Question:
A obtains 5 different loans from B in the following manner
Month Amount Interest
November 2014 20,000 20%
December 2014 40,000 5%
February 2015 10,000 10%
March 2015 10,000 15%
Total 80,000
A decides to make repay only a sum Rs. 50,000/- in April, 2015. Please explain taking the above
example as how the debts shall be appropriated as per Clayton’s Rule of Appropriation of
Payment under the Contract Act.
My Answer:
In the given example A is a debtor and B is a creditor.
The rule says that when a debtor makes a payment, he may appropriate it to any debts he pleases, and the creditor must apply it accordingly.
In the given example A has not intimated or expressed to apply the payment towards the discharge of a particular debt.
In the given example the debtor A does not intimated and the circumstances are also not indicative as the prepayment amount do not match with any of the loan amount.
This also a case of part payment where according to rule part payment is applied towards the interest first and later towards principal.
So, here creditor B shall first clear the interest on loan take in November 2014, for an amount of 20000 at the rate of 20% interest.
In the example the date of borrowing and repayment is not mentioned, so I am considering this from November 2014 to April 2015 which is six month and interest will be 2000 rupees.
Now this interest and principal, i.e. 2000 + 20000 = 22000 rupees shall be cleared first and amount remained after adjustment will be 50000-22000 = 28000 rupees.
Now go for second loan amount 40000 rupees at the rate of 5% interest taken in December 2014. Interest against this for 05 months would be 833.33 rupees. The interest amount of 833.33 shall be deducted from 28000. So 28000 – 833.33 = 27166.67 rupees to be appropriated towards second loan principal amount. So, 40000 – 27166.67 =12833.33 rupees.
So, after appropriation it is found that the first loan taken in November 2014 of an amount of 20000 rupees at 20% rate of interest is clear and closed.
After closing of first loan, remaining repayment amount 28000 rupees was adjusted towards the second loan amount in a way that first interest (833.33 rupees) and remaining 27166.67 rupees was adjusted towards the principal amount of 40000 rupees. Principal remained after adjustment would be 40000 – 27167.67 = 12833.33 rupees.
After appropriation of April 2015 payment of 50000 rupees, the remaining loan on debtor A would be as follows –
1. December/ 12833.33 at 5%
2. February/ 10000 at 10%
3. March/ 10000 at 15%
Total = 32833.33 rupees to be paid to creditor B.
Please confirm if my answer is correct.

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