Appropriation of Payments.
When a debtor, who owes several debts to the same creditor, makes a payment which is not sufficient to satisfy all the debts or complete indebtedness, the question arises as to which of the debts, the payment is to be applied, or the payment is to be appropriated to which of the debts Sections 59 to 61 of the Indian Contract Act lays down the rules. These rules are as to against which debt the payment is to be adjusted or appropriated may be discussed under the following heads:
1. Where the debt to be discharged is indicated by the debtor (Sec. 59): As a matter of fact, the appropriation is the right given to the debtor for his benefit. He has the right to instruct his creditor to which particular debt the money paid is to be adjusted. And if the creditor accepts the payment, he is bound by the instructions of the debtor. Thus, where the debtor has stated that the payment made by him should be adjusted against a particular debt. the creditor must do so if he accepts the payment. And if there is no express intimation by the debtor, the law will gather his intention from the circumstances regarding the payment, e.g. if the amount paid by the debtor is the exact amount of one of the debts, it must be used to discharge that particular debt.
Illustrations : ('A' owed to 'B' Rs. 1,000/-, upon a promissory note which falls due on 1st June. 'A' also owed to 'B' two other debts of Rs. 2,000 and Rs. 5,000/-. On 1st June, 'A' paid to 'B' Rs. 1,000/-. In this case the payment is to be adjusted against the debt due on promissory note only. (i) 'A' owed to 'B', among other debts, a sum of Rs. 2500/-, 'A' sent Rs. 2500/- to 'B' with the instructions that this amount was to be adjusted against the debt of Rs 2500/-. In this case, the payment is to be applied to discharge this debt of Rs. 2500/-.
2. Where the debt to be discharged is not indicated by the debtor (Sec. 60) : Sometimes, the debtor makes payment without any indication about the appropriation of the payment. In such cases. the creditor may adjust the payment according to his discertion. The creditor would like to adjust the payment against a debt which is not likely to be recovered. But he may adjust the payment only against the legal debts and not against the illegal or disputed debts. However, the creditor may also adjust the payment against the debts which are time barred. Thus, the debtor makes the payment without any instructions about its appropriation, the creditor is free to appropriate the payment towards any lawful debt which is actually due and payable to him.
The creditor may also adjust the payment against the debt which carries lesser interest. It may, however, be noted that the appropriation once made and communicated to the debtor is binding on the creditor, and cannot be subsequently altered by him to suit his convenience.
Illustration : A owed several debts to 'B'. Among these debts, one debt of Rs. 5,000/- is time barred (.e., the time limit for its recovery has expired). 'A' paid Rs. 10,000/- to 'B' without indicating against which debt the amount is to be adjusted. In this case, 'B' may adjust Rs 5,000/- against the time barred debt of Rs. 5,000/-, and then balance against any other debt which he likes.
3. Where neither party makes any appropriation (Section 61): Sometimes, the debtor does not expressly intimate anything about the appropriation of the payment, and the creditor also fails to make any appropriation. In such cases, the legal position is to wipe out the earlier debt in order of time irrespective of the fact that some of them are time barred. In nutshell, where the appropriation is not made by the debtor and the creditor, both, the payment shall be adjusted in discharging the earlier debts in order of time. And if there are several debts of the same date, the payment is to be adjusted against each debt proportionately.
Illustration: A owed three debts of Rs. 2,000/-, Rs. 4,000/ and Rs. 6,000/- to 'B' which were due on 31st March, 2001, 31st December, 2003, and 15th January, 2005. On 1st January, 2005 'A' paid Rs. 5,000/- to 'B'.
In this case Rs. 2,000/- shall be adjusted against the debt of Rs. 2,000/- (due on 31st March, 2001) and the balance of Rs. 3,000/- shall be appropriated against the debt of Rs. 4,000/- (due on 31.12.2003). As such the debt of Rs. 4,000/- shall be treated as discharged to the extent of Rs. 3,000/- and the residue Rs. 1,000/- will remain outstanding.
4. Where the debt and interest, both are outstanding : Sometimes, the debtor makes part payment without stating whether it is towards interest or principal. In such cases, the general rule is that the payment received should first be adjusted towards interest and the balance be appropriated towards the principal amount In short, we can put the rules for appropriation of payment as under:
(1) Where the debtor has indicated the debt against which the payment is to be adjusted, the creditor is bound by such instructions if he accepts the payment.
(2) Where the debtor does not make any indication about appropriation of payment, the creditor may adjust the payment according to his own discretion and his suitability.
(3) Where neither the debtor nor creditor make any appropriation, the law allows the adjustment of debts in accordance with the time.
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