Delhi District Court
Sunita Chaudhary vs . Vikramjit @ Vicky. on 28 October, 2014
Sunita Chaudhary Vs. Vikramjit @ Vicky.
CC No.: 7131/13
28.10.2014
At 3.33 pm
Present: None for the Complainant.
Accused in person.
ORDER
1. This complaint u/s 138 of the N.I.Act has been filed by one Ms.Sunita Chaudhary against Vikramjit@Vicky[hereinafter 'Accused'] with respect three cheques of Rs. 30,00,000/- each. Cognizance in this case was taken by my Ld.Predecessor, who summoned the accused to face charge for an offence u/s 138 of the N.I.Act. The accused on entering appearance was released on bail. The matter is currently pending at the stage of Section 251 of the Cr.P.C i.e for framing of notice and has been very hotly contested as the accused has sought dropping of proceedings against him on various grounds, legal as well as factual. Before embarking on a discussion of the merit of these objections, on which the accused has sought dropping of proceedings, let us begin at the beginnings and see what led to the filing of the present complaint.
2. The complainant's case, shorn of unnecessary details, is that she is the sole proprietor of M/s Padmavati & Associates, which is a concern engaged in the business of Committee (Finance Pooling). The complainant submits that in the year 2010 the accused approached the complainant expressing a desire to join the Committee (Finance pooling) and became member of the following groups of Committee (Finance Pooling) with the complainant. The details of the groups of which the accused was made a member are reproduced as under in Table 1.1 :-
Sunita Chaudhary Vs. Vikramjit @ Vicky 1 of 28
Group A
Value of Group - Rs. 30,00,000/-
No. of Members - 15
Duration/Period - Oct.2010 to Dec.2011
Monthly Installments - Rs.2,00,000/- x 15
No. of Share - One
Group B
Value of Group - Rs. 30,00,000/-
No. of Members - 15
Duration/Period - Dec.2010 to Feb.2012
Monthly Installments - Rs.2,00,000/- x 15
No. of Share - One
Group C
Value of Group - Rs. 30,00,000/-
No. of Members - 15
Duration/Period - April.2011 to June.2012
Monthly Installments - Rs.1,60,000/- x 15
No. of Share - One
Table 1.1
The complainant claims that as per the prevailing practice in the business, any member could bid on the due dates of payments and the highest bidder was entitled to take the amount after deduction of the deficit. The complainant in her complaint, has admitted, quite candidly, that in order to ensure the payments of share of all of the members, the members were required to provide post dated cheque(s) in the name of the Prop/Cashier/Fund Manager, according to their respective share.
The complainant has claimed, that in case of default of a member in keeping to the financial discipline of the payment of the committee. The Prop/Cash Fund Manager had to make up the deficiency towards the other members, with a right to recover the same from the defaulting subscriber. The complainant claims that, this is what happened in the present case. It is alleged that the accused withdrew the payment of his shares from the said Sunita Chaudhary Vs. Vikramjit @ Vicky 2 of 28 groups and handed over post dated cheques to the complainant to ensure the remaining payment which was due towards the Accused's share. The complainant claims, that the accused became a defaulter and did not pay the outstanding balance of his said shares to the complainant and therefore became liable to the complainant, who had incurred losses on his behalf, running into a staggering Rs.90,00,000/-, in discharge of which the accused is stated to have given the following three cheques to the complainant (details in table 1.2) [hereinafter 'cheques in question'] which on presentation got dishonored, leading to the service of legal notice, which when remained unheeded, constrained the complainant to file the present case.
Table 1.2 - Details of Cheques
Cheque No. Date Amount
163225 13.09.2012 30,00,000/-
163226 07.09.2012 30,00,000/-
163227 30.08.2012 30,00,000/-
This, in a nutshell, is the complainant's story.
3. The accused, on being summoned, entered appearance and sought dropping of proceedings at the stage of Section 251 of the Cr.P.C. His challenge to the proceedings being two-pronged :-
3.1 First - it has been argued, with great eloquence, that in the present case, even taking the complainant's case at its face value, there is no legally enforceable debt or liability for which the present cheque could have been given. It has been argued that the complainant is admittedly running a Chit Fund, therefore the mischief of Chit Funds Sunita Chaudhary Vs. Vikramjit @ Vicky 3 of 28 Act, 1982 is attracted. It has been argued that the complainant has been running the chit fund sans registration and in stark contravention of the provisions of the Chit Funds Act. Reliance has been placed on Section 4 & 5 of the Chit Fund Act, to drive home the contention that there is a statutory mandate to get previous registration & chit wise sanction of the State Government within whose jurisdiction the chit is to be commenced. It has been argued that the complainant is in actuality the foreman of the chit fund, and therefore liable for compliance with the provisions of the Act. It has further been argued that no chit agreement has been executed between the subscribers and the foreman, and in light of total non compliance to the safeguards laid down under the Chit Funds Act, the committee has no legal sanctity, as a result of which there is no legally enforceable liability on the accused which could have been sought to be discharged by the cheques in question. It has further been argued that running of a chit fund without statutory compliance is a penal offence for which the complainant is liable. Summing up his arguments, he has contended with great vehemence that the court should not come to the aid of a party's attempt to recover unaccounted wealth.
