A chit subscriber incurs a debt upon prizing a chit, enabling the creation of an equitable mortgage for securing future obligations, contrary to the trial court's dismissal on grounds of limitation.

JUDGMENT :

P.Krishna Kumar, J.

The plaintiff in a suit for money, by sale of mortgaged property, is the appellant. The appellant is a private company engaged in the business of conducting chits. The respondent, who is the defendant in the suit, was a subscriber to the chits. He is alleged to have created an equitable mortgage in favour of the appellant to secure the loans availed from the chit. By the impugned judgment, the trial court dismissed the suit holding that a chit transaction cannot be secured by a mortgage and, the suit is barred by limitation.

2. The facts necessary for the disposal of this appeal, in brief, are as follows:

The respondent joined in nine chits conducted by the appellant, each valued at Rs.10,00,000/-, and on 17.03.2011 he availed a loan of Rs.37,50,000/-, on executing an agreement to repay the due amount in monthly instalments. On the same day, he created an equitable mortgage over the plaint schedule property by deposit of title deeds, which was confirmed by a memorandum dated 18.03.2011. Subsequently, he availed an additional loan of Rs.30,00,000/- on 18.10.2011 and extended the equitable mortgage to secure the said amount. The respondent also executed demand promissory notes towards security for the amounts. He prized all the chits and adjusted the amount against the balance outstanding in the loan. As he failed to pay the future installments of the chits, an amount of Rs.95,04,209/- became outstanding, compelling the appellant to institute the suit seeking sale of the mortgaged property.

3. In the written statement, the respondent admitted that he had prized the chits, but contended that he had neither availed any loan under the chits nor created any equitable mortgage and that, consequently, the suit is barred by limitation. He raised several other contentions; however, we are not adverting to them, having regard to the limited scope of the present appeal.

4. Upon recording the evidence, the trial court dismissed the suit solely on the ground of limitation. It was held that creation of an equitable mortgage is impermissible in relation to a chit transaction, since no debtor–creditor relationship exists therein.

5. We have heard Adv. Mahesh V. Ramakrishnan, the learned counsel appearing for the appellant. In spite of service of notice, the respondent remained absent.

6. The question that arises for consideration is, whether a mortgage can be created in relation to a chit transaction and, if so, whether the appellant is entitled to the reliefs claimed.

7. A chit transaction is an arrangement under which a specified number of persons agree to contribute a fixed sum at fixed intervals, and the aggregate amount so collected at each interval is paid to one of the subscribers in turn. The prized-subscriber is usually decided by lot, auction, or any other method agreed upon among them (see Section 2 (2) of the Kerala Chits Act, 1975 and Section 2 (b) of the Chit Funds Act, 1982 ).

8. For the effective management of a chit, there is a foreman, whose role is to conduct the chit, collect the subscriptions, and distribute the prized amounts. The foreman acts on behalf of all the subscribers. Since the amount prized by a subscriber is collected from all the subscribers, the foreman cannot be regarded as a moneylender. However, this does not imply that the subscriber is not incurring any liability when the chit is prized before the completion of the scheme. Similarly, the foreman is also not precluded from recovering amounts due from a prized-subscriber in lump sum, when he defaults in payment of future installments.

9. The question whether a subscriber in a chitty, upon receiving