An Analysis of the Rules of Appropriation of Payment in Respect of Debts
By Dr Kubi Udofia
The question of appropriation of payment in relation to debts becomes imperative where a debtor with more than two separate debt obligations to the same creditor or lender, makes a payment which is insufficient to discharge all the debts. The debtor’s desire could be to discharge one, or some (but not all) of the debts. In contrast, where a debtor owes a single debt to a creditor, payment by the debtor does not give rise to any complex questions regarding appropriation of the payment. The payment is simply applied in discharge of the single debt, whether partially or wholly.
The core principles of appropriation of payment examined in this discourse, dictate how a debtor’s payment is to be appropriated or allocated or applied in discharge of its debt obligations to a single creditor. Whist there is a dearth of Nigerian case laws on this subject; there are a plethora of judicial decisions from England and other common law jurisdictions. Furthermore, in some common law jurisdictions like India, the core principles of appropriation of payment in respect of debts, have been codified in contract-related laws.
Debtor’s Right to Appropriate Payment
A debtor who owes two or more separate debts to the same creditor or lender and makes a payment which is insufficient to discharge all the debts, is entitled to specify the debt(s) the payment is to be applied. If the creditor accepts such payment, the creditor must discharge that specified debt: Cory Brothers & Co. v Owners of Turkish Steamship ‘Mecca’  AC 286, 293. The Latin maxim is quicquid solvitur, solvitur secundum modum solventis, meaning “whatever is paid is applied according to the wish of the payer.” The rationale for the foregoing, is that the debtor to whom the money belongs, has the right to part with it on its own terms.
In Thomas v Ken Thomas Ltd  EWCA Civ 1504, the debtor informed the creditor in advance and in writing that it would be appropriating (i) two payments made in December 2004 to a rent due on 1/12/2004, and (ii) four payments made in January 2005 to a rent due on 1/1/2005. The creditor responded in writing, rejecting the appropriations and stating the manner which the creditor wanted the payments to be applied to the debts.
At trial, the creditor argued that considering his rejection of the debtor’s appropriation and the creditor’s “counter-appropriation” prior to the debtor making the payments, the debtor’s options were to either (i) pay on the basis counter-proposed by the creditor, or (ii) not make any payment. The court held that, the creditor’s contention entailed wrongfully depriving the debtor of the right to make a payment with its own choice of appropriation. The court stated that the debtor had validly appropriated payments to particular debts, and in consequence, the creditor could not rightly appropriate the payments to other debts. The court also held that, where a debtor communicates an appropriation in advance of a payment, it is not open to a creditor to defeat the debtor’s appropriation by challenging or disagreeing with the appropriation prior to payment.
Accordingly, a creditor is not entitled to appropriate or “counter-appropriate” payment, where the debtor’s appropriation of payment is not satisfactory to the creditor. Where a debtor’s appropriation of payment is not acceptable to a creditor, the proper response is for the creditor to reject the payment. If the debtor has already made a transfer of such payment to the creditor, for instance electronically, the creditor may cause a re-transfer of the money to the debtor within a reasonable time.
A debtor’s appropriation of payment must be apparent from the circumstances or duly communicated to the creditor. This will ensure that the creditor does not wrongly assume that his right of appropriate has arisen by reason of the debtor’s failure, omission or neglect to appropriate. A debtor’s appropriation may be expressly communicated to the creditor or inferred/implied from a variety of circumstances: In re Footman Bower & Co Ltd  1 Ch 443, 448. As regards implied appropriation, each case must be considered on its own peculiar facts or circumstances: Parker v Guinness (1910) 27 TLR 129, 131.
In Leesen v Leesen  2 KB 156, 160-163, Greene LJexplained that an inference of a creditor’s appropriation was not to be made from “undisclosed intention in the mind of the debtor”. Rather, a debtor’s appropriation is to be inferred from the circumstances of the case known to both the debtor and the creditor. This position was recently echoed in Khandanpour v Chambers  EWCA Civ 570, , , where the court stated that “what matters is that in the light of all the circumstances, and viewing the matter objectively, there should be no doubt about the debtor’s intention.” The circumstances must show that the debtor intended to appropriate the payment to specific debts.
