Section 59 of Contract Act 1872 states:
Where application of payment where debt to be discharged is indicated.
“Where a debtor, owing several district debts to one person, makes a payment to him, either with
express intimation, or under circumstances implying that the payment is to be applied to the
discharge of some particular debt, the payment, if accepted must be applied, accordingly.”
Where there are several debts owing to one person then any payment made by the debtor either
through express or implied intimation must be applied to discharge of such debt as intimated
expressly or impliedly. Under English law the general rule is stated in Claytons case where a
debtor can appropriate it to any debt as he pleases and creditor has to abide by it accordingly.
Once the creditor accepts payment then he must abide the directions of debtor.
The point is that debtor can make payments towards any of the debts owed unless there is a
specific arrangement that specifies order of payment.
However in circumstances where the creditor has not accepted the payment, then court cannot
force him to accept payment regarding the particular debt.
The creditor only has the option to refuse or reject the payment (AIR 1979 Cal 243). He is not
bound to accept the payment proposed by the debtor
Section 60 of Contract Act 1872 states:
Application of payment, where debt to be discharged is not indicated.
“Where the debtor has omitted to intimate and there are no other circumstances indicating to
which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful
debt actually clue and payable to him from the debtor, whether its recovery is of is not barred by
the law in force for the time being as to the limitation of suits.”
Where the amount is paid by debtor without specifying its adjustment towards any particular
debt then in such circumstance the creditor would be entitled to adjust such amount towards any
particular debt, even though it be barred by time. (West Pakistan Tanks Terminal Pvt Ltd vs
Collector 2007 SCMR 1318)
61. Application of payment 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 proportionally.”
It is important to look at the circumstances and mode of dealing between parties to conclude
whether the debtor intended to treat debt of a separate account or it treated as continuous
combined account. In such situation payments will be appropriated to the earliest unpaid item of
the combined account.
Position regarding payment of interest
Indian position:
The general rule of appropriation of payments towards a debt is that in absence of a specific
indication to the contrary by the debtor, the money is first applied in the payment of interest and
then when that is satisfied, in payment of capital (Jia Ram v Sulakhan Mal AIR 1941 Lahore
386)
Therefore where there is a debt carrying interest, the money paid and received without any
definite appropriation is to be first applied in payment of interest.
Pakistani position:
Where payment towards both principle and interest is due, then no implied appropriation of
amount towards principle is to be inferred in absence of express direction.
Dents which carry interest will be ranked first than those which do not carry any interest.