Appropriation of Payments :
Where a person [Debtor] owes a number of debts to another person [Creditor], and when he releases certain payments, then the question arises as to how to adjust the receipt against so many dues. This issue is considered and answered in Sections 59, 60 and 61 of the Act under the heading ‘Appropriation of payments’.
(i) Application of payment where debt to be discharged is indicated: In term of section 59 of the Act “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”.
Where a debtor owes a number of debts and he pays an amount with express or implied instructions towards appropriation, the debtor is at will to appropriate to any debt and the creditor is bound by it. This is set out in the Latin Maxim of “quicquid sovitur, sovit sectionundum modum solventis” meaning that whatever is paid, is paid according to intention or manner of party paying. The right of debtor to decide the appropriation is also known as decision in Clayton’s case.
What is the position if the debtor does not expressly state the method of appropriation? Then we have to go by the circumstances of the case. For example a debtor who owes among other debts ` 2000/- to a creditor and pays ` 2000/- on a given day when the debt of ` 2000/- falls due, then the amount must be accordingly applied and the debt be discharged accordingly.
(ii) Application of payment where debt to be discharged is not indicated: “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 from 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”.
From the above it can be seen that the creditor enjoys the right to appropriate even to a debt which is barred by limitation.
It was held by Lord Macnaughten in Cory Bros. & Co. vs. Owner of the Mecca (1817) A.C.286 & 293, that if the debtor does not make any appropriation, at the time of payment, the right devolves on the creditor. Creditors have a right to decide till the very last moment. The above decision was followed in a number of important cases including in the famous case of Vinkatadri Appa Rao vs Parthasarthi Appa Rao [(1921) L.R. 48. I.A. 150; 44 Mad 570 and 573.. In the said case it was held that creditor can decide at his discretion on the appropriation of payment towards any lawful debt even if barred by limitation. If there is any debt carrying interest and if there are no express or implied instructions the amount paid should be appropriated towards payment of interest and then to capital.
(iii) Application of payment when neither party appropriates: In terms of section 61 of the Act, where neither party appropriates-
(a) the payment shall be applied in discharge of debts in order of time, and
(b) if the debts are of equal standing the payment shall be applied in discharge of each proportionately.
The above appropriation takes place whether or not the debt is barred by limitation.
For example where there are two debts one ` 500/- and another ` 700/- falling due on the same day, and if the debtor pays ` 600/- the appropriation shall be prorata of ` 250/- and ` 350/- for the two debts.