Page 27 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes 1.8.3 Appropriation of Payments

Appropriation of payments means application of payments. When a debtor owes several debts
in respect of which the payment must be made (to the same creditor), the question may arise as
to which of the debts, payment is to be appropriated.

In India, the rules regarding appropriation of payments are contained in Ss. 59 to 61 which, in
fact, have adopted with certain modifications the rules laid down in Clayton’s case.

The provisions of these sections are summarized hereunder:
1. Appropriation by debtor: Where a debtor, owing several distinct debts to one person,
makes a payment to him with express intimation that the payment is to be applied to the
discharge of some particular debt, the payment, if accepted, must be applied to that debt.

Example: A owes B among other debts, the sum of ` 974. B writes to A and demand
payment of his sum. A sends to B ` 974. This payment is to be applied to the discharge of the debt
of which B had demanded payment.

2. Appropriation by creditor: Where the debtor has omitted to intimate and there are no other
circumstances indicating to which debt payment is to be applied, the creditor may apply it
at his discretion to any lawful debt actually due and payable to him by the debtor.

Example: A obtains two loans of ` 20,000 and ` 10,000, respectively. Loan of
` 20,000 is guaranteed by B. A sends the bank ` 5,000 but does not intimate as to how it is to
be appropriated towards the loans. The bank appropriates the whole of ` 5,000 to the loan of
` 10,000 (the loan not guaranteed). The appropriation is valid and cannot be questioned either by
A or B.
3. Where neither party appropriates: Where neither party makes any appropriation, the
payment is to be applied in discharge of the debts in order of time, including time-barred
debts. If the debts are of equal standing the payment is to be applied proportionately.
Rule in Hallett’s Estate Case. The rule in Hallett’s Estate Case is an exception to the above
Rule 3. The rule applies where a trustee had mixed up trust funds with his own funds.
In such a case, if the trustee misappropriates any money belonging to the trust, the fi rst

amount so withdrawn by him would be first debited to his own money and then to the

trust funds. Similarly, any deposits made by him would first be credited to trust fund and
then to his own fund, whatever be the order of withdrawal and deposit.

Example: A trustee deposits ` 10,000 being trust money with a bank and
subsequently deposits ` 50,000 of his own in the same account. Thereafter, he withdraws
` 10,000 from the bank and misappropriates it. The said withdrawal will not be appropriated
against the trust amount of ` 10,000 but only against his own deposit though this was made later

than the first deposit thus leaving the trust fund intact.
1.8.4 Different Modes of Discharge of Contracts

A contract may be discharged by:
(i) Performance,

(ii) Tender;
(iii) Mutual consent;
(iv) Subsequent impossibility;

22 LOVELY PROFESSIONAL UNIVERSITY