Appropriation of payments

In one minute

A debtor may owe a creditor several separate debts and pay less than the total. Appropriation decides which debt the payment clears. The debtor chooses first. If he does not, the creditor chooses. If neither does, the law applies the payment to the oldest debt first.

The choice matters because debts differ in interest, security and age. In exams, the three-step order of sections 59, 60 and 61 earns the marks. In real life it settles disputes over which invoice or loan a part-payment has cleared.

Exam focus

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Legal provision

Section 59: a debtor who owes several distinct debts to one person makes a payment with express intimation, or in circumstances implying, that it is for a particular debt. If the payment is accepted, it must be applied accordingly.
Section 60: if the debtor gives no such intimation and nothing else shows the debt, the creditor may apply the payment, at his discretion, to any lawful debt actually due and payable. The debt may be one barred by the law of limitation.
Section 61: if neither party appropriates, the payment is applied to the debts in order of time, whether or not they are barred by limitation. If the debts are of equal standing, it is applied to each proportionately.

Meaning and definition

Appropriation means applying a payment to a particular debt. It arises only when one debtor owes one creditor several separate debts and pays a sum that does not clear them all.

The law gives the first say to the debtor because the money is his. It gives the next say to the creditor because the debtor stayed silent. It fills the gap with a fixed rule, oldest debt first, so that no dispute is left open. The timeline shows the order.

Who decides where a payment goesHow to read this: read the boxes from left to right on a wide screen, or from top to bottom on a phone. Go to the next box only if the earlier step did not settle the matter.

When the debtor paysThe debtor says, or the circumstances show, which debt the money is for. The creditor must follow it if he accepts the payment (section 59).
If the debtor stays silentThe creditor may apply the payment to any lawful debt actually due and payable, even a time-barred one (section 60).
If neither appropriatesThe law applies the payment to the debts in order of time. Debts of equal standing share it in proportion (section 61).

Detailed explanation

Step 1: when appropriation arises

Three things must be present. One person owes the debts. They are to one creditor. They are several distinct debts, and the payment does not clear all of them. A single debt that carries interest is not a case of several debts. For that case, see the comparison below.

Step 2: the debtor's right (section 59)

The debtor may name the debt, in words or by the circumstances. A cheque marked for one invoice is an example. If the creditor accepts the payment, he must apply it as the debtor said. A creditor who does not agree with the direction should refuse the payment. He cannot take it and ignore the direction.

Example. Anita owes Bharat, among other debts, Rs 1,000 on a promissory note that falls due on 1 June. She owes him no other debt of that amount. On 1 June she pays him Rs 1,000. The payment clears the promissory note (section 59, illustration (a)). In a second case, Bharat writes to Anita demanding Rs 567 and she sends Rs 567. The payment clears the debt he demanded (illustration (b)).

Step 3: the creditor's right (section 60)

If the debtor is silent and nothing else shows the debt, the choice passes to the creditor. He may apply the payment to any lawful debt actually due and payable. It need not be the oldest. It may be a debt on which a suit is now barred by limitation. It cannot be a debt that is unlawful or not yet payable.

Example. Chandan owes a wholesaler Rs 20,000 on an invoice three years old and Rs 15,000 on last month's invoice. He pays Rs 15,000 and says nothing. The wholesaler may apply it to the old, time-barred invoice.

Step 4: the rule of time (section 61)

If neither party appropriates, the law applies the payment to the debts in the order in which they arose. Time-barred debts count. Debts of equal standing share the payment in proportion. This is close to the English rule in Clayton's Case (Devaynes v. Noble, 1816), where payments into a running account clear the earliest entries first.

Example. Deepa owes a supplier Rs 10,000 for January goods and Rs 10,000 for March goods. She pays Rs 10,000 and says nothing. The supplier makes no choice. The payment clears the January debt.

Who chooses at a glance

Section	Who chooses	Rule
59	The debtor	Express intimation, or circumstances implying the debt. The creditor must follow it if he accepts the payment
60	The creditor	Any lawful debt actually due and payable, even a time-barred one
61	The law	Order of time, even for barred debts. Equal debts are paid in proportion

Don't confuse: several debts and one debt with interest

Sections 59 to 61 deal with several distinct debts. A single debt with interest, costs and principal follows a different rule.

