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IN THE HIGH COURT OF MADRAS
Stone, J.
P.N. Raghavan Pattar and Ors.
Versus
Minor S. Arumugham by his mother and guardian Singarammal and Anr.
Decided On : 10.10.1934
Chit Fund Transaction - Mortgage Bond - Indian Contract Act, Section 74, I11.(g) - The court examined whether a clause in a mortgage bond should be treated as a penalty clause and varied its terms in favor of the defendants. The court held that the chit fund transaction was a contract of sale and not a loan transaction, and therefore, the default clause in the bond did not fall under Section 74 of the Indian Contract Act. The court referred to various decisions and concluded that the appeal succeeded with costs throughout.
Fact of the Case:
The plaintiffs were the stake-holders of a chit fund. The defendant bound himself to pay future instalments as per the terms of the purchase. The Subordinate Judge treated a clause in a mortgage bond as a penalty clause and varied its terms in favor of the defendants.
Finding of the Court:
The court held that the chit fund transaction was a contract of sale and not a loan transaction, and therefore, the default clause in the bond did not fall under Section 74 of the Indian Contract Act. The appeal succeeded with costs throughout.
Issues: The main issue was whether the clause in the mortgage bond should be treated as a penalty clause and varied in favor of the defendants.
Ratio Decidendi: The court concluded that the chit fund transaction was a contract of sale and not a loan transaction, and therefore, the default clause in the bond did not fall under Section 74 of the Indian Contract Act.
Final Decision: The appeal succeeded with costs throughout, and the decree should be as prayed for less the amount decreed by the lower Court which has been paid into Court and drawn out.
Stone, J.
1. This appeal raises a simple point in connection with a chit fund transaction. The Subordinate Judge has treated a certain clause in a mortgage bond as a penalty clause and has varied its terms in favour of the defendants. The question is whether he was right in so doing. The examination of the point is to be found on page 16 of the printed pleadings under the heading of the 4th issue. The learned Judge does not refer to any cases. He does not definitely give the reasons why he considers that the clause in question is penal but he puts it on the following ground.
2. "As the plaintiffs are mere stakeholders who have merely to collect the instalments at stated intervals and as they do not require the entire amount from the first defendant for distribution among the share-holders at once, the ends of justice will be met with in this case if a decree is passed for the instalments that are overdue on the date of the plaint with interest at 18 percent. per annum on the amount of each instalment from the date of default to the date of the plaint as provided for in the bonds."
3. The material facts are as follows:
4. The plaintiffs are the stake-holders of a chit fund. The scheme of this fund was to collect from the contributors to the fund so many rupees, gather by that means a fund and put that fund up to auction. The person who offers the highest discount at the auction gets that fund less the discount (which was distributed between the other contributors) and less the current contribution due from the auction-purchaser. It was a term of the purchase that the person offering the highest discount should bind himself to pay the future instalments. The defendant accordingly bound himself in this case by two bonds Exs. A and B. In essence the bonds provide that he shall pay the future instalments as they become due and if he fails to pay any instalments on the due date then he says in the bond,
5. "I shall pay the same within 15 days from the date of the default with interest at 2 per cent, per mensem. If default is made even in respect of the payment by that time and thus default is committed in respect of any one instalment I shall pay in one lump the entire amount of all the instalments to come with interest at Rs. 1-8-0 per cent, per mensem from the date of default after excluding the payments that I have made for the instalments that had gone by previous to the one in respect of which default is committed by me without having anything to do with the instalments yet to come".
6. Now it is said that the default clause brings this case within Section 74, I11.(g) of the Indian Contract Act because in essence this chit fund transaction is a contract of loan wherein the borrower borrows a sum of money and gives a bond for a larger sum of money with a default clause in that bond. The case in Muthukrishna Aiyar v. Sankaralingam Pillai I.L.R.(1912) 36 Mad. 229 : 24 M.L.J. 135 was accordingly pressed as showing that a clause of this nature should be regarded as a default clause. Muthukrishna Aiyar v. Sankaralingam Pillai I.L.R.(1912) 36 Mad. 229 : 24 M.L.J. 135 is a case of a loan of money on an instalment bond and it has no applicability whatsoever to a case like the present unless this is in essence a loan transaction. In our opinion this is not a case of borrowing at all. At the auction the person bidding the highest discount is regarded as a purchaser of the subject-matter of the auction. There is no reason we can see why a chit fund auction is different from any other auction save that as a rule what is sold is a present sum of money which is "moveable property" and no goods within the meaning of the Contract Act, whereas at most auctions what is sold are goods, in the ordinary sense. But even a chit auction in some cases has as the subject-matter the sale of goods in the ordinary sense viz., rice, and it seems to us clear that in essence the person who offers the highest discount and therefore becomes the owner of the ch
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