Appropriation of payment to pay off a specified debt

“The debtor is entitled to determine the debt for which he makes a payment”

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 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.

He may designate the payment he makes for a debt to be set off in order to reduce or discharge himself from liability for the specific debt, the terms of which, such as the interest rate, may be sufficiently high compared to another or other debts, or he may dispute that he owes the 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 introduce into Cyprus the principle of the Clayton rule originating from English common law.

On the other hand, if the debtor does not specify the debt to which the payment made relates and this cannot be inferred from the circumstances, the creditor may at will attribute the payment to any legal debt of the debtor, which is payable to him, 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 has proceeded to the appropriation of the 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 appropriation of the payment is done 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 his guarantors and depending on the debts secured, they 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 its decision issued in C.A. 93/2016 dated 11.12.2024, 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 to him apply such money, for or in satisfaction of such debts or obligations.

It then emphasized 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 his will be inferred from other circumstances, then the creditor is entitled at will to repay the various debts.

Appeal Court Conclusion

The Appeal Court concluded that since neither the lien agreement of the other guarantor with the bank, nor in any other way had it been determined in which account the money of the said guarantor that had been pledged 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 does 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.