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"9. The Division Bench in the impugned Judgment dated
15.01.2009, held that 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 installments. The chitty agreement embodies a
promise to pay and discharge a contractual
obligation, and not a promise to repay an existing
debt.
10. We do not agree with the view expressed by the
division bench. 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liable to be withdrawn in the event of default being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.
xxx xxx
13. 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.
14. 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
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members of the chit fund.
15. In view of the aforesaid discussion, 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."
While so holding, the Apex Court examined the above decisions
of this Court. It noticed that though the Full Bench of this
Court in P.K. Achuthan took a similar view, it was overruled
by the larger Bench in Janardhana Mallan. However, it was also
observed that, in K.P. Subbarama Sastri and Others v. K.S.
Raghavan and Others (AIR 1987 SC 1257), the Apex Court upheld
the view in P.K. Achuthan, though the decision of the larger
Bench of the High Court was not brought to its notice. The
Apex Court also referred to Shriram Chits & Investment (P)
Ltd. v. Union of India and Others (AIR 1993 SC 2063), where a
three bench of the Court referred to the above decisions,
while considering the constitutional validity of the Chit
Funds Act, 1982. However, the Court held that the three-Judge
Bench had made only a passing reference to the judgments in
P.K. Achuthan and Janardhana Mallan, and that it neither
affirmed nor rejected the ratio laid down in either of those
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decisions.
11. In short, the law laid down in P.K. Achuthan by the
Full Bench of this Court stands approved by the Apex Court in
K.P. Subbarama Sastri and Oriental Kuries Ltd., and
consequently, the view expressed in Janardhana Mallan does not
hold the field at present. The foregoing analysis makes it
clear that although the relationship between a chit subscriber
and the chit foreman is contractual in nature, a debt comes
into existence on the date of prizing of the chit, and the
foreman is entitled to recover the entire balance amount in a
lump sum in the event of default in payment of future
installments. In a recent decision, a learned Single Judge of
this Court reiterated a similar view in Ramachandran N.K. v.
T.B. Sunil Kumar (2025 KHC 1355).
12. The next question to be considered is whether an
obligation arising out of a prized chit transaction or a loan
taken from a chit fund even prior to prizing the chit can be
secured by a mortgage. The expression "mortgage" is defined in
Section 58 of the Transfer of Property Act, 1882 (for short,
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"the T.P. Act") as follows:
"Section 58(a): A mortgage is the transfer of an
interest in specific immovable property for the
purpose of securing the payment of money advanced or
to be advanced by way of loan, an existing or future
debt, or the performance of an engagement which may
give rise to a pecuniary liability"
Under Section 58(a) of the T.P. Act, a mortgage may be created
for securing (i) payment of money advanced or to be advanced
by way of loan, (ii) an existing or future debt, or (iii) the
performance of an engagement which may give rise to a
pecuniary liability. Thus, the provision does not restrict the
creation of a mortgage only to cases where a debt has already
arisen.
13. From the above definition it is also clear that a
mortgage can be created not merely to secure repayment of
money advanced, but also to secure performance of an
engagement giving rise to a pecuniary liability. Such
liability can also arise in future, owing to the non-
performance of a contractual obligation or in the like
instances. Sir Dinshaw Fardunji Mulla, in the commentary on
the Transfer of Property Act, 1882 (eleventh edition, 2013,
2026:KER:9731
Lexis Nexis Publication), states that the word "engagement" in
Section 58 means a contract, and that the expression "as may
give rise to a pecuniary liability" includes cases in which
there is a legal obligation to pay damages. In K.S. Natesa
Aiyar vs Sahasranama Iyer (AIR 1927 Mad 773), it is held by
the Madras High Court that, a kootchit executed by the
stakeholder of a chit fund over his property in favour of the
subscribers, to secure the due performance of his obligation
to conduct the chit properly, constitutes a mortgage for the
performance of an engagement which may give rise to a
pecuniary liability.
14. It is relevant to note that, according to the
appellant, the respondent availed the loan upon executing an
agreement to pay the future instalments promptly. Even if the
loan amount was disbursed from a common fund collected from
all the subscribers, to which the respondent himself had
contributed, his contractual obligation to pay the future
instalments of the chit, together with interest, if any,
accruing on account of default, would "give rise to a
pecuniary liability". Thus, where a mortgage is created for
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the due performance of such an agreement--an "engagement"
within the meaning of Section 58 of the T. P. Act--executed at
the time of availing the loan, the same is clearly enforceable
against an actual pecuniary liability. In any event, upon
prizing the chit at a later point of time, a definite debt is
incurred by the subscriber.
15. As noticed above, a mortgage can also be created to
secure a future debt. This Court, in Madhusoodanan Nair v.
Kochunni (2001 (1) KLT 548), held that where an equitable
mortgage is created by a subscriber of a chit/kuri to secure
an existing or future debt, the same is enforceable under
Section 58 of the Transfer of Property Act, 1882, as a
mortgage includes future debt. Therefore, it can be concluded
that an obligation arising out of a prized chit transaction,
or a future liability that may arise followed by availing a
loan from a chit fund even prior to the prizing of the chit,
can be secured by a mortgage.
16. In the light of the foregoing discussion, it is thus
evident that the contractual obligation of a subscriber of a
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chit to pay the due amounts to the foreman can be secured by a
mortgage and that the foreman is entitled to recover such
amounts by enforcing the mortgage. The period of limitation
for enforcement of a mortgage is twelve years under Article 62
of the Limitation Act, 1963. Consequently, the suit for sale
of mortgaged property in relation to the chit transaction in
question is maintainable and not barred by limitation. The
impugned judgment is, therefore, liable to be set aside.
17. The judgment under challenge was not rendered on a
preliminary issue, but after a full-fledged trial. Even so,
the disputed question as to whether an equitable mortgage was
in fact created remains unanswered in the judgment. When a
case is not disposed of on a preliminary issue, the trial
court is obliged to consider and decide all issues arising in
the suit, on their merits; however, the findings in the
impugned judgment are confined solely to the issue discussed
above. Such an approach is not in conformity with Rule 2(1) of
Order XIV of the Code. The Rule, as amended by the Code of
Civil Procedure (Amendment) Act, 1976, lays down that the
court shall ordinarily pronounce judgment on all issues.
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However, Rule 2(2) of Order XIV confers discretion on the
court to first try issues relating to the jurisdiction of the
court or a bar to the suit as preliminary issues.
Nevertheless, once the court chooses not to proceed under Rule
2(2) and tries the suit on all issues, it is bound to
pronounce judgment on all such issues. (See Prasad R. v.
Travancore Devaswom Board and Another, 2017 (4) KLT 468).
Otherwise, the appellate court may, in certain cases, be
compelled to remit the matter for fresh consideration upon
reversing the finding on the maintainability of the suit.
18. Having regard to the peculiar nature of the disputed
factual questions involved in the case, we are of the view
that it would be just and proper to remit the matter to the
trial court for fresh consideration and disposal in accordance
with law.
As a result, the appeal is allowed. The impugned
judgement is set aside. The suit is remanded back for fresh
consideration. We are sure that the trial court will make
every endeavour for an expeditious disposal of the suit. The
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appellant is entitled to get a full refund of the court fee
paid on the memorandum of appeal.
The parties shall appear before the trial court on
16.03.2026.
Sd/-
SATHISH NINAN, JUDGE
Sd/-
P.KRISHNA KUMAR, JUDGE
dlk/27/01/02/02
