Appropriation of payment to pay off a specified debt
The exercise of the right by a debtor to choose and determine for which debt he makes a payment binds the creditor who accepts it and they must allocate it to pay off the specific debt. The debtor should owe several debts to the same person, s
The exercise of the right by a debtor to choose and determine for which debt he makes a payment binds the creditor who accepts it and they must allocate it to pay off the specific debt. The debtor should owe several debts to the same person, such as a borrower or his guarantor for a specific amount to a bank or even a taxpayer to the state.
They may designate the payment they make for a debt in order to reduce or discharge themselves from liability for the specific debt, the terms of which, such as the interest rate, may be higher than other debts, or they may dispute that they owe other debts or that they have been paid or even become statute-barred. The choice may be express or inferred from the circumstances in which the debtor makes the payment.
Legislative provisions
The relevant legislative provisions are found in articles 59–61 of the Contracts Law, Cap. 149, which is based the Clayton rule originating from English common law.
On the other hand, if the debtor does not specify which debt a payment made relates to and this cannot be inferred from the circumstances, the creditor may attribute the payment to any legal debt of the debtor, which is payable to them, regardless of whether or not its recovery is prevented by the law in force concerning prescription or the limitation of actions.
There is a possibility that none of the interested parties will allocate a payment made, in which case it is assigned to the repayment of the debts in order of seniority, regardless of whether or not they can be recovered pursuant to the law in force at that time regarding the limitation period. If the debts have the same order of seniority, the payment is made symmetrically.
For their security, banks request and receive, among the collateral for banking facilities that grant the signing of a lien agreement, both by the primary debtor and by their guarantors, and depending on the debts secured, exercise the lien and assign the payments to the debts they consider payable, as is in their interest so as not to lose money.
Appeal court decision
Among the issues examined by the Court of Appeal in a decision issued in C.A. 93/2026 dated December 11, 2024, was the exercise of the right of lien, as well as the appropriation of a payment towards the repayment of an indicated debt, in a dispute that arose between a bank and a guarantor of a company that was unable to pay its debts.
It ruled that it was clear from the lien agreement that its exercise was at the discretion of the bank, which was not even obliged to inform anyone before transferring money from one of the guarantors to another account.
The document contained a provision that the guarantor, by signing the lien document, agreed that the bank could at any time without further instruction or notice use such money towards such debts or obligations.
It then emphasised that based on the English common law relating to the appropriation of payments, including the Clayton Rule incorporated in the Contract Law, Cap. 149 at articles 59–61, if the debtor does not specify the debt for which the payment is made, nor can it be inferred from other circumstances, then the creditor is entitled at will to repay the various debts.
The appeal court concluded that since it had not been determined by the lien agreement of the other guarantor with the bank or in any other way in which account the money of the guarantor would be credited, the bank was entitled to credit it against any debt and not necessarily the debt of the company.
On this basis, it dismissed the appeal of the other guarantors of the company, which although deleted from the Register of the Registrar of Companies, was reinstated.
Consequently, its previous deletion could have no significance, nor did such deletion cancel anything that took place in the interval between the deletion and its reinstatement and the approach of the court of first Instance that the debt was due was correct.
George Coucounis is a lawyer specialising in Immovable Property Law, based in Larnaca. E-mail: coucounis.law@cytanet.com.cy, tel: 24818288
Related
Share this page
Guest Posts by Easy Branches
