WHAT IS RIGHT OF APPROPRIATION ?
In case of usual business, a banker receives payments from his customer. In case a customer has more than one account or has taken more than one loan from the banker, the customer has the right to direct his banker against which debt the payment should be appropriated/settled.
But if the customer does not direct the banker and there is more than one debt outstanding in his/her name , the bank has the right of appropriation & it can apply it in payment of any debt, including time barred debts also.
Section 59 to 61 of the Indian Contract Act, 1872 contains provisions regarding the right of appropriation of payments in such cases .
Section 59 states that the right of appropriation is vested in the hands of debtor. He/she can appropriate the payment by an express intimation or under circumstances implying to the payment to be charged against some particular debt.
For example- Ram owes Daisy several debts, including Rs. 1,000 upon a promissory note which falls due on 1st March, 2021. He owes B no other debt of that amount. On 1-03-2021 Ram pays Daisy Rs. 1,000. The payment is to be applied to the discharge of that particular promissory note.
Section 60 of the Act states that if the debtor does not intimate how the payment is to be used, the right of appropriation is in the hands of the creditor.
Section 61 states that in case there is no appropriation made by either of the parties , the payment shall be used in discharge of the debts in the order of their time.
However, the general principle is that in case of a debt due with interest, any payment made by the debtor should be first applied by the bank to the interest and thereafter to the principal amount, unless there is agreement to the contrary.
NOTICE BEFORE APPROPRIATION
Where the bank decides to appropriate the payment it has to send a notice to the customer. When appropriation comes to the notice of the customer, it becomes irrevocable
TIME OF APPROPRIATION AND COMBINING OF ACCOUNTS
Right can be exercised only at the time of a payment. Bank cannot unilaterally combine all the accounts of customer.
Thus, in simple words, Right of Appropriation implies that if the customer has more than one loan account he can direct repayment of the loan as credit into other accounts . However, if there is no comment from the customer, the banker has the right to appropriate the payment according to his choice.