Creditor’s right to Appropriate Payment
Where a debtor has not allocated payment and the circumstances do not also indicate which debt a payment is to be applied, the right to appropriate will devolve to the creditor: City Discount Co. v McLean (1874) LR 9 CP 692; Deeley v Lloyds Bank Ltd  AC 756, 783. In Stepney Corporation v Osofsky  3 All ER 289, the debtor which owed the creditor two sets of debts made certain payments to the creditor without specifically appropriating the payments to any particular debt. The creditor appropriated the payments in satisfaction of arrears of the earliest debt. An action instituted by the debtor against the creditor, in which it contended that it had intended to pay the most current debts, was unsuccessful.
Accordingly, a creditor may appropriate payment in a manner which is beneficial to it. In this regard, the creditor may strategically appropriate payments to debts which it regards as being comparatively riskier. For instance, the creditor may appropriate payments to unsecured debts instead of secured debts. Similarly, the creditor may appropriate payment to debts which are not guaranteed instead of debts backed by personal or corporate guarantee: Re Sherry (1884) 25 Ch.D. 692; Kinnard v Webster (1878) 10 Ch.D. 139.
Where some of the debts are lawful whist some are unlawful (i.e. unlawful by reason of underlying unlawful transactions), it has been held that it is impermissible for a creditor to appropriate payment to the unlawful debt: Smith & Son Ltd v Walker  2 QB 319, 328. In other words, when the right to appropriate devolves to a creditor, the creditor can only allocate payments to lawful debts. However, a debtor may specifically appropriate payment which it has made to an unlawful debt. Where a debtor, for whatever reason, makes such an appropriation and communicates to the creditor, the debtor cannot reverse the appropriation either directly or by an action.
Furthermore, where some of the debts are statute-barred whilst others are not, a creditor whose right to appropriate has arisen may appropriate payment to debts which are statute-barred: In re Footman Bower & Co Ltd  1 Ch 443, 448; Nash v Hodgson (1855) 6 D. M. & G 474, 480. However, the payment by the debtor of such debts by reason of the creditor’s appropriation will not operate to revive the creditor’s right to sue for the statute-barred debt: Friend v Young (1897) 2 Ch 421, 434.
As regards when a creditor should make an appropriation, it is fairly settled that a creditor is entitled to appropriate “up to the very last moment” of the occurrence of an event which makes appropriation inequitable: Owners of Turkish Steamship ‘Mecca’ [supra] at 293-294; Hitch v Enaam (2021) EHWC 2112 (Ch). What constitutes “the very last moment” depends on the circumstances of each case. In Seymour v Pickett  1 KB 715, 725, Romer LJ held that the creditor was entitled to make an appropriation when he was being examined as a witness in the creditor’s action against the debtor in relation to the creditor’s right of appropriation of payment. However, in Smith v Betty (1903) 2 KB 317, the court stated that it was no longer open to the plaintiff/creditor to make an appropriation after judgment had been given.
A creditor exercising a right to appropriate payment must communicate or make apparent the appropriation to the debtor to avoid the legal consequence of non-appropriation. Where the appropriation is to be inferred, the creditor’s presumed intention may be gathered from surrounding circumstances which make such intention unmistakably clear: Owners of Turkish Steamship “Mecca” (supra) at 294. It has been suggested that a creditor’s appropriation may be inferred from the issuance or a writ or filing of a defence (where the creditor is a defendant): Seymour v Pickett  1 KB 715, 722-723.
An appropriation by a creditor, whose right to appropriate has arisen, will not be binding on the creditor until it has been communicated to the debtor: Simson v Ingham  2 B & C 65. However, once a creditor communicates his appropriation to the debtor, the creditor cannot thereafter reverse or change such appropriation. In other words, so long as a creditor has not communicated its appropriation to the debtor and nothing has occurred to make it inequitable for the creditor to exercise the right to appropriate, a creditor may alter its appropriation.
Where neither the debtor nor its creditor has appropriated a payment to one or more debts, the payment will be applied based on the order in which the debts were incurred. In other words, first in, first out: Devaynes v Noble  1 Mer 527, 608 (Clayton’s Case).