Appropriation of Payments

Appropriation means ‘application’ of payments. In case of a creditor and a debtor, Section 59 to 61 lay down certain rules regarding the appropriation of payments. When a debtor pays an amount to the creditor, the creditor is to take note of these sections before applying the payment to a particular debt, because the creditor would be inclined to appropriate the payments to the debt which is not likely to be realized easily.

Sections 59 to 61, of the Contract Act, embody the general rules as to appropriation of payments in cases where debtor owes several distinct debts to one person and voluntarily makes payments to him.

It was observed that “When money is paid, it is applied according to the express will of the payer and not the receiver. If the party to whom the money is offered does not agree to apply it according to the express will of the party offering it, he must refuse it and stand upon the rights which the law gives him.

Appropriation is therefore, a primary right of a debtor. Appropriation rules apply only in case of several and distinct debts and do not apply where there is only one debt, though payable by installments.

Sections 59 to 61 lay down three rules regarding appropriation of payments based on English law laid down that when a debtor makes a payment he may appropriate it to any debt he pleases and the creditor must apply it accordingly.

Rules:
Where payment of debt to be discharged is indicated: (Sec.59)

Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment if accepted, must be applied accordingly.

Illustrations:
(a) A owes B, among other debts, Rs.1,000 upon a promissory note which falls due on 1st June. He owes B no other debt of that amount. On the 1st of June A pays to B Rs.1,000. The payment is to be applied to the discharge of the promissory note.
(b) A owes B, among other debts a sum of Rs.567. B writes to A and demands payment of this sum. A sends B Rs.567. This payment is to be applied to the discharge of the debt which B had demanded.

Debtor may express his intentions expressly or impliedly under the circumstances. If there is no express intimation by the debtor, but from the circumstances, it is implied that the debtor intended appropriation to a particular debt, the debtor’s intentions must be followed, if the money is accepted.

The Court should, in the absence of any appropriation by the debtor or creditor, direct that the payment should be applied in discharge of the debts, in order of time if there be such, and if they are all of the same date, in discharge of each of such debts proportionately.

Where payment of debt to be discharged is not indicated: (Sec.60)

Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him by the debtor whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.

If a debtor does not exercise his right, the creditor has the right to appropriate the payment to any lawful debt though barred by the law of limitation. In case where there is a running account, the payment can be appropriated to any debt. It is a settled law that a creditor is entitled to adjust the debts from any security in the creditor’s custody. The time barred debt remains a debt even if the remedy to recover it is barred.

Where the debtor does not intimate and the creditor fails to appropriate: (Sec.61)

Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.

To summarize, the debtor has the first right to intimate appropriation of a debt at the time of payment if he fails to exercise his right, this right than devolves on the creditor and if the creditor also fails to exercise his right the appropriation will be done in order of time. In case of debts of equal standing, each will be appropriated proportionately.