Sunita Chaudhary Vs. Rakesh Bakolia.

CC No.: 7121/13, 7123/12, 7125/12 & 7126/13.

28.10.2014
At 3.32 pm
Present:

None for the Complainant.

Accused with Ld. Proxy Counsel.
ORDER

1. These are four complaint cases u/s 138 of the N.I.Act filed by a common
complainant Sunita Chaudhary against Rakesh Bakolia [hereinafter
Accused] with respect to 11 cheques, spread over four separate complaints.
Cognizance in all the four cases was taken by my Ld.Predecessor, who was
pleased to summon 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
matters are currently pending at the stage of Section 251 of the Cr.P.C i.e for
framing of notice and have 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 complainants 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 various 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. Rakesh Bakolia

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Group A
Value of Group
No. of Members
Duration/Period
Monthly Installments
No. of Share

Rs. 30,00,000/15
Oct.2010 to Dec.2011
Rs.2,00,000/- x 15
One

Rs. 30,00,000/15
Dec, 2010 to Feb.2012
Rs.2,00,000/- x 15
One

Rs. 24,00,000/15
January, 2011 to March, 2012
Rs.1,60,000/- x 15
One

Rs. 30,00,000/15
April 2011 to June 2012
Rs.2,00,000/- x 15
Two

Rs. 21,00,000/15
June. 2011 to August, 2012
Rs.1,40,000/- x 15
Two

Group B
Value of Group
No. of Members
Duration/Period
Monthly Installments
No. of Share
Group C
Value of Group
No. of Members
Duration/Period
Monthly Installments
No. of Share
Group D
Value of Group
No. of Members
Duration/Period
Monthly Installments
No. of Share
Group E
Value of Group
No. of Members
Duration/Period
Monthly Installments
No. of Share

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
Sunita Chaudhary Vs. Rakesh Bakolia

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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
groups and handed over post dated cheque(s) to the complainant to ensure
the remaining payments which was due towards the Accuseds shares. 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.1,08,00,000/- (Rupees One Crore Eight Lacs
only), in discharge of which the accused is stated to have given 11post dated
cheques to the complainant (details in table 1.2), which on presentation got
dishonored, leading to the service of legal notice, which when remained
unheeded, constrained the complainant to file the present set of cases.
Table 1.2 Details of Cheques
Case No.
7121/12
7121/12
7121/12
7123/12
7123/12
7123/12
7125/12
7125/12
7125/12

Cheque
No.
236833
236834
236835
236826
236827
236829
236830
236831
236832

Sunita Chaudhary Vs. Rakesh Bakolia

Date

Amount

18.08.2012
18.08.2012
18.08.2012
18.08.2012
18.08.2012
18.08.2012
18.08.2012
18.08.2012
18.08.2012

2,00,000/2,00,000/2,00,000/2,00,000/2,00,000/2,00,000/2,00,000/2,00,000/2,00,000/3 of 28

7126/12
7126/12

117761
117762

10.08.2012
10.08.2012

45,00,000/45,00,000/-

This, in a nutshell, is the complainants 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 complainants 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
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

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is a penal offence for which the complainant is liable. To further this

argument, reliance has been placed on the case of G.Pankajlakshmi
Amma&Ors. V. Mathai Mathew V(2005) SLT 599, to argue that
No Court shall come to the aid of a party to an illegal transaction.
Ld. Counsel for the Accused has argued with great vehemence that
the court should not come to the aid of a partys attempt to recover
unaccounted wealth.
3.2

The accused has alternatively argued that even if the complainants

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.

4. The Complainant, desperate to sustain her complaint, per contra, has

challenged the accuseds 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
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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 Honble 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
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
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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
Honble 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 complainants 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

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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
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 Honble Supreme Court in Adalat
Prasad (supra). This has been clarified by the Honble 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. Rooplal 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
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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 Honble 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
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 Courts decision in Adalat Prasad Vs. Rooplal 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 is 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 over come. 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

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arrangement which is nothing but - an out and out chit fund.

Let us see how.
7.1. What is a Chit Fund.
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
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auction or by tender or in such other

manner as may be specified in the chit
agreement, be entitled to the prize
amount".

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 foremanthe company or person conducting the
chittybrings 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 complainants 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 complainants so called
finance pooling/committee is nothing but a chit fund.
In this case (in Group A)- accused Rakesh Bakolia 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 was15 months with each member contributing an installment
Sunita Chaudhary Vs. Rakesh Bakolia

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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 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
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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
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 peoples 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
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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
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 investors 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 weve 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.

Sunita Chaudhary Vs. Rakesh Bakolia

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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
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

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(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,
and, subject to the provisions of subsection (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
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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.
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.
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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.
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 the warning sign for a potential

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member to be beware and act with caution.

This again has been observed in its breach in the present case as the
complainants concern operated under the name and style of M/s Padma
Associates and conspicuously fails to mention chit fund, chitty etc in its 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
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 complainants 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
complainants proprietorship firm, to which no satisfactory reply was forthcoming.
The complainant also remained equivocal. The main plank of the complainants 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

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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 subsection(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. Wed
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
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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
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;

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 complainants 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, action the supposition
that it does not exist. Simply put, the accused has to establish a fairly plausible
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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
complainants 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
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

Explanation:- For the purpose of this

section, "debt or other liability" means a
legally enforceable debt or other
liability.
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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 :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 ?

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To my understanding the answer is a clear and resounding yes. As weve 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
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 whena 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
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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
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
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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
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 wellestablished 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
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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
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
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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
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 the
chit business in stark contravention to the provisions of the Act, and the role of the
complainant Sunita Chaudhary, her associates, and also the accused Rakesh Bakolia
be probed and investigated.
Let a copy of this order be sent forthwith to the SHO, PS Karol Bagh forthwith, who
shall file an Action taken report within a fortnight.
Renotify for compliance on 24.11.2014.
(BHARAT CHUGH)
MM-(NI Act)-Central-01/THC/Delhi
28.10.2014

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