Rescission (Ighaleh) in Banking Transactions

Rescission (Ighaleh) in Banking Transactions

Rescission, known in Iranian law as Ighaleh, refers to the termination of a transaction by mutual agreement of the parties.

The same mutual consent that brings a contract into existence may also dissolve it and prevent the continuation of its legal effects, thereby restoring the parties to their original position. Accordingly, the essential element of rescission is the mutual consent of the parties. This principle is expressly recognized in Article 283 of the Iranian Civil Code, which provides that after the conclusion of a contract, the parties may rescind it by mutual agreement.

For example, if goods are sold for 10,000 rials and the contract is subsequently rescinded, the goods are returned to the seller, and the price is refunded to the buyer, thereby restoring the prior status.

In Islamic jurisprudence, acceptance of a request for rescission is regarded as a recommended act, based on a narration from the Prophet of Islam stating that whoever accepts the rescission requested by a Muslim will have God forgive his faults.

The Legal Concept of Rescission in Banking Contracts

In cases where a customer or mortgagor fails to fulfill contractual obligations, and the bank’s claims remain unpaid, banks are compelled, pursuant to Article 34 of the Registration Law and the regulations governing the execution of official instruments, to initiate enforcement proceedings.

These measures may include auction procedures and, in the absence of a buyer, the execution of an enforcement transfer deed, ultimately resulting in the bank’s acquisition of the mortgaged property.

At present, numerous properties have been acquired by banks under the former version of Article 34 of the Registration Law, as subsequently amended. Acquisition of immovable property converts significant liquid banking capital into real estate assets, thereby rendering them illiquid, idle, and removed from the normal cycle of banking operations.

Following the acquisition, banks are required to offer these properties for sale through auction in accordance with applicable laws and regulations. Despite repeated auction notices, the lack of a developed market culture for purchasing such properties has led to a substantial accumulation of these properties on banks’ balance sheets. These properties generally lack effective purchasing demand and often represent a source of ongoing costs rather than revenue.

Converting these assets back into liquid capital prevents additional expenses, facilitates the recovery of valuable resources, and enhances profitability. Such conversion may occur by