assignment of the promissory note was made with a view to defeat the right of the respondent to claim adjustment in

respect of the amounts paid towards other chits, the lower appellate Court concluded that the appellant cannot be considered to be a holder in due

course entitled to recover the amount from the respondent. On the aforesaid conclusions, the lower appellate Court allowed the appeal and

dismissed the suit. It is the correctness of this, that is questioned in this second appeal.

Learned Counsel for the appellant first submitted that the suit had been instituted by the appellant against the respondent for recovery of moneys

due on the foot of an assigned promissory note and that though the promissory note had been executed by the respondent for the due payment of

the future instalments of the chit, it would not partake the character of security and would not also fall within the Section 25 of the Act, as the suit is

not by the Foreman against a defaulting subscriber. It was also further pointed out that even assuming the appellant stood in the position of a

Foreman, the issue of notices under Exs. A-5 and A-7 would be sufficient. The decision in Lazer v. Selvamony, 1978 T.L.N.J. 60 relied on by the

lower appellate Court was stated by the counsel, to be wholly inapplicable. On the other hand, learned Counsel for the respondent contended that

the relationship between the respondent and Uma Investments was not that of debtor and creditor and there was also no default on the part of the

prized subscriber and there could therefore be no enforceable claim for the consolidated payment of the future subscriptions from the respondent in

the absence of a demand against him from Uma Investments. Strong reliance was placed in this connection upon the decision in Janardhana Mallan

and Others Vs. Gangadharan and Others, .

In order to appreciate the contentions thus raised, it would be necessary to briefly refer to the basis of a chit transaction. A certain number of

persons agree that each shall subscribe a certain amount of money by certain periodical investments and that each in his turn, as may be determined

by lot, take the whole of the subscribed amount in each drawing. There is also auction in chits, in which, the prized winner is not decided by lots,

but the total collection is put up in auction and paid to that bidder among the subscribers, who offers the largest interest in the shape of discount. In

other words, a chit transaction is in substance essentially a loan transaction, in which each subscriber gets a loan from out of a common fund,

except that the order of taking the loan is settled by lots or by auction, as the case may be. The basis of a chit is that, all get a return of the amount

of their contributions and it is only in the nature of a loan of the common fund to each subscriber in turn, that being decided either by lots or by

auction, as the case may be. When a subscriber is allowed to draw the chit amount, he becomes a prized subscriber and the transaction is nothing

but the grant of a loan to him from out of the common fund in the hands of the Foreman. The relationship between the Foreman and the subscribers

in a chit is of such a nature that there is need and justification for making strict provisions for the protection of the interests of the Foreman as well

as the non-prized subscribers. The Foreman is obliged after a prized subscriber gets paid the amount, to find an equivalent amount from other

sources to fulfil his obligation for payment of the chit amount to the other subscribers, who may prize the'' chit at subsequent auctions or draw.

With a view to raise this amount, the Foreman may have to pay higher rates of interest. The dominant purpose in the prized subscriber executing a

promissory note in favour of the Foreman is to enable him to recover from the prized subscriber the balance of the amount in instalments so as to

minimise at least to some extent his obligation in finding amounts from other sources for meeting in turn his obligation for payment of chit amounts to

other subscribers at the subsequent auctions or draws. The relationship between the prized subscriber and the Foreman is that of a debtor and

creditor but the prized subscriber is given the concessional facility of effecting repayment in instalments, subject to the withdrawal of that facility in

the event of default being committed by the prized subscriber in the payment of any instalment. To put it differently, the debt payable by the prized

subscriber is one In Prasenti and he is allowed to pay it in instalments, which facility would be available only so long as the instalments are regularly

paid. Viewed in the light of the aforesaid considerations, it is clear that the promissory note Ex. A-3, dated 21.9.1973, executed by the respondent

in favour of the Foreman, though referred to as security, is really one by the debtor to the creditor and the liability of the respondent appears on the

face of the instrument. That liability has been transferred to the appellant by the endorsement under Ex. A-4 dated 20.8.1974, and the appellant

seeks to enforce the same against the respondent.

