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What is Appropriation of Payment?

Appropriation of Payment – Means Allocation or Allotment of payments. 

Introduction:

When a debtor owes a certain amount of money to the creditor but the payment which debtor has made is not sufficient as per the amount, then under sections 59, 60, and 61 of the Indian Contract Act, 1872, a creditor can take a note of that so that the creditor can receive the appropriate amount of money which he has lent to the debtor. if both the parties are not able to specify the appropriation then the charge and the responsibility can be taken by the law to appropriate them.

Classification of appropriation of payment : 

Appropriation by the debtor (Section – 59)

Appropriation by a debtor is defined under section 59 of the Indian Contract Act, which specifies when the debtor lends various debts from the same creditor and then repays it by requesting the creditor to apply this specific payment to a particular debt and if the creditor accepts it then he is called to be obligated for their appropriation.

This is applied where there are various debts and not a single Debt. The primary right of the debtors is the appropriation of payment which is made for his benefit. The creditor has a duty or responsibility to listen to a debtor who expressly intimates at the time of actual payment and towards the discharge of a particular debt.

The payment must be applied towards the discharge of a particular debt. If the debtor does not express any intimation then the circumstances for the appropriation of payment will be looked at by the law itself.

  • When a debtor lends various and distinct amounts of money from the creditor then section 59 of the Indian Contract Act is been applied. But if there is only single debt then section 59 wouldn’t be applied even if it is to be in installments.

Clayton’s case 

Appropriation by the debtor is considered the most important and basic rule in England. Since the case of Devayman Vs Nobel, which is also called Clayton’s case. In this case, it was held that the Debtor can ask the creditor to appropriate the money which he has given to any of his debts if he owes to the Creditor various debts, the creditor is then bound to listen to him and agrees with him.

  • The debtor must announce all the payments of the debt to the creditor that the certain amount which he has paid was the amount paid for the liquidation of that specific debt. If the creditor doesn’t find it right or doesn’t want to accept it, then the creditor has all the right to refuse so. But once the creditor has accepted, the creditor cannot alter the terms later. 
  • It is a responsibility of a debtor to give an appropriate intention that why the debtor wants appropriation in a specific manner he wanted and then also have to prove it.
  • Only the debtor is provided with the right of appropriation. It is not provided to surety though they are bound to the creditor’s appropriation. The surety cannot insist on the appropriation of any payment related to guaranteed debt unless asked so.
  • A owes two different debts of rupees 2000 and 3000. it will be assumed automatically that the payment of later debt is revealed from the amount of the second debt. 
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Appropriation by the creditor ( Section—60) 

 under the appropriation of creditor, the creditor is also capable of appropriation.  Section 60 specifies that If the debtor repays any payment without any appropriation specified then the creditor can decide or use his power to wipe out any debt of his which is due either which has a lower interest or can use it in payment of time-barred debt.

In such cases, creditors have given the various scope of using their rights which can help him in his profit and advantage. So as long as there is no notice given by the debtor for Appropriation the creditor can change it. The creditor owns a right of discretion to any debt which is lawful and Due and is payable to him from the debtor.

It is mostly in cases when the debtor doesn’t exercise their rights or intimate where the circumstances attending to the payment do not indicate any intentions.

  • This section specifies that if the debt is unlawful then also the appropriation cannot be made against it. The existence of a lawful debt must be there for the creditor.
  • Under limitation act 1963, in the absence of Appropriation of the debtor, the creditor can appropriate the amount of Barred debt. It mostly happens when the creditor 
  • appropriately time-barred debt to the amount and for the amount which is not barred. A creditor can sue the debtor for that.
  • Under this law, Even if the principal and interest have been acquired on a debt then when the sum is paid interest will be accrued and it must be applied to the interest first. It is beneficial for the creditors to which he would be entitled under his contract.
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In the case Jia ram vs. Sulakhan Mal (AIR 1941 Lahore 386) it was held that under this case the principal, as well as interest, will both be applicable.

  • M owes N three different loans : 

Rs 2000 taken on 1st April

Rs 5000 taken on 1st May

Rs 6000 taken on 1st July

If he pays rupees 4000, the payment should be appropriate towards the first and second loans in full and the rest of the money will be given towards the third one.

Appropriation by law (Section —61)

Under this section neither of the party appropriate. It is applied when none of the parties make the appropriation then according to the rules, it will be according to the order of time in which the debt which has been taken first will be winded up or discharged first whether it is time-barred or not. And in the case of Debt of all time, the discharge of debt will be in proportionate agreement.

Case : Kundan lal vs. Jagannath, 1915

Equivalent Citation : (1915) ILR 37 AII 649

FACTS: This was the case of a money bond where the defendant pleaded for the payment. The defendant made a payment by check where there was no appropriation of payment made by the plaintiff and accordingly the payment should be credited to the debtor which has been made earliest but due by the defendant to the plaintiff which was the bond sued on.

Held: The court decided on the assumption that neither of the party has made any appropriation. The court held that under sections 60 and 61 of the Indian contract act, whether the debtor is allowed to intimate or not, there are no circumstances that indicate to wish the Debt of payment which is to be applied.

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The creditor can apply with their own to any lawful debt which is due and payable to the debtor. Also, When none of the parties make any appropriation the payment shall be made in just discharge of the debt in order of time.

Conclusion 

In this article, it is explained how the debtor under the appropriation of a contract has the first and foremost right to intimate at the time of appropriation of debt and if he fails then automatically all the rights and powers are been passed on to the creditor where credit can use his appropriation right and adjust according to his benefits.

But if both the creditor and debtor fail to exercise their right of appropriation then the appropriation is done by the law itself and will be done accordingly to order in time.  And if there is a case of equal standing, then it will be distributed in equal proportionate.

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