Appropriation of Payments

Section 61, where neither party appropriates:

"Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably."

Broken down: the order of priority

First, the debtor, section 59

The debtor has the first right, and it is exercised at the time of payment, not afterwards. Two ways.

• Express intimation. He says which debt the money is for.
• Circumstances implying. He does not say, but the circumstances make it plain. Paying the exact amount of one particular debt is the classic case, and so is paying on the day one particular debt falls due.

The words "if accepted" matter. The creditor is not obliged to take a payment on the debtor's terms. He may refuse it. What he may not do is take the money and apply it elsewhere, and this is where problems are set: acceptance binds him to the debtor's direction.

Three requirements for section 59 to apply at all: several distinct debts, owed to one person, and a payment that does not discharge them all.

Second, the creditor, section 60

Where the debtor has said nothing and nothing implies a direction, the choice passes to the creditor, and it is a wide one.

• He may apply it to any lawful debt actually due and payable.
• He may apply it to a debt whose recovery is barred by limitation. This is the practical value of the section to a creditor.
• He may exercise the choice at any time before he brings a suit or otherwise commits himself.

Two limits. The debt must be lawful, so a payment cannot be appropriated to a claim under a void or illegal agreement; and it must be actually due and payable, so a debt not yet fallen due is not available.

Third, the law, section 61

Where neither party appropriates, the law does it, and the rule is mechanical.

• In order of time, that is the earliest debt first, whether or not barred by limitation. This is the statutory form of what English lawyers call the rule in Clayton's Case, under which payments into a running account are applied to the earliest items first.
• Debts of equal standing are discharged proportionably, that is rateably.

Interest before principal. Sections 59 to 61 speak of debts. Where a debt carries interest, the general rule applied by the courts is that a payment is applied first to interest and then to principal, unless the parties have agreed otherwise. That rule sits alongside these sections rather than in them.

A worked example

Ishita owes Jatin three separate debts: two lakh rupees lent in 2019, now time barred; three lakh rupees lent in 2022, secured by a pledge of her jewellery; and four lakh rupees lent in 2024, unsecured. She pays him three lakh rupees.

• She writes "this payment is towards the 2024 loan". Section 59: express intimation. If Jatin accepts the money, he must apply it accordingly. He may refuse the payment, but he cannot bank it and credit it elsewhere.
• She pays exactly three lakh rupees, the precise amount of the 2022 loan, and says nothing. Circumstances imply the direction under section 59, because the sum matches one debt exactly. The payment goes to the 2022 loan, and the pledge is discharged.
• She pays three lakh rupees and says nothing, and no circumstance points anywhere. Section 60: Jatin may choose, and he may apply it to the time barred 2019 debt, which is exactly what the section permits and what he will want to do, since he could never have sued for it.
• Neither of them appropriates and the question comes before a court. Section 61: in order of time. The 2019 debt of two lakh is discharged first, barred or not, and the remaining one lakh goes to the 2022 debt.
• Suppose the 2019 and 2022 debts were both incurred on the same day and were of equal standing. Section 61's second limb: the payment is applied to each proportionably.

What it does NOT mean

"The creditor always chooses." He chooses only where the debtor has not, expressly or by implication. The debtor has the first right.

"The debtor may direct the payment after he has made it." The direction must be made at the time of payment.

"A creditor who dislikes the debtor's direction may apply the money elsewhere." He may refuse the payment; he may not accept it and disregard the direction.

"A time barred debt cannot be paid off by appropriation." Both sections 60 and 61 say expressly that it can. Limitation bars the remedy, not the debt.

"Section 61 applies whenever there is a dispute." It applies only where neither party has appropriated.

"These sections decide how interest is treated." They speak of debts. The rule that payments go first to interest and then to principal comes from the general law and applies unless the parties agree otherwise.

Quick revision

• The order is debtor, then creditor, then the law.
• s.59: payment with express intimation or circumstances implying a particular debt must, if accepted, be applied accordingly. Requires several distinct debts to one person.
• "If accepted": the creditor may refuse the payment; he may not accept it and appropriate elsewhere.
• s.60: where the debtor has not intimated, the creditor may apply it at his discretion to any lawful debt actually due and payable, even one barred by limitation.
• s.61: where neither appropriates, apply in order of time, barred or not; debts of equal standing are discharged proportionably. The statutory rule in Clayton's Case.
• Interest first, then principal, unless otherwise agreed. That rule is outside these sections.

Test yourself

1. Set out the order of priority in appropriating payments. The debtor has the first right, under section 59, by express intimation or by circumstances implying a direction, and the creditor who accepts the payment must apply it accordingly. Failing that, the creditor may appropriate under section 60 to any lawful debt actually due and payable, including one barred by limitation. Failing both, section 61 applies the payment to the debts in order of time, and proportionably where they are of equal standing.

2. What is the effect of the words "if accepted" in section 59? They mean that the creditor is not obliged to take a payment on the debtor's terms and may refuse it. What he cannot do is accept the money and then apply it to a different debt: acceptance binds him to the appropriation the debtor directed.

3. May a payment be appropriated to a time barred debt? Yes. Sections 60 and 61 both provide expressly that appropriation may be made whether or not recovery of the debt is barred by the law of limitation, because limitation bars the remedy and does not extinguish the debt. It is often precisely what the creditor will choose to do under section 60.

4. What is the rule where neither party appropriates? Section 61 applies the payment in discharge of the debts in order of time, whether or not they are barred by limitation, and where the debts are of equal standing it applies the payment to each proportionably. This is the statutory form of the rule in Clayton's Case for running accounts.

5. A debtor pays exactly the amount of one of three debts and says nothing. Which debt is discharged? That one. Section 59 applies not only to an express intimation but also to a payment made under circumstances implying that it is to be applied to a particular debt, and paying the precise amount of one debt is the standard example of such circumstances. If the creditor accepts the payment he must apply it to that debt.