Legal Question in Banking Law in India

03.04.2016

Dear Sir / Madam,

Clayton's Rule : Unless there is an agreement to the contrary, any payment made by a debtor is applied first towards interest and thereafter towards principal. If a customer has only one account and he deposits and withdraws money from it regularly, the order in which the credit entry will set off the debit entry is in the chronological order, this is known as Clayton�s rule.

Rule in Clayton�s case:

The rule was laid down in famous Devayanas Vs. Noble. The rule applies to running accounts like Cash Credit (CC) / Overdraft (OD) with debit balance. The rule states that each withdrawal in a debit account is considered as a new loan and each deposit as a repayment in that chronological order.

Right of Appropriation:

It is the right of the customers to direct his banker against which debt (when more than one debt is outstanding) the payment made by him should be appropriated. In case no such direction is given, the bank can exercise its right of appropriation and apply it in payment of any debt. Section 59,60 and 61 of Indian Contract Act, 1872 lays down the rules of appropriation.

Sec.59.Application of payment where debt to be discharged is indicated: (i.e.� As per borrowers instructions)

Where a debtor, owing several distinct 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.

Sec.60. Application of payment where debt to be discharged is not indicated: (i.e. in the absence of express or implied intention of debtor)

Sec.60 of the Indian Contract Act states that if the debtor does not intimate or there is no circumstance of indicating how the payment is to be used, the right of appropriation is vested in the creditor.

According to the Act, �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 due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.�

Sec.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.

Supreme Court of India Citation & Judgement :

Tata Engineering And ... vs Municipal Corporation Of The City ... on 22 November, 1991

Equivalent citations: 1992 AIR 645, 1991 SCR Supl. (2) 445

Author: V I Ramaswami

Bench: Ramaswami, V. (J) Ii

Regards,