Appropriation of payment
Introduction
When a debtor takes several loans from the creditor and returns the payment which is less than the whole amount then the question arises which is known as appropriation of payment. When once made, the appropriation cannot be changed. Section 59,60 & 61 of the contract act 1872 provides the rules for the appropriation of the payment in case when debtor takes loan and when return the payment to his creditor. When a debtor gives the payment to his creditor, he has the right to indicate this payment to any particular debt which he has taken, and it is a duty of creditor to discharge the payment accordingly.
Definition of Appropriation of payment
When a debtor returns the money to his creditor and instructs his creditor that from which debt, the payment to be discharged, it is called appropriation of payment. And according to law, creditor is bound to discharge the payment accordingly
Meaning of Creditor
A creditor is a person or enterprise that gives money to another person or party
Meaning of debtor
A debtor is a person or enterprise that have a loan from any other person or party
Rules of appropriation of payment
Following are the rules of appropriation of payment. Details are as under
Appropriation by debtor
First rule of appropriation of the payment is laid down in sec 59 of contract act 1872 and it gives the right to debtor about the appropriation of the payment
According to section 59.
Each debtor who takes several debts from a single creditor, he has the right to instruct his creditor that payment to be discharged from particular debt, and it is a duty of the creditor to discharge the payment accordingly. The creditor has to follow the debtor’s instruction.
Application of rule
This rule of appropriation of payment applies upon where are several debts and it not applies upon a single debt which is payable by the installments
Example
A gives to B three different debts of 20,000, 30,000 and 50,000. And B returns 50,000 to A and instructs that the payment should be discharged against the first two debts (20,000 & 30,000). A is bound to discharge the payment from first two debts
Indirect appropriation by debtor
Each debtor who takes several debts from a single creditor and debtor makes a payment to his creditor without any expressed instructions from which debt payment to be discharged. In such case it is duty of creditor to discharge the payment from the debt which is intended by the debtor
Example
When the debtor gives an amount of 800 to the creditor and there is no similar amount pending from the debtor. It is the duty of the creditor to clear the payment of a particular debt because his intention is to clear particular debt. Such appropriation should be done by the creditor
Appropriation by creditor
Second rule of appropriation of the payment is laid down in sec 60 of contract act 1872 and it gives the right to creditor about the appropriation of the payment
According to sec 60.
If the debtor does not give any direct or indirect instruction about the appropriation of the payment to the creditor. The creditor has the right to discharge the payment on his own discretion from any debt. He can discharge the received amount from any lawful debts but he cannot discharge the payment from unlawful debts
Example
A has several loans from B. One of them R.s 2 Lac is time barred. A sent R.s 4 Lac to B without instruction from which debt payment to be discharged. B may discharge the amount R.s 2 Lac against the time barred debt.
Appropriation by law
Third rule of appropriation of the payment is laid down in sec 61 of contract act 1872. Details are as under.
According to the sec 61
When the debtor does not instruct expressly or impliedly to his creditor, and the creditor does not discharge the payment on his own discretion then sec 61 would apply. In such
cases, the payment by the debtor will be discharged towards the debts in order to the time. In sec 61 this method of appropriation of the payment applies as per rule of law
Application
This rule of appropriation of the payment applies when no party makes any appropriation. In this situation the law gets the right to appropriate the payment
Example
A have two loans of R.s 4 lac each which are time barred and another loan of R.s 8 Lac. A sends R.s 4 Lac and no party makes any appropriation of R.s 4 Lac. In this case it would automatically be discharged from the payment of time barred
When principal and interest both are due?
If a payment has been made without expressly stating that it is towards interest or principal, payment must be discharged from interest first, and then from the principal
It is emphasized by law that if the creditor accepts the payment, he must follow the above rules of appropriation; otherwise he must refuse to accept the payment.
Conclusion
Under the contract act 1872 in which sec 59,60 & 61 deals with the rules of appropriation of the payment . There are certain conditions for debtors and creditors which legally bind them to follow these rules. Section 59 give authority to debtor while sec 60 gives authority to creditor according to these rules both of debtor and creditor can exercise their rights according to the law. Section 61 which empowers the law to use his own discretion when there is no express or implied instructions from both the parties in such case law has right to the appropriation of the payment . All rules apply then a number of debts have been taken from creditor and in case of single debt taken by creditor , these rules not apply in such conditions