P. Krishna Kumar. J

1. 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 ₹10,00,000/-, and on 17.03.2011 he availed a loan of ₹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 ₹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 ₹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 the prize money, becomes a debtor to the foreman has vexed this Court on numerous occasions. In one among those instances, a Full Bench of this Court in P.K. Achuthan and Another v. State Bank of Travancore, Calicut (1974 KLT 806) held that the prized chit amount becomes a debt due on the date of executing the bond and the debtor is thereby allowed to pay it by installments. The said decision was overruled by the larger Bench in Janardhana Mallan & Others v. Gangadharan & Others (1983 KLT 197). It is held by the larger bench that even when a prized subscriber in a chitty receives the prize money and executes a bond to secure the payment of future subscriptions in accordance with the obligations under the contract embodied in the chit variola, he would not become a debtor to the foreman. Following this decision, the trial court dismissed the present suit holding that since there is no debtor-creditor relationship, no mortgage is possible in a chit transaction.

10. However, the Apex Court, in Oriental Kuries Ltd. (M/s) rep. by its Chairman P.D. Jose v. Lissa and others [2019 (19) SCC 732], considered this aspect in detail and held that the chit subscriber at the time of prizing a chit, incurs a debt which he is liable to pay in installments. The Court held thus:

                  “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 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 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, “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, 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 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 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. 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 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.