Debts are not that simple
There are limitations on the right of a creditor, including which debt a payment should be applied to.
THE right of a creditor is not absolute. If a debtor has defaulted in his repayment, the creditor can choose to take action whenever he likes. In this regard, two facets have legal implications.
The Limitation Act 1953 provides that an action based on a contract or agreement must be brought within six years from the date on which it was payable.
In Sabah, under the Limitation Ordinance, if it is an oral contract then the limitation period is three years. In the case of contracts in writing, it is six years.
Where a debt is incurred, when the limitation period kicks off depends on the arrangement between the parties. If a date of repayment is stipulated, then non-payment on that date is a default.
In other cases, it may be repayable on demand. If that demand is not complied with, then there is default and time begins to run.
Once a limitation period is reached, the right to recover becomes time-barred. However, any payment by the debtor towards the debt or the acknowledgement of the debt after it has become time-barred would revive the limitations period.
Where goods are sold or money is lent, there may be different times when payment is due. In this connection, the question will be whether all debts are one debt or separate debts?
Where all is one debt, then time for purposes of the limitation will begin to run from the last day on which payment was made or further credit extended. Where each transaction constitutes a separate debt, its effect would be that the limitation period will run from the date that the particular debt was due.
In many situations, the statement shows debts which are time-barred and those which are not time-barred. So when a payment is made, the common tendency is to just send a cheque and the creditor sets it off against the older debts.
However, this is not an absolute right of the creditor. It all depends on what terms the payment is made under. This is where the law relating to “appropriation” comes in.
When a payment is made with express intimation that it is to be applied to a particular debt, then it must be applied accordingly to that debt. Sections 60 – 62 of the Contracts Act 1950 are based on the age-old principle that as long as the amount paid is paid and accepted for a particular debt, then it does not revive a debt which is barred by limitations.
In The City Discount Company, Ltd v. McLean, concerning how payments were to be appropriated, the Court traced back the principle to early times when Blackburn J. said:
“It has been considered a general rule since Clayton’s Case that when a debtor makes a payment, he may appropriate it to any debt he pleases, and the creditor must apply it accordingly. If the debtor does not appropriate it, the creditor has a right to do so to any debt he pleases, and that not only at the instant of payment, but up to the very last moment.”
Our Sections 60, 61 and 62 also correspond with Sections 59, 60 and 61 of the Indian Act. Therefore as far as Section 60 is concerned, Section 59 of the Indian Act provides guidance.
Pollock and Mulla’s Indian Contract & Specific Relief Acts discusses “Appropriation of Payments”: “The underlying principle of Section 59 is that where there are several debts owing to one person, any payment made by the debtor either with an express intimation or under circumstances from which an intimation may be implied, must be applied to the discharge of the debt in the manner intimated or which can be implied from the circumstances.”
It says that in England, “It has been considered a general rule since Clayton’s case that when a debtor makes a payment, he may appropriate it to any debt he pleases, and the creditor must apply it accordingly. Where several distinct debts are owing by a debtor to his creditor, the debtor has the right when he makes a payment to appropriate the money to any of the debts that he pleases, and the creditor is bound, if he takes the money, to apply it in the manner directed by the debtor. If the debtor does not make any appropriation at the time when he makes the payment, the right of appropriation devolves on the creditor.”
Many creditors may not be aware of and realise the implications of this provision of the law. A failure to do so and appreciate the legal provisions will result in a loss of a debt. On other occasions, the debtor may take advantage of such a provision against a less knowledgeable creditor.
A person taking advantage of a provision, knowing full well the debt is owed, would be immoral. However the law and morality do not always go hand in hand.