It would be useful at this stage to refer to the decision of the Supreme Court in Subbarama Sastri v. Raghavan, 100 L.W. 1114 (S.C.). Though

the main question considered by the Supreme Court in that case was with reference to the unconcionable and penal nature of the provisions in the

contract, it is seen that the Supreme Court approved the decision of the Full Bench of the Kerala High Court in P.K. Achuthan and Another Vs.

State Bank of Travancore, Calicut, . While so approving that decision, the Supreme Court has particularly referred to the observations of

Balakrishna Eradi, J. (as he then was) to the effect 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 a stipulation enabling the Foreman to withdraw the concessional facility

on default of the punctual payment of the instalments would not be penal or unconcionable. The Supreme Court also referred to, with approval,

paras 6 and 7 of the judgment of the Full Bench of the Kerala High Court to the effect that if 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 in instalments, intimating that if default should be made in any one

instalment, he would withdraw the concession, then it would not be penal. Though the latter decision of the Kerala High Court in Janardhana

Mallan and Others Vs. Gangadharan and Others, appears to take the view that no debt is incurred by the subscriber for the amount of future

instalments payable, in view of the approval by the Supreme Court in Subbarama Sastri v. Raghavan, 100 L.W. 1114 (S.C.) of the decision of the

Kerala High Court in P.K. Achuthan and Another Vs. State Bank of Travancore, Calicut, the latter decision in Janardhana Mallan and Others Vs.

Gangadharan and Others, , cannot be taken to have correctly laid down the law. It follows from the aforesaid decision of the Supreme Court that

the prized subscriber, viz., respondent became a debtor in respect of the prize amount paid and he had merely been afforded the facility of

payment of the amount due in instalments, as a matter of concession, and no more. The promissory note, under Ex. A-3, represented this liability

of the respondent and that had been assigned in favour of the appellant. The question whether the execution of a promissory note would only be

some kind of a security for the payment of the money due on the future instalments of the chit and not negotiable, as a negotiable instrument, came

to be considered in two decisions of this Court. In N. Chellaperumal Chetty Vs. N.M. Jayarathnam Chettiar, , Subrahmanyan, J., pointed out that

the liability expressly appeared on the face of the instrument and when that liability is transferred by endorsement, which is sought to be enforced

by the transferee, he does not seek to enforce any other liability. It was also laid down that by the endorsement, the endorsee obtained the right

under the promissory note to recover whatever money was due by the promisor to the Foreman. In Durgachalam v. Jannet Chit Fund (P) Ltd., 90

L.W. 565 a Division Bench held agreeing with the decision in N. Chellaperumal Chetty Vs. N.M. Jayarathnam Chettiar, that the promissory note

represented the future instalments payable as on the date of execution of the promissory note and the suit based on that has to be adjudged as one

claiming relief on the promissory note executed, by a person, who took the prized chit and in lieu thereof executed the promissory note, for

payment of the future instalments admittedly payable by him, as a member of the scheme. Considered in the light of the principles laid down in the

decisions referred to above, it follows that the suit instituted by the appellant as a holder in due course on the basis of the promissory note has to

be regarded only as such.

u/s 25 of the Act, unless the Foreman shall have demanded the consolidated payment of all future subscriptions from a defaulting prized

subscriber in writing he shall not be entitled to the same. In this case, there is no claim by the Foreman against the defaulting prized subscriber and

there is therefore no need for the issue of any notice of demand in writing in accordance with Section 25(l) of the Act. The lower appellate Court

relied upon the decision in Lazer v. Selvamony, 1978 T.L.N.J. 60. In that case, the claim was made by the Foreman in respect of the unpaid 19

instalments and the main question that arose for consideration was whether the suit was in time. That decision cannot therefore have any application

in the present case. It therefore follows that the suit laid by the appellant based on the assigned promissory note was properly laid and there was

no need for any demand in writing. Even on the footing that the appellant stood in the position of a Foreman, there had been a demand under Exs.

A-5 and A-7 and that would be sufficient to fulfil the requirements of Section 25 of the Act, if the provisions of the Act applied to the promissory

note sued upon. Therefore, the first contention of the learned Counsel for the appellant is well founded.

