Question based Jain MBA BL Assignment Solution and other course
Answer:
When a debtor, owing several distinct debt to any one person makes payment of these debts to the creditor, how the payment so received may be appropriated against which particular debt, is called appropriation of payments. In other words Appropriation means application of payments; the question of appropriation of payments arises when a debtor owes several debts to the same creditor and makes a payment that is not sufficient to discharge the whole in debtless.
Illustration: Gunn & Company owes to Shyam Ji & Sons, three debts of Rs. 10,000, Rs. 15,000 & Rs. 25,000. Determination, as to against which debt payment of Rs. 35,000 by Gunn & Company may be appropriated, whether, Rs. 10,000 for first loan, Rs. 15,000 for second loan and remaining Rs. 10,000 for the third debt or the entire amount for the third debtor, is called appropriation of payments.
The general rule regarding appropriation of payments is that when a debtor makes payments to the creditor, its appropriation may be made, only according to the wishes of the debtor, and not of the creditor. Sections 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 (Sec 59): 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 (Sec 59): 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.
- Appropriation at the Discretion of the Creditor (Sec 60): Sometimes, neither the debtor sends express instructions nor the circumstances imply as to which debt the payment is to be applied. In such a case, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor. It makes no difference whether the recovery of the debt is or is not barred by the law of limitations. The creditor cannot, however, apply the payment to a disputed or unlawful debt, but he may apply it to a debt which is barred by the law of limitation.
Illustration: In this regard, the case, Syndicate Bank V/s M/s West Bengal Cement Ltd, 1989 is worth mention.
In this case, the plaintiff bank had granted overdraft facility of Rs. Ten Lakhs to the respondent, for which the respondent had submitted a promissory note. Every third month, interest was booked on the amount of overdraft and it was added to the principal amount. The respondent paid several installments to the bank for paying this amount. But, did not intimate to the bank, for which debt, this payment was being made. The court, in its judgment held that the respondent cannot compel the bank to appropriate these installments, against the principal amount of the loan.
- Application of Payment Where Neither Party Appropriates (Sec 61): 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.
- First interest then principle
- Director of payer not receiver.
- Right primary of the debtor
Whatever is paid, paid according to the intention of paying it Example: A owes B, the following debts:
A sends Rs. 1,500 in the month of June. He neither expressly intimates nor circumstance of the case imply as to which debt the amount is to be applied. Moreover, B also does not appropriate the payment at his own discretion. Therefore, the payment will be appropriated in order of time. However, here in this case two debts are of equal standing. The payment will, therefore, be appropriated in order of time but to all equal standing debts. In this case, Rs.1,500 will be appropriated towards the first two debts of equal standing proportionately, i.e. in the ratio of 2:1.
- In Case Interest is Also Due: If interest is also due to be paid, along with debt, the amount paid will be appropriated first for payment of interest and the remaining amount, if any, will be appropriated against the principal amount.
- In Case of Current Account: In case of current account, payment will be appropriated, in the order of time, according to the provision of Section 61 of Indian Contract Act. In other words, in current account, first debit entry is offset against first credit entry.
- In Case of Payment Received in Demand for Various Debts: Sometimes, creditor’s makes a demand for payment of various debts due from the debtor and the debtor pays a part of the amount due. In such a case, the payment will be appropriated to the each debt due proportionately.
- In case of Appropriation of Trust Fund: Sometimes, a man keeps one bank account and makes a series of deposits and withdrawals in it of his own money as well as the money of which he is a trustee. Firstly the withdrawals are of his money and withdrawals thereafter are of the trust. Similarly, when money will be deposited in the account, it will be presumed that firstly, the deposit is of the trust and only thereafter the deposit is of the individual, irrespective of any order of depositing or withdrawing the money. This system is based on the principle of public interest, Justice and the security of the assets of the public institutions.