3.2 The accused has alternatively argued that even if the complainant's case is to be believed and the chit fund angle is eschewed from consideration for a moment, even then since the cheques in question have been taken at the commencement of the chit fund only, they cannot be said to have been issued in discharge of an existing legal liability but are taken as security for a liability to arise in future, trigger may be default in payment of subscription.
However that in no way, takes away the fact that at the time of issuance of cheque there was no subsisting liability, therefore prosecution u/s 138 of the N.I.Act does not lie. He also argues that even believing the complainant's story for an instant that the accused withdrew the amount under the Sunita Chaudhary Vs. Vikramjit @ Vicky 4 of 28 committees. It can be safely presumed that he must have made some payments towards installments, only then he must have been permitted to withdraw the amounts. In that situation his liability towards the committee would have stood partially reduced and would not have remained for the entire amount i.e 30 lakhs in each committee. He further argues that it is highly improbable that the complainant would go on to allow the accused to take benefit of three different successive committees, when he was already in default of the first. He states that these are inherent infirmities in the case of the complainant which render her case incredible.
4. The Complainant, desperate to sustain her complaint, per contra, has challenged the accused's plea on two counts :-
a) Firstly, it has been argued that such an application is not maintainable at this stage. Ld.Counsel for the complainant has argued that the court having taken cognizance, cannot discharge the accused at this stage for two reasons, firstly a criminal court has no power to review and discharging the accused at this stage, would in essence, amount to review or recall of the order of summoning.
Secondly, it has been argued that a trial of summons case, does not envisage the possibility of a discharge, there being no provision akin to Section 239 (which provides for discharge in a warrants case) with respect to a summons case, such as the present one. According to him, the appropriate remedy for the accused is to challenge the summoning order and approach the Hon'ble High Court in an action for quashing of proceedings u/s 482 of the Cr.P.C. To bolster this argument, Ld.Counsel for the Complainant has placed vehement reliance on Adalat Prasad v. Roop Lal Jindal and others 2004 (7) SCC 338;
b) Even glossing over the maintainability question for a moment, Ld.Counsel for the complainant has waxed eloquent, on presumptions as Sunita Chaudhary Vs. Vikramjit @ Vicky 5 of 28 engrafted under sections 118 & Section 139 of the Negotiable Instruments Act. The complainant has argued that as per the scheme of Negotiable Instruments Act, every cheque signed and issued, carries with it, the presumption of having been issued in discharge of an antecedent liability and for good consideration. It has been argued that it falls on the accused to rebut the presumption, which can be done only after a trial is held on the merits of the case, and after looking into the case of each side.
He sums up, that, armed with the mandatory statutory presumptions, there is ample material on record to suggest prima facie commission of offence u/s 138 of the N.I.Act and that notice should be framed against the accused.
5. Record perused. Submissions made at Bar heard at length.
6. First things first. At the very outset, since an objection has been registered by the Ld.Counsel for the complainant, as to the very tenability of the present hearing and as to the power of the court to drop proceedings against the accused at this stage. The following issues arises for consideration :-
"Whether in a case u/s 138 of the N.I Act, after the accused is summoned, can the court drop proceedings ? or in other words can the court discharge the accused at the stage of framing of notice u/s 251 Cr.P.C ?"
and if yes, whether the same shall run foul of the embargo of non review on a criminal court and the ratio as laid down in Adalat Prasad (supra).
The answer to my mind is a clear no. The issue is no longer res integra. The Sunita Chaudhary Vs. Vikramjit @ Vicky 6 of 28 Hon'ble Supreme Court has decisively ruled in Bhushan Kumar v. State (NCT of Delhi) (2012) 5 SCC 424, that a magistrate would be within his power to drop proceedings against an accused in a summons case if the material on record does not make out a case against him. The relevant extract from the judgment, is being reproduced as follows :-
17) It is inherent in Section 251 of the Code that when an accused appears before the trial Court pursuant to summons issued under Section 204 of the Code in a summons trial case, it is the bounden duty of the trial Court to carefully go through the allegations made in the charge sheet or complaint and consider the evidence to come to a conclusion whether or not, commission of any offence is disclosed and if the answer is in the affirmative, the Magistrate shall explain the substance of the accusation to the accused and ask him whether he pleads guilty otherwise, he is bound to discharge the accused as per Section 239 of the Code.
Hence it is too late in the day to argue the non existence of such a power, and there is no doubt that the Court in an appropriate case drop proceedings against the accused where there is no prima facie case against him. The underlying philosophy is clear that when there is no case against the accused even on the basis of the complainant's case, or there is a legal flaw, which goes to the root of the matter and does not need a factual controversy to be resolved, subjecting the accused to a long drawn trial would be unjust and not just, fair and reasonable procedure. The very requirement of reading out the substance of offence to the accused is premised on the fact there should be an offence in the first place, which may require reading out or explanation to the accused. The power to frame notice u/s 251, carries with it the power not to frame a notice in a case where the Sunita Chaudhary Vs. Vikramjit @ Vicky 7 of 28 same would be a travesty of justice.