Learned Counsel for the appellant next submitted that the view taken by the lower appellate Court that Section 26 of the Act would invalidate

the assignment in favour of the appellant, is erroneous, as a transfer of rights of a Foreman, without the previous sanction in writing of the Registrar,

had not been declared void, but only voidable and the transfer in favour of the appellant had not in any manner been challenged by any non-prized

subscriber or unpaid prized subscriber. Reference in this connection was also made to the decision in Sankaran Nair v. Chellappa Pillai, 1966

K.L.T. 517 and Amrudhan v. Damodharan Asari, 1971 K.L.T. 240. Per contra, learned Counsel for the respondent contended that the couching

of Section 26(l) of the Act in a prohibitive or negative language indicated that the provision was intended to be mandatory and therefore, an

assignment made in the face of the provision contained in Section 26(1) of the Act would be invalid. Reliance was also placed in this connection

upon the decision in Lachmi Narain and Others Vs. Union of India (UOI) and Others, .

u/s 26(1) of the Act, no transfer of the rights of a Foreman to receive subscription from prized subscribers shall be made without the previous

sanction in writing of the Registrar. Sub-Section (2) of Section 26 states that any such transfer of the rights of a Foreman to receive subscription

from a prized subscriber, shall, if it is likely to affect prejudicially the interest of any non-prized subscriber or unpaid prized subscriber, be set aside

on an application by such subscriber to such Officer as may be empowered by the Government in this behalf. Provision is made in sub-Section (3)

of Section 26 regarding the burden of proof regarding the solvency of the Foreman in a case, where the transfer is disputed u/s 26(2) by a

subscriber. No doubt, u/s 26(1), there is an interdict relating to the transfer of the rights of a Foreman to receive subscriptions from prized

subscribers without prior sanction in writing of the Registrar. But then, sub-Section (2) declares the effect of such a transfer of rights without the

permission in writing of the Registrar. The opening words in sub-Section (2) of Section 26, viz., ''any such transfer'' have reference to the transfer

of the rights of a Foreman to receive subscriptions from prized subscribers without the sanction in writing of the Registrar and that has been

declared to be voidable at the instance of the non-prized subscriber or unpaid prized subscriber, whose interest may be thereby affected

prejudicially. It is thus seen that there is no provision in the Act declaring as void the transfer of rights of a Foreman without the previous sanction in

writing of the Registrar. On the contrary, u/s 26(2) of the Act, such a transfer is declared to be voidable, which can be set aside on an application

by a non-prized subscriber or unpaid prized subscriber, whose interests are likely to be affected prejudicially by the transfer. A conjoint reading of

Sub-section (1) and sub-Section (2) of Section 26 clearly establishes that there is no total prohibition for a transfer of the rights of a Foreman to

receive subscription from a prized subscriber but that if such a transfer is made, it is only a voidable transfer, which can be set aside on application

by a non-prized or unpaid prized subscriber, whose interests are likely to be affected prejudicially by such transfer. There is thus an indication even

in Section 26(1) and (2) of the Act, that the transfer is not rendered void. In Sankaran Nair''s Case, 1966 K.L.T. 517, Section 33(1) and (2) of

the Chitties Act. 1120 came up for consideration and it was argued that the provisions of Section 33(1) are mandatory and would nullify the

assignment. In rejecting this argument, Kerala High Court pointed out that the object of the provision is to protect the interest of non-prized

subscribers and therefore, it is not open for the respondent to contend that the assignment is invalid, because the sanction in writing of the Registrar

was not obtained. In the statutory provisions contained in that case also, there was no indication regarding the consequences, which would flow

from a violation of Section 33(l), which is In Pari Materia with Section 26(1) of the Act. Further, u/s 26(2) of the Act, it is clearly provided that