Point	Several distinct debts	One debt with interest
Governing rule	Sections 59 to 61	The ordinary rule: interest and costs first, then principal, unless the decree or agreement says otherwise
Who chooses	Debtor, then creditor, then the law	Neither. The rule applies unless the creditor agreed to a different course

Inside the idea. Eshwar owes a bank three separate loans. He pays Rs 50,000 and does not say which loan it is for. Sections 60 and 61 decide.

Just outside it. Eshwar owes the bank one loan of Rs 5 lakh with interest. He pays Rs 50,000. The payment goes first to the interest due, then to the principal.

Common mistakes

Applying section 61 first. The debtor's choice under section 59 comes first, then the creditor's under section 60.
Saying a creditor cannot apply a payment to a time-barred debt. Sections 60 and 61 allow it.
Using sections 59 to 61 for a single debt with interest. That case follows the interest-first rule.
Saying a creditor can accept a payment and ignore the debtor's direction. Under section 59 he must apply it as directed if he accepts it.

Apply it

Problem

Ramesh owes a wholesaler Rs 20,000 on an invoice three years old, now time-barred, and Rs 15,000 on last month's invoice. He pays Rs 15,000 without saying which invoice it is for. The wholesaler applies it to the old invoice. Is that valid?

Issue. Who decides which debt the payment clears, and may a time-barred debt be chosen?

Rule. If the debtor gives no intimation and nothing else shows the debt, the creditor may choose. He may apply the payment to any lawful debt actually due and payable, even one barred by limitation (section 60).

Application. Ramesh gave no direction. The old invoice is a lawful debt actually due, even though a suit on it is barred. The wholesaler's choice is within section 60.

Conclusion. The application to the old invoice is valid. Had Ramesh written "for last month's invoice" on the cheque, the payment would have cleared that invoice under section 59.

Leading case laws

Industrial Credit and Development Syndicate v. Smithaben H. Patel (1999)
Facts. The Supreme Court (Khare and Sethi, JJ.), decided on 10 February 1999, dealt with a mortgage decree for a money debt with costs and interest at 18 per cent. The question was how the debtor's payments in instalments were to be applied.

Principle. Unless the decree or an agreement says otherwise, a payment goes first to interest and costs, then to the principal. Citation: (1999) 3 SCC 80.

Why it matters. It shows that a single decree debt with interest is outside the debtor-first scheme of section 59.
Meghraj v. Bayabai (1969)
Facts. A mortgagee firm obtained a decree on a mortgage. The mortgagor deposited money in court. A dispute arose over whether those deposits went to interest or to principal.

Principle. The normal rule is that a payment on a debt with interest goes first to interest and then to principal. A debtor who claims that it was accepted on a condition must prove that the creditor accepted that condition. Citation: (1969) 2 SCC 274, Supreme Court.

Why it matters. It shows that a debtor's direction binds only if the creditor accepted the payment on that condition.

How to write this answer in the exam

5-mark answer

Define appropriation: applying a payment where several debts are owed to one creditor.
State section 59: the debtor's right.
State section 60: the creditor's right, even for a time-barred debt.
State section 61 and give one example.

10-mark answer

Meaning and conditions: one debtor, one creditor, several distinct debts.
Section 59 with illustrations (a) and (b).
Section 60, with the time-barred debt point.
Section 61, order of time and proportion.
The single-debt rule: interest first, with Meghraj v. Bayabai.
A worked example and a short conclusion.

Key points to remember

Appropriation applies where one debtor owes one creditor several distinct debts.
Order of choice: the debtor (section 59), the creditor (section 60), the law (section 61).
The creditor must apply the payment as the debtor directed if he accepts it.
The creditor may choose a time-barred debt, but only a lawful debt actually due and payable.
Under section 61 the oldest debt is cleared first. Debts of equal standing share in proportion.
For one debt with interest, a payment goes first to interest and costs, then principal, unless otherwise agreed.

Quick self-test

1. Who has the first right to appropriate a payment?

The debtor, by express intimation or by circumstances implying the debt (section 59).

2. May a creditor apply a payment to a time-barred debt?

Yes, under section 60, if the debtor gave no direction. It must be a lawful debt actually due and payable.

3. What happens if neither party appropriates?

The payment clears the debts in order of time. Debts of equal standing share it in proportion (section 61).