Transfer of Debt

The Islamic law permitting the Transfer of Debt is similar to the assignment of a chose in action at English Law (under the Law of Property Act 1925).  In a manner related to but distinct from both agency and guaranty at Islamic law, the contract transferring a debt cancels one debt, replacing it with a new debt owed by a third party to the same creditor. As a result the creditor may now demand repayment only from the new debtor, formerly the third party. The contract of Transfer of Debt requires the following:

  • the legal capacity of a debtor and creditor, and a third party (‘the parties’)
  • the principal debtor initiates the transfer, not the creditor
  • mutual agreement of each of the three parties (in the form of offer/acceptance at the same meeting)
  • the subject matter transferred must be a debt, not a specific thing
  • the particulars of the initial and the transferred debt must be known to the parties
  • the amount of the two debts must be equal in tenure and amount (par value)
  • neither debt may be a result of a Future Commodity Sale as that sale requires possession
  • the majority view restricts the transfer to a situation where the principal debtor transfers a debt to a third party who owes him a debt

The Transfer of Debt contract concludes when the subsisting loan contract does. If the transferee does not pay the debt, under certain circumstances the creditor may have recourse to the original debtor.

The counterpart to the Transfer of Debt from the standpoint of the creditor is also lawful. This is the Transfer of Right, from a creditor to a third party.

The congruence of the above with novation and assignment in English law is evident although not exact.

 

 

 

Mejelle, 4th Book, Preface-Definitions and Chapters I-II