As to the argument, that dropping proceedings at this stage - shall amount to a review of order of summoning and therefore barred in view of the ruling in Adalat Prasad (supra). I am afraid this contention too, fails to cut any ice. It cannot be gainsaid that the considerations at the stage of summoning and framing of notice (as per S.251 of the Cr.P.C) are different. The inquiry at the stage of Section 251 of the Cr.P.C is much more broad-based than the extent of scrutiny permissible at the time of issue of process/summoning. The view that proceedings can be dropped even in a summons case, is not incompatible with the ruling of the Hon'ble Supreme Court in Adalat Prasad (supra). This has been clarified by the Hon'ble High Court of Delhi in Urshila Kelkar v. Make my Trip India(CRL.M.C.2598/2012 & Crl.M.A.13279/2012, Dated - 18.11.2013), wherein it has been held :-
"
...
9. It is no doubt true that Apex Court in Adalat Prasad Vs. Roop lal Jindal and Ors.
(2004) 7 SCC 338 has ruled that there cannot be recalling of summoning order, but seen in the backdrop of decisions of Apex Court in Bhushan Kumar and Krishan Kumar (supra), aforesaid decision cannot be misconstrued to mean that once summoning order has been issued, then trial must follow. If it was to be so, then what is the purpose of hearing accused at the stage of framing Notice under Section 251 of Cr.P.C. In the considered opinion of this Court, Apex Court's decision in Adalat Prasad (supra) cannot possibly be misread to mean that proceedings in a summons complaint case cannot be dropped against an accused at the stage of framing of Notice under Section 251 of Cr.P.C. even if a prima facie case is not made out."
To the same effect is the decision of the Hon'ble Delhi High Court in Raujeev Taneja v. NCT of Delhi (Crl.M.C. No.4733/2013 decided on 11th November, 2013) where a summoning order under Section 138 of the Negotiable Instruments Sunita Chaudhary Vs. Vikramjit @ Vicky 8 of 28 Act was challenged before the High Court. The High Court while relying upon Bhushan Kumar (supra) directed the accused to urge the plea before the learned Trial Court at the stage of framing of notice whereupon the Trial Court was directed to deal with the pleas raised by the accused, by passing a speaking order and it was clarified that if the Trial Court proceeds to drop the proceedings qua petitioners, then the Apex Court‟s decision in Adalat Prasad v. Roop Lal Jindal, (2004) 7 SCC 338, would not stand in the way of Trial Court to do so.
Hence it is manifest from the above discussion that if there is no prima facie case made out against the accused, the court would be within the i's powers to drop proceedings against the accused and the accused in a proper case need not go through the ignominy of a full fledged trial to earn an exoneration.
7. The maintainability hurdle having been overcome. The question that now arises for consideration is, whether the present case is one such case. In other words, The specific legal issue that is required to be resolved is "Whether the cheques in these cases can be said to have been issued in discharge of a legally enforceable liability ?"
In my opinion the answer has to be in negative. The cheques in question cannot be said to have been issued in discharge of a legal liability and for this we need not look beyond the case of the complainant itself. Though the complainant has, and quite cleverly, employed the words 'committee & finance pooling' to denote the financial transactions between the parties. It is clear that the same are mere euphemisms. An eye wash meant to obscure the real nature of the arrangement which is nothing but - an out and out 'chit fund'.
Let us see how.
7.1. What is a Chit Fund.
Sunita Chaudhary Vs. Vikramjit @ Vicky 9 of 28 A brief introduction to what a chit fund is, should set the discussion in perspective. A Chit Fund is a saving scheme practiced in India. It originated 1000s of years ago, as an informal association of traders and households with in communities. Chit Funds therefore acted as saving schemes for individuals in a society, which was bereft of proper institutional investment options, which provided an informal investment solution - closer to home. The system of committee has evolved from a conventional chit, an old indigenous financial institution involving regular periodical subscriptions by a group of persons. It is, in law, a contract between the subscribers and the foreman which provides that the subscribers shall subscribe a certain sum by periodical installments for a definite period. Each subscriber shall, in his turn, as determined by lot or auction or in such other agreed manner shall be entitled to the prize amount. The winning subscriber has to normally furnish security for the payment of the rest of the installments to the other members/chit group. There will be as many periodical installments as there are members. As there is mutuality of interest among the small number of subscribers to each chit fund, it constitutes a convenient instrument of combining savings and borrowings.
Section 2(b) of the Chit Fund Act, 1982 [hereinafter 'Chit Fund Act'] defines a 'chit', as follows :-
"Chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount".
Sunita Chaudhary Vs. Vikramjit @ Vicky 10 of 28 Needless to state, the words '...by any other name..' reflects the legislative anxiety to ensure that there is no exclusion error i.e - no scheme escapes the sweep of the act merely because it is given a peculiar name by its proponents to disguise its real nature. It may be apposite to underscore that these chit funds are known by different names in different parts of the country. While in South India the terms 'chitty', 'kuree' are used. The words 'Committee/Kitty Parties' are in vogue in North India to denote to such chit fund arrangements.
7.2 - A Chit fund in action.
Chit funds operate in different ways, and there are also many fraudulent tactics practiced by private firms. The basic necessity of conducting a 'Chitty, 'Kitty' or a 'Committee' or an arrangement referred to by, what ever name - is a group of needy people called subscribers. The foreman--the company or person conducting the chitty--brings these people together and conducts the chitty. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of gross chitty amount) monthly for his efforts. Other than that, the foreman has no specific privileges, he is just a chitty subscriber.
