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contract_laws:part-1:appropriation-of-payments

Appropriation of Payments

Appropriation means application of payments. The question of appropriation of payments arises when a debtor owes several debts to the same creditor and make a payment that is not sufficient to discharge the whole indebtness.

  • When a creditor, to whom a debtor owes several distinct debts, receives a payment from the debtor with express or implied instructions that it must be applied to discharge a particular debt, and the creditor accepts the payment, the creditor must discharge that specified debt.
  • Where the debtor has not given express instructions, nor are there circumstances from which his intimation can be implied, the creditor may apply the amount received to any debt lawfully due from the debtor including any time-barred debts.
  • If neither party makes any appropriation, the payment must be applied in order of time, that is, the earlier debt, including a time-barred debt, is to be discharged first, and if both are of equal standing, the payment must be applied proportionately.

Appropriation of Payments

Sometimes, a debtor owes several distinct debts to the same creditor and he makes a payment which is insufficient to satisfy all the debts. In such a case, a question arises as to which particular debt the payment is to be appropriated. Section 59 to 61 of the Act lay down following rules as to appropriation of payments which provide an answer to this question.

Appropriation as per express instructions

Every debtor who owes several debts to a creditor has a right to instruct his creditor to which particular debt, the payment is to be appropriated or adjusted. Therefore, where the debtor expressly states that the payment is to be applied to the discharge of a particular debt, the payment must be applied accordingly.

Example : A owes B three distinct debts of Rs.2,000, 3,000 and 5,000. A sends Rs.5,000 and instructs B that the payment should be appropriated against the third debt. He is bound to appropriate the payment against the third debt only

Application of payment where debt to be discharge is not indicated

If section 60 is attracted, the creditor shall have the discretion to apply such payment for any lawful debt which is due to him from the person making the payment.

Example: A owes to B, among other debts, the sum of Rs.520. B writes to A and demands payment of this sum. A sends to B Rs.520. This payment is to be applied to the discharge of the debt of which B had demanded payment.

Application of payment where neither party appropriates

The payment shall be applied in discharge of the debts in order of time whether they are or are not based by the limitation Act 1963, if the debt are of equal standing (i.e. payable on the same date) the payment shall be applied in discharge of each of these debt proportionately.

Appropriation of Interest

As between the principal of a single debt and its interest, if both principal and interest are due, the usual presumption is that the amount received is to be applied to the interest first.

Payment under Orders of Court

A decree of a civil court which orders the payment of money consists of a single debt consisting of the principal amount awarded, interest and costs. Therefore, the rule regarding appropriation of payments which applies to several distinct debts, does not apply. In the case of such a decree of court, the amount paid shall be applied as stipulated in the decree. If the decree does not contain any direction, any payment made must be applied first to interest and costs, and then to the principal. If a decree provides for the payment of the amount decreed in instalments, money received must be applied to the instalments as due. If no default has occurred in an instalment decree with a default clause, the direction relating to appropriation given by the judgment debtor has to be followed. If the debtor has not appropriated, the creditor can appropriate as he thinks fit.


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