RULES OF APPROPRIATION

RULES OF APPROPRIATION 

INDIAN CONTRACT ACT

When a debtor owing several debts makes qa payment, the creditor should appropriate it as per the rules of appropriation.

The rules of appropriation are laid down in section 59, 60 & 61 of Indian Contract Act.

Section 59 : states that if the borrower expressly mentions the debit to which the payment will be credited or if it is implied from the circumstances, the creditor must appropriate the payment of the debit.

Section 60: In the absence ofthe express or implied intention of the borrower, the creditor may use his discretion and apply the payment to any lawful debit actually due and payable including time barred debt from the debtor.

Section 61 : Where neither of the two parties makes any appropriation, the payment will be applied for discharging debt in order of ltime. If the debts are of equal time, the payment will go to discharge the debts proportionately. The provision of this section is same to that of the rue laid down in famous Clayton's case.

RULES IN CLAYTON'S CASE

This rule, which was laid down in the famous case Devayanas Vs Noble states the rule of appropriation in running accounts like Cash Credit and Overdraft accounts.

As per this rule, each withdrawal in a cash credit account is considered as a new loan and each deposit as a repayment of the loan in the order in which is is made. The first debit in the account is considered to have been discharged or reduced by the first item in credit side and accordingly other entries follow suit in chronological order.

It is to avoid application of this rule, the bankers stop operation of the account in case of death/insolvency of a partner/guarantor/joint accountholder.

APPROPRIATION FIRST  TOWARDS  INTEREST

In the absence of the agreement to the contrary, any payment by a borrower to a loan will first go towards interest and then to principal (M/s Kharavela Industries Vs OSFC & others.

APPROPRIATION OF CLAYTON'S RULE

1. Death/Insolvency of borrower

Where an individual borrower or the proprietor expires insolvent, we stop operation in his cash credit account. In case any fresh credit comes to the account, the liability of such deceased borrower stands reduced by the amount and his estate cannot be made liable for the same. The estate of the deceased/insolvent borrower cannot be made liable for all fresh debit after his death/insolvency.

2.  Death/Retirement/Insolvency of a partner in partnership firm

On the death /retirement/insolvency pf a partner the liability of such partner stands determined. In case of any fresh debitto the account, the deceased/retirement/partners' estates cannot be made liable for the same.

On the contrary their liability stands reduced by the credit.

In case the bank decides to allow operation to the new firm, it should be done after ruling off/braking the account and allowing operation in a fresh page.

3.  Death or guarantor of a Cash Credit/Overdraft account

On receipt of notice of death/insolvency of a guarantor the operation of the account should be stopped or should be ruled off.

In case it is snot done, the rule in Clayton's case will apply and the liability of the estate on the guarantor will diminish to the extent of credits allowed in the account after the receipt of news of death/insolvency.

The same principle also holds good in case of revocation of guarantee.

4.  Joint account

On receipt of news of death/insolvency of one of the joint account holders the operation in the account should be ruled off as otherwise the rule in Clayton's case will apply.