To illustrate a chit fund in action, let us take complainant's Group A scheme only (See Table 1.1) and try to recreate what must have transpired for a better understanding. This would also demonstrate how the complainant's so called 'finance pooling/committee' is nothing but a chit fund.
In this case (in Group A) - accused Vikramjit @ Vicky was one of the subscribers. The value of the group was Rs.30,00,000/-. The group consisted of 15 members and the duration of the group was 15 months with each member contributing an installment of Rs.2,00,000/- each month. Hence the maximum sum/corpus accumulated each month from 15 subscribers is Rs.30,00,000/- (in legal parlance known as 'chit amount' as per S.2(c) Chit Fund Act). This constitutes the source of prize money which is up for grabs for one (lucky!) subscriber each month. One Sunita Chaudhary Vs. Vikramjit @ Vicky 11 of 28 subscriber receives a part of this chit amount each month. The part of the chit amount that the winning subscriber receives is known as the 'prize amount' (as defined in Section 2(m) of the Chit Fund Act). Now as to who gets the prize money is determined by auction (bidding process - as admitted by the complainant in her complaint). 'Prize money' is the difference between the chit amount i.e Rs. 30,00,000/- in the above case minus the discount. Discount as per Section 2(g) of the Chit Fund Act means the sum of money that the prized subscriber (for eg: the accused in this case) is required to forego as per the terms of the committee, which may be used for redistribution among the rest of the members or/and funds for management of the chit. In a chit fund determined by auction - The person bidding the highest gets the amount being the prized subscriber. For eg - in the present case the accused may have got the prize money for a sum, say 80 % of the gross sum, i.e Rs.24,00,000/- (This would be the prize amount, that he gets). The complainant in her complaint has admitted that the highest bidder is entitled to take the amount after deduction of the deficit. The deficit that the complainant talks about is nothing but 'discount' within the meaning of Section 2(g) of the Chit Funds Act and the amount that he is entitled to take is the 'prize amount'.
Now the prized subscriber, having paid his first installment (Rs. 2,00,000/) now stands to pay the remaining 14 installments. His name, needless to state, is not picked again during the course of the committee as a prized subscriber. The incentive for him for bidding and then getting the prize amount (which of course is at a loss which is the - discount amount), is that, if he is in need he gets a ready liquidity of Rs. 24,00,000/- having paid only 2,00,000/- with the option of repaying the same over 15 months of time, in an informal fashion sans any loan formalities and beyond the tax arena etc. The same cycle goes on till every subscriber gets a go at the amount, with all, but the last, distribution being by way of auction. The balance (discount - amount foregone by the prized subscriber) i.e Rs. 6,00,000/- in the above case is redistributed among the other members and constitutes their profit in the entire scheme. A part may also be taken by the foreman as fees or chit fees for the management of the fund. Maximum bid is normally between 20% to 40% and Sunita Chaudhary Vs. Vikramjit @ Vicky 12 of 28 the duration of chit is normally between 12 months to 50 months. In case there are more than one highest bidder in an auction, then draw of lots is made and chit amount given to the successful subscriber.
Coming back to the case at hand, therefore it is clear that these 15 subscribers (including the accused) constitute a 'Chit Group' and the chit fund company can run many such groups. The Chit fund company in this case is 'M/s Padmavati Associates' with the complainant as clearly the 'foreman' (as defined in Section 2(j) of the Chit Fund Act).
Having demonstrated how the financial arrangement of the complainant is actually a chit fund. Let us turn to the law governing Chit Funds.
7.3 Law governing Chit Funds.
Such chit fund schemes may be conducted by organized financial institutions, or unorganized schemes conducted between friends or relatives. All in all, judicial notice can be taken of the fact that they cater to a large number of Indian households. In view of their pervasiveness, and the possibility of 'cheat funds' masquerading as 'chit funds', and con-men acting as Fore-men, a Pan-India legislation in the form of Chit Funds Act, 1982 was enacted with a view to institutionalize the system of chit funds and have a regulatory mechanism in place, to ensure investor protection and smooth conduct of chit funds. The mischief sought to be curbed by the act was to protect naive people against the risk of so called managers of these schemes disappearing with people's hard earned wealth. There was also the risk of exploitation by clever foremen who may by way of ghost/bogey members within the funds (their own or even fictitious people), try to shoot up the discount in a particular chit by falsely inflated bidding so that a needy committee subscriber ends up accepting an amount as prize money which is substantially less than the total contribution of his, sometimes running as low as accepting 40 % of the total amount and then paying installments for the entire amount). To guard against such excesses, the legislation was enacted after extensive deliberations with all Sunita Chaudhary Vs. Vikramjit @ Vicky 13 of 28 concerned. This legislation replaced the earlier Madras Chit Fund Act, 1961 which was applicable to Delhi. This new legislation (supplemented by Delhi Chit Fund Rules 2007), inter-alia, provided for mandatory registration of chit fund companies, in addition to sanction with respect to each chit scheme individually. It also mandated a provision for minimum capital requirements for a company intending to organize a chit fund, written chit agreements between the foreman and the subscribers detailing their respective contractual obligations, and other similar regulations to protect investor's interest, apart from providing a self-contained machinery for the settlement of disputes between a foreman and a subscriber by means of arbitration.
