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Appropriation of Payment

Appropriation of payment means an adjustment and application of the money to a given transaction. When there are several debts outstanding from one person to another and certain payment is made by the debtor, and such payment is insufficient to satisfy the whole debt, the order in which the debts are satisfied is known as appropriation of payment.
The Indian Contract Act has laid down the following rules regarding the appropriation of a payment made by a debtor to the creditor:

Debtor’s express instruction to be followed

Each debtor, who owes several debts to the creditor, has a right to instruct his creditor to which particular debt, the payment is to be appropriated or adjusted. Therefore, when the debtor expressly states that the payment is to be applied to the discharge of a particular debt, the payment must be applied accordingly. The creditor has to follow the debtor’s express instruction in this respect (Sec. 59).



Nilesh owes Shahid three distinct debts of ₹20,000, ₹ 30,000 and ₹ 50,000. Nilesh sends ₹ 50,000 and instructs Shahid that the payment should be appropriated against the first two debts (₹ 20,000 & ₹ 30,000). He is bound to appropriate the payment against the first two debts only.

Debtor’s implied intention to be followed

Sometimes, the debtor makes a payment to his creditor without any expressed instructions as to which particular debt the payment is to be appropriated. In such a case, the creditor must appropriate the payment towards the debt to which, under the implying circumstances, the debtor intended to do. (Sec. 59).



Fakirchand owes Amirchand, among other debts, an amount of ₹ 567. There is no similar amount pending from Fakirchand to Amirchand. Fakirchand sends a cheque of ₹ 567. His implied intention is to clear that particular debt. Such appropriation should be done by the creditor.

Appropriation by the creditor

If the debtor does not give any direct or indirect indication about appropriation, the creditor gets a chance to apply the payment at his discretion. He may appropriate the received amount towards any of the lawful debts including a time barred debt. But, he cannot apply the payment to unlawful or disputed claims (Sec. 60).

Appropriation by law

When the debtor does not signifies either expressly or impliedly nor the creditor appropriates payment according to his discretion then Sec 61 would apply. Sec 61 lays down the method of appropriation of payment as per law. Sometimes neither the debtor nor the creditor makes any appropriation of the payment. In such a case, the payment by the debtor should be appropriated towards the debts in order of time, i.e. in the order in which they were created, including a time barred debt. This principle always applies in the context of a running loan account with a bank or any other creditor.
When there is more than one debt pertaining to a certain date then the payment shall be applied in discharge of each proportionately.

Appropriation between principal and interest

If a debt includes the principal amount and also the interest due on it and the amount is insufficient to cover the interest as well as the principal then the ordinary rule would be that the money paid should be appropriated first towards the interest and then the residue if any towards the principal amount.

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