''any such transfer of rights'' referring to such transfer without the previous sanction in writing of the Registrar, could be set aside. In the absence

therefore of any statutory declaration that the transfer of rights without the previous sanction in writing of the Registrar would be void, it would

follow that such a transfer is only voidable, even as provided in Section 26(2) of the Act and not invalid as contended by the respondent. A similar

view has been taken by another Division Bench of the Kerala High Court in Amrudham v. Damodaran Asari, 1971 K.L.T. 240, wherein it has

been laid down that the words ''any such transfer'' appearing in sub-Section (2) of Section 33 of the Chetties Act, would refer to a transfer without

the previous sanction in writing of the Registrar and not a transfer with such sanction. It has also further been pointed out that a breach of Sub-

section (1) only renders the transfer voidable under sub-Section (2) and nor null and void In view of the provisions u/s 26(1) and (2) of the Act,

and the principles laid down in the decision referred to above, it follows that the transfer of rights in favour of the appellant cannot be considered to

be invalid and inoperative. The decision in Lachmi Narain and Others Vs. Union of India (UOI) and Others, relied on by the learned Counsel for

the respondent, sets out the rule of construction with reference to the mandatory or directory nature of a provision, but that decision cannot be

pressed into service by the learned Counsel for the respondent, in view of the clear provision made u/s 26(2) of the Act, referred to earlier. It has

therefore to be held that the assignment in favour of the appellant was legally valid.

Learned Counsel for the appellant next contended that the view taken by the lower appellate Court that the respondent is entitled to claim an

adjustment in respect of the amounts paid by him for other chits in relation to the claim made in the suit, is unsustainable, as the respondent had not

established that he had made payments in respect of the other chits and had not also claimed specifically an adjustment for the amounts so paid.

Further, learned Counsel submitted that each chit is a separate transaction and there cannot be an adjustment with reference to a claim arising out

of one chit and that too after an assignment, as against amounts stated to have been paid in respect of other chits. Learned Counsel for the

respondent, however, pointed out that under Rule 34 of the Tamil Nadu Chit Fund Rules, 1964, a subscriber is entitled to the benefit of a set off

when amounts are due from the Foreman to a subscriber and also from the subscriber to the Foreman. Though in the written statement, the

respondent had stated that he had been subscribing for three chits and had also paid certain amounts, as detailed in para 4, the respondent did not

place the relevant chit pass book or even the receipts for payment of amounts. Even in the course of the evidence of the respondent examined as

D.W. 1, he has not mentioned anything about the payment of amounts towards the other chits. There is thus no evidence of any payment having

been made by the respondent in respect of other chits and no question therefore, of any adjustment of the amounts stated to have been paid as

against the claim made by the appellant in the suit, could arise. The lower appellate Court was therefore in error in non-suiting the appellant on the

ground that the respondent will be entitled to an adjustment of the amount paid by him to the Foreman in respect of other chits.

Lastly, learned Counsel for the respondent submitted that if at all, the respondent could be made liable only in a sum of Rs. 1,550, after giving

credit to the payment of a sum of Rs. 2,450, made by the respondent in respect of the chit. It was pointed out by the learned Counsel for the

appellant that Ex. B-1 showed that inclusive of dividends, a sum of Rs. 2,450 alone had been paid by the respondent, leaving a balance of Rs.

2,550 payable to the Foreman and the respondent cannot escape his liability to pay that amount. A perusal of Ex. B-1 shows that inclusive of

dividends, as against the amount of Rs. 5,000 payable by the respondent, a sum of Rs. 2,450 alone had been paid leaving a balance of Rs. 2,550

payable to the Foreman. Though the assignment of Ex. A-3 is for Rs. 3,000, the appellant will be entitled to recover only Rs. 2,550 and not Rs.

1,550, as claimed by the learned Counsel for the respondent. The trial Court, in para 7 of its judgment, has referred to this and had rightly

determined the amount payable by the respondent at Rs. 2,550. The appellant will be entitled to recover the amount of Rs. 2,550 with interest-at

12 per cent per annum on this amount from 20.8.1974 till this date and future interest at 6 per cent per annum till the date of realisation.

Consequently, the second appeal is allowed, the judgment and decree of the lower appellate Court are set aside and there will be a decree in

favour of the appellant as indicated earlier, with costs throughout.