As per the rules a Chit fund company, in order to run business is required to first obtain a certificate of incorporation from the Registrar of Companies. Then the same needs to be registered with the Chit fund department of the government after compliance with the elaborate formalities including drawing up of bye laws and spot inspection by the registrar. As per the Scheme of things, therefore, in order to start and run a chit in Delhi. A prior registration is mandatory as we've seen above, in addition to the above, every new chit group organized needs to be approved from the registrar.
As per provisions of the Chit Funds Act,1982, no person shall commence or conduct any chit or publish any notice, circular, prospectus, proposal or other document inviting the public to subscribe for tickets in any chit unless previous sanction of the Registrar, Chit Funds, Delhi has been obtained and thereafter a certificate of commencement under section 9(1) of the Chit Funds Act,1982 is issued in Form VII of Delhi Chit Funds Rules,2007.
8. In this regard the relevant provisions of the Chit Fund Act, 1982 are reproduced as under :-
4. Prohibition of chits not sanctioned or registered under the Act.-
(1) No chit shall be commenced or Sunita Chaudhary Vs. Vikramjit @ Vicky 14 of 28 conducted without obtaining the previous sanction of the State Government within whose jurisdiction the chit is to be commenced or conducted or of such officer as may be empowered by that Government in this behalf, and unless the chit is registered in that State in accordance with the provisions of this Act;
Provided that a sanction obtained under this sub-section shall lapse if the chit is not registered within twelve months from the date of such sanction or within such further period or periods not exceeding six months in the aggregate as the State Government may, on application made to it in this behalf, allow.
(2) An application for the purpose of obtaining a sanction under sub-section (1) shall be made by the foreman in such form and in such manners as may be prescribed.
(3) The previous sanction referred to in sub-section (1) may be refused, if the foreman,-
(a) had been convicted of any offence under this Act or under any other Act regulating chit business and sentenced to imprisonment for an such offence; or
(b) had defaulted in the payment of fees or the filing of any statement or record required to be paid or filed under this Act or had violated any of the provisions of this Act or the rules made thereunder; or
(c)had been convicted of any offence involving moral turpitude and sentenced to imprisonment for any such offence unless a period of five years has elapsed since his release;
Provided that before refusing any such sanction, the foreman shall be given a reasonable opportunity of being heard.
(4) The order of the State Government, Sunita Chaudhary Vs. Vikramjit @ Vicky 15 of 28 and, subject to the provisions of sub-
section (5), the order of the officer empowered under sub-section(1). Issuing or refusing previous sanction under this section shall be final.
(5) Any person aggrieved by the refusal to issue previous sanction by any officer empowered under sub-section (1). may appeal to the State Government within thirty days of the date of communication to him of such refusal and the decision of that Government on such appeal shall be final.
Section 5 further provides :-
5.Prohibition of invitation for subscription except under certain conditions -
No person shall issue or cause to be issued any notice, circular, prospectus, proposal or other document inviting the public to subscribe for tickets in any chit unless such notice, circular, prospectus, proposal or document contains a statement that the previous sanction required under Sec. 4 has been obtained and the particulars of such sanction.
Hence it is clear that in addition to the registration of the chit fund company, every chit requires to be approved. The approval is not given except when the provisions of the act have been complied with. Which includes a written chit fund agreement (approved by the registrar), security as to minimum capital capabilities, requirement of keeping minutes of each meeting, maintenance and submission of books of account/record and balance sheets (See Sections 6,7,8,9,17,20,23 & 24).
9. The act also requires the foreman to give security of an amount equal to the chit amount, before applying for sanction. This has been done with the salutary object of protecting the interest of the investor.
Sunita Chaudhary Vs. Vikramjit @ Vicky 16 of 28 Apart from the above, the other duties of the foreman are elaborately laid down in Section 22 of the Act, which reads as under :-
"
...
...
Duties of foreman of the company
i) To provide a true copy of chit agreement to all the subscribers before the conduct of 1st draw of the chit.
ii) To intimate all the subscribers about the date, time and amount of subscription of chit every month.
iii) To pay chit amount to the prized subscribers after getting sufficient security for further installments.
iv) To allow the subscribers to examine chit record on getting payment of prescribed fee.
v) To file minutes of proceedings, Form of the transfer of subscribers, Balance Sheets etc. with the Registrar, Chit Funds Delhi within the stipulated time limit.
vi) To furnish proper securities to the satisfaction of the Registrar, Chit Funds, Delhi in the event of foreman himself becoming a prized subscriber.
vii) A foreman intending to transfer his right to receive subscription from prized subscriber shall apply in writing to the Registrar, Chit Funds, Delhi for obtaining his sanction thereof.
viii) To maintain record as prescribed in Rule 25 of Delhi Chit Funds Rules, 2007.
ix) To produce such records for inspection as and when required by the R.C.F., Delhi.
x) To preserve all the records pertaining to a chit for a period of at least eight years from the date of termination of the chit.
xi) To file Balance Sheet of the Chit Fun Company referred to in section 24 of the Chit Funds Act, 1982 with the Registrar within a period of three months from the expiry of the period with reference to which it is prepared.
