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1921 Supreme(SC) 26
Privy Council
Ameer Ali, Sir John Edge, Shaw, Justice Dunedin , JJ.
Rai Bahadur Seth Nemichand, since deceased (now represented by Seth Teekam Chand) -Appellant
Versus
Seth Radha Kishen (since deceased) and others -Resopndent
Decided On : 09-03-1921
Nevill, Rogers , Messrs. Barrow, B. Dube
A creditor is entitled to appropriate indefinite payments to interest first unless the debtor stipulates the payment be applied to the principal and the creditor accepts it on those terms.
Headnote:(A) Mortgage Law - Appropriation of payments - Principal and Interest - A creditor to whom both principal and interest are owed is entitled to appropriate any indefinite payment received from a debtor to the payment of interest. A debtor may stipulate that a payment be applied only to the principal; however, the creditor is not obliged to accept the payment on such terms and may return the money. If the creditor accepts the payment on the debtor's proposed terms, the creditor is then bound by that appropriation.
(B) Interest - Rate of interest - Where a contract specifies a rate of interest, that contract rate applies up to the date of the decree, after which the rate of interest is at the discretion of the Court.
Facts of the case:
A mortgage was executed for a sum of Rs. 30,000 with interest at 10 annas per cent per mensem. Payments were made over time, and endorsements on the mortgage deed indicated that payments were credited to interest first and then to the principal. A dispute arose as to whether subsequent payments should be credited to the principal or interest. The debtors alleged that the endorsements were made under undue influence, a claim that was rejected by the lower courts.
Findings of Court:
The court found that there was no evidence of a proposed appropriation to capital by the debtor that was acceded to by the creditor. The inference drawn by the lower appellate court, based on entries in one of the creditor's books suggesting a different interest rate and appropriation, was deemed fallacious as it confounded simple and compound interest.
Issues: Whether payments made toward a mortgage debt should be credited to the principal or the interest, and whether the contract rate of interest should apply until the date of the decree.
Ratio Decidendi: The court held that in the absence of a specific stipulation by the debtor which is accepted by the creditor, the creditor has the right to appropriate indefinite payments to interest first. Since the endorsements signed by the debtor supported this and no valid contrary agreement was proven, the payments must be credited to interest, and the contract rate of interest must be maintained until the decree.
Result: Appeal allowed. Case remanded.
This is suit upon a mortgage. The mortgage was of date the 12th December 1890, for Rs. 30,000, with interest at 10 annas per cent, per mensem, executed by three persons carrying on business as bankers in favour of the Plaintiff. On the back of the mortgage deed there are certain endorsations signed by the debtor, who was the manager of the firm. These show that upto the 11th August 1893, there had been paid Rs. 11,334-6-6. This was accordingly, as also shown, credited to the extent of Rs. 4,652-6-6 to interest being the total amount of interest due as at that date, the balance of Rs. 6,682 being credited to principal, thus reducing the principal due as at that date to Rs. 23,318. After that there are successive credits to interest only at the 14th April 1896, the 17th January 1902, and the 12th August 1904, the payments which each of these credits represents being admittedly less than the amount of interest due at the respective dates.
The present suit was raised on the 12th December 1906 for payment of the balance outstanding. Two of the Defendants contested liability, but this was decided against them, and there is now no question of liability. The only question before the Board is as to how the account is to be stated. The Plaintiff contends that the account should be stated as it is in the endorsements, i. e., that the payments made should all be credited to interest. The Defendants contend that they should be credited to principal as at each date at which they were made, and interest calculated only on the balance as so brought out. The Defendants allege that the endorsements before referred to were executed under undue influence
without direct proof but upon what seems a quite unsatisfactory inference, was negatived by the District Judge to whom appeal was taken, and his view was confirmed by the Chief Commissioner on appeal from the District Judge. This makes a concurrent finding so far as this Board is concerned.
Now the law as to payments being applied to principal or interest was laid down by the Board in the case of Meka Venkatadri Appa Row Bahadur Zemindar Garu v. Raja Parthasarathy Appa Row Bahadur Zemindar Garu , AIR 1922 PC 233 : 48 IA 150 : 44 Mad 570 (PC) decided only a few days ago. Shortly re-stated, it is this. A creditor to whom principal and interest are owed is entitled to appropriate any indefinite payment which he gets from a debtor to the payment of interest.A debtor might in making a payment stipulate that it was to be applied only to principal. If he did so, the creditor need not accept the payment on these terms,but then he must give back the money or the cheque by which the money is proffered. If he accepts it, he would then be bound by the appropriation proposed by the debtor. The learned District Judge correctly stated the law in his judgment and accordingly gave decree for the outstanding principal of Rs. 23,318 and interestatthe agreed rate from the 12th August 1893 to the date of the suit, under deduction of the sums paid to credit of interest.
The Chief Commissioner recalled this judgment. He held that, inasmuch as in one of the Plaintiff's books there were certain entries as credits to principal with interest at 8 per cent., then, although in the other books the payments were credited to interest, yet the entry in the one book could not be disclaimed by the Plaintiff, and he drew the inference that the parties agreed that the payments should be to capital and should only be credited to interest if interest was reduced to 8 annas simple.
Now that entries in the books of the creditor may be taken as indicative of agreement to a proposed appropriation by the debtor need not be denied and is in accordance with the law as above stated. But the learned Chief Commissioner has omitted to notice a fact which in their Lordships' opinion prevents the inference to be drawn as he drew it. It is this : Both parties came into Court with opposing views as to an alleged verbal agreement made aft