Sunita Chaudhary Vs. Vikramjit @ Vicky 17 of 28
xii) To file a receipt and payment account and a statement showing the assets and liabilities of the individual chit group as on the last date of each calendar or financial year, as the case may be, in Form XV of the Delhi Chit Funds Rules, 2007, duly audited either by auditors appointed under the Companies Act, 1956 or by auditors appointed under section 61 of the Chit Funds It is therefore clear that to insulate the members, onerous duties have been casted upon the foreman of the chit fund.
In addition to the above Section 11 of the Chit Fund Act, 1982 - mandates that the name of the chit fund shall contain the words 'chit fund', 'chitty' or 'Kuri'. Section 11 reads as follows :-
11. Use of the words chit, chit fund, chitty or kuri.- (1) No person shall carry on chit business unless he uses as part of his name any of the words "chit fund", "chitty" or "Kuri" and no person other than a person carrying on chit business shall use as part of his name any such word.
...
...
This salutary provision was engrafted with a view to protect naive investors, who may be beguiled into investing in a finance scheme believing it to be a genuine enterprise, but which in fact is a chit fund. The use of word 'chit fund, chit, chitty' in the name of the business was intended to act as a warning sign for a member to be beware and act with caution.
This again has been observed in its breach in the present case as the complainant's concern operated under the name and style of 'M/s Padma Associates' and conspicuously fails to mention chit fund, chitty etc in it's name.
Hence it is clear that there are elaborate provisions are laid down under the Act for the conduct of chit funds, all with a salutary objective of protecting the Sunita Chaudhary Vs. Vikramjit @ Vicky 18 of 28 interests of all concerned. Sadly the same have been observed in their total breach by the complainant.
10. In the present case, though the complainant in her reply to the application for discharge, has claimed that the Chit Funds Act does not apply to the present case. But this denial is a blanket denial. She has not sought to explain as to why the act would not apply. We have already demonstrated above as to how the present case is a case of chit fund. The complainant's case, very interestingly, is that of non application of act in the present case, but without explaining why. It is not her case that any of the provisions of the act were complied with. During arguments, Ld. Counsel for the complainant was queried as to the legal status of the complainant's proprietorship firm, to which no satisfactory reply was forthcoming. The complainant also remained equivocal. The main plank of the complainant's case therefore remained that these issues cannot be examined at this stage and a trial is necessitated in this case. However as to the issue of registration and sanction& other compliance, the complainant remained mum.
In this case it is manifest that committee transactions running into crores were being run, without any registration or sanction, which is in clear contravention to every conceivable provision of the Act. The complainant has sought to hoodwink the court by clever drafting and terming the financial arrangement as a committee (finance pooling) whereas the same is nothing but a euphemism for a chit fund.
The provisions of the fact requiring prior registration, sanction and other compliance are mandatory in nature and their contravention renders the complainant liable u/s 76 of the Chit Funds Act, 1982.
Section 76 reads as under :-
76. Penalties.-
(1) Whoever contravenes or abets the contravention of any of the provisions of Secs.
4,5,8,9,11,12,13,14,19,20,22,24,30,31, sub section (4) of Sec. 33, Secs. 46,47 or sub-
Sunita Chaudhary Vs. Vikramjit @ Vicky 19 of 28 section(5) of Sec.61 shall, on conviction be punishable with imprisonment for a term which may extend to two years or with fine which may extend to five thousand rupees or with both.
Hence it is clear that the complainant has rendered herself liable for having violated various provisions of the act, the liability for which is provided as above. We'd discuss the criminal liability aspect later in the order.
11. Coming back to the instant case and in continuation of the second issue as adumbrated above. The question that arises in this factual & legal background therefore, is, whether the cheques in question which are said to have been issued towards subscription/payment due on such a chit fund can be said to have been issued in discharge of a legal debt or liability ?;
or, put differently, -
Whether such an agreement, which is clearly forbidden by law can give rise to legally enforceable contractual obligations, or not?
Ld.Counsel for the complainant, at the very outset has sought to argue that this question cannot be gone into at the stage of notice, and his case is to be presumed to be correct. He has argued that once foundational facts, i.e signatures on cheque and it being drawn on an account of the accused has been admitted. By virtue of Section 118(a) & (g) and Section 139 of the NI Act - a presumption of the cheque having been issued in discharge of a legally sustainable liability and drawn for good consideration arises.
Section 118 of the N.I Act provides :-
"Presumptions as to negotiable instruments: Until the contrary is proved, the following presumptions shall be made:
(a) of consideration - that every negotiable instrument was made or Sunita Chaudhary Vs. Vikramjit @ Vicky 20 of 28 drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred was accepted, indorsed, negotiated or transferred for consideration;"
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Section 139 of the N.I Act further provides as follows:
"Presumption in favour of holder - It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability"
It is the complainant's case that armed with these presumptions, the accused has to bear the onus of rebutting his case, which he would do, at the time of trial by leading evidence.
In my opinion, this contention is thoroughly misconceived. It is now fairly settled that the accused can displace this presumption on a scale of preponderance of probabilities and the lack of consideration or a legally enforceable debt need not be proved to the hilt or beyond all reasonable doubts. The accused can either prove that the liability did not exist or make the non existence of liability so probable that a reasonable person, ought under the circumstances of the case, act on the supposition that it does not exist. Simply put, the accused has to establish a fairly plausible hypothesis. The accused is fully within his right to rebut the presumption by demonstrating the inherent infirmities in the case of the complainant. In the present case, the accused has sought to rebut the presumption of legal liability from the complainant's complaint itself, which to my understanding is a perfectly legal course of action. Furthermore - the complainant cannot shield behind the presumption when it is clearly patent that the transaction in question is illegal. Presumptions, as the saying goes, are the bats of law, they flutter in darkness but vanish in the sunlight of actual facts. In this case since the illegality of the transaction is writ large on the record, there is no need for invoking a presumption Sunita Chaudhary Vs. Vikramjit @ Vicky 21 of 28 and presuming otherwise. The Court need not presume when the court clearly sees, and with that let us go on to examine the two legal issues as adumbrated above.
As to the issue of whether legal liability under a valid contract arose in this case or not. In my considered opinion - the answer is no. It needs no gainsaying that for a prosecution u/s 138 of the N.I. Act to be successful, the cheque needs to be issued in discharge of a legal liability or consideration. Let us for a moment turn to Section 138 of the N.I.Act :-
138. Dishonour of cheque for insufficiency, etc., of funds in the account.- Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank...
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Explanation:- For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability.
Hence it is clear that a debt or liability should be legally enforceable in order for a prosecution u/s 138 of the N.I. Act to sustain. In other words, there should be a lawful contract between the parties. A contract, needless to state, is an agreement that is enforceable by law (Section 2(h) of the Indian Contract Act). Parties enter into an agreement, law renders it a contract by reinforcing it with enforcement in cases parties go back on it. Under what conditions the law shall back a pact with enforcement ? For that we turn to Section 10 of the Indian Contract Act, 1872, which reads as under :-
Sunita Chaudhary Vs. Vikramjit @ Vicky 22 of 28
10. What agreements are contracts.--All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void As to what objects are lawful, we are guided by Section 23 of the Indian Contract Act, again, which reads as :-
23. The consideration or object of an agreement is lawful, unless -
it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
The question, therefore, that arises is "Whether the agreement to contribute made by a subscriber to a unregistered chit fund, is legally unenforceable ? or in other words, is it an agreement, the object of which is forbidden by law or which if given effect to would defeat the provisions of a statute ?"
To my understanding the answer is a clear and resounding yes. As we've seen above Section 4 & 5 of the Chit Funds Act, 1982, in categorical terms, prohibit running of a chit fund or proposing subscriptions in a chit fund without sanction. Infact Section 76 of the Act, as reproduced above, renders it a penal offence, attracting punishment upto two years, with or without fine.
12. It is clear that running a chit such as the present one is clearly forbidden by law. Any such agreement between a subscriber and a foreman therefore, is forbidden by law and if given effect - would defeat the provisions of the Chit Funds Act, 1982. In Sunita Chaudhary Vs. Vikramjit @ Vicky 23 of 28 such circumstances, the object of the agreement cannot be said to be lawful, as a result of which the agreement, having an illegal object, is therefore void ab initio.
Now the next question that arises is, what are the implications of such a void agreement ? Whether a person having received money under a void agreement, under a legal obligation to return the same ?
In order to find out, let us allude briefly to Section 65 of the Indian Contract Act, 1872, which reads as follows :-
65. When an agreement is discovered be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.
The catch words are 'discovered to be void' or 'becomes void'. It becomes important to underscore here, that the expressions "agreement" and "contract" have distinct meanings under the Contract Act. As mentioned earlier, an "agreement" becomes a "contract" only if it is enforceable in law. Thus, the phrase "a contract becomes void" appearing in the said Section 65 would not have any application in the case where an agreement is void ab initio. It only applies to cases, to illustrate, of supervening impossibility due to which a contract becomes void or a case where time is of the essence of the contract and one party fails to keep up to the time obligation and the other party exercises the option to rescind the contract.
It has already been demonstrated, as to how, the agreement in the present case was void from the very beginning. Therefore atleast the first part of Section 65 is not attracted.
This leaves us with agreements which are "discovered to be void". This has reference to those agreements which, the contracting parties or one of them did not know, at the time of entering into the agreement, that the same was not enforceable Sunita Chaudhary Vs. Vikramjit @ Vicky 24 of 28 in law but, it was later "discovered" by them or one of them as being void. Where the parties are aware and have knowledge that the agreement is unlawful and despite this knowledge they go ahead with the agreement, they would not be able to take recourse to the provisions of the said Section 65 because there would be no "discovery" of the invalidity of the agreement. That the agreement was unlawful and, therefore, void, was known to them all along. It is apt to note that this is not a one off incident, the complainant is into this business and has instituted many cases which are currently pending against various persons with respect to committees running into crores. She appears to have been the kingpin of all these committees, wherein unaccounted wealth worth crores exchanged hands. The complainant, knowing perfectly well, the illegality of her actions persisted in the same and has now come knocking on the doors of justice to recover the amount. In that regard Section 65 also would not come to her rescue, for this is a case where the doctrine of pari delicto would apply in full force. Doctrine of Pari Delicto is the embodiment of the principle that the courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud.
As per Blacks' law dictionary (fifth edition), the maxim -pari delicto portior est condition possidentis (defendantis)-means:
In a case of equal or mutual fault [between two parties] the condition of the party in possession [or defending] is the better one. Where each party is equally in fault, the law favors him who is actually in possession. Where the fault is mutual, the law will leave the case as it finds it.
In Herbert Broom's "A Selection of Legal Maxims" (10th edition) the maxim is explained as follows:
The maxim, in pari delicto portior est condition possidentis, is as thoroughly settled as any proposition of law can be. It is a maxim of law, established, not for the benefit of plaintiffs or defendants, but is founded on the principles of public policy, which will not assist a plaintiff who has Sunita Chaudhary Vs. Vikramjit @ Vicky 25 of 28 paid over money, or handed over property, in pursuance of an illegal or immoral contract, to recover it back; 'for the Courts will not assist an illegal transaction in any respect'. The maxim is therefore, intimately connected with the more comprehensive rule of our law, ex turpi causa non oritur actio, on account of which no court will "allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal"; and the maxim may be said to be a branch of that comprehensive rule: for the well- established test, for determining whether the money or property which has been parted with in connection with an illegal transaction can be recovered in a Court of justice, is to ascertain whether the plaintiff, in support of his case, or as part of his cause of action, necessarily relies upon the illegal transaction: if he "requires aid from the illegal transaction to establish his case, " the Court will not entertain his claim.
In my opinion, this is a case where the court shall not lend its aid to the complainant, who is a person who has based her cause of action on an act that constitutes a transgression of law. Both the parties in this case are equally complicit in their attempt to hoodwink the law by indulging in the committee business of unaccounted wealth. Here none of the parties is a victim of exploitation and both parties have voluntarily and by their free will joined hands to flout the law for their mutual gain. It is manifest that the role of the accused is not beyond reproach either, as he has willingly participated in the committee transaction or may be even defaulted (without expressing anything on merits), but in such a situation where the parties are hand in glove in illegality, the law leaves them were they are and does not allow its portals to be tainted with their illegal claims. A message needs to be sent loud and clear to the effect that may you indulge in such illegality, you do so at your own peril, and courts would not have anything to do with such a tainted claim. The arrangement in question is clearly a chit fund as we have demonstrated above. It is clear that all of this was being criminally run sans any registration or sanction, and without compliance to even a single statutory regulation. All this, puts the money of Sunita Chaudhary Vs. Vikramjit @ Vicky 26 of 28 an investor/subscriber/member at great peril. There is no investor security and there is always the risk of the so called managers of these schemes running away with hard earned money of members. Conversely in absence of a legal chit agreement, the bona fide subscribers may also stand to suffer due to a bad egg (member) entering the scheme and defaulting on payments thereby causing loss to all.
13. In this case if the agreement to pay subscription, to what is clearly an illegally run chit fund, is upheld, that would set a dangerous precedent and thereby incentivize the running of such schemes which are of course fraught with attendant risks as highlighted above and defeat the salutary policy behind the Chit Funds Act.
I hasten to add that apart from offering absolutely no investor protection. Such non regulated finance pooling schemes, often degenerate into Ponzi schemes thereby causing immense monetary loss to the naive public as apparent from flood of such cases in the past. This also renders all the money involved beyond the pale of tax authorities and thereby exacerbates the problem of black money. All this unaccounted wealth then becomes part of a parallel underground black economy. This non taxed money may then be laundered for criminal purposes and also deprives the country of a useful source of revenue, so imperative for the developmental needs of a country such as ours, which has the mandate of wiping every tear from every eye by ensuring equitable growth and socio-economic welfare measures for the least privileged by wealth re-distribution and progressive taxation. This is the larger social context in which the present order is being passed. The Chit Funds Act has been seldom invoked, the law sleeps while illegal chit funds like the present one flourish. Not anymore.
Coming back, to sum up the cogitation above, the cheques in question, cannot be said to have been issued in discharge of a legal liability, therefore the proceedings against the accused are hereby dropped. Bail bonds stand discharged. Documents, if any, of surety be released after cancellation of endorsements.
Before parting - the court would be failing in its duty to uphold the rule of Sunita Chaudhary Vs. Vikramjit @ Vicky 27 of 28 law, if the criminality in this case is allowed to go unmet. I therefore direct the SHO PS Karol Bagh that an FIR be registered u/s 76 of the Chit Funds Act, 1982 (read with sections 4,5,8,9,11,13,14,20,22,24,30,31,33 etc of the Act) for running of chit business in stark contravention to the provisions of the Act. The role of the complainant Sunita Chaudhary, her associates be investigated. Let the accused Vikramjit's role be also probed.
Let a copy of this order be sent forthwith to the SHO, PS Karol Bagh, for compliance, who shall file an Action taken report within a fortnight.
Renotify for compliance now on 24.11.2014.
(BHARAT CHUGH) MM-(NI Act)-Central-01/THC/Delhi 28.10.2014 Sunita Chaudhary Vs. Vikramjit @ Vicky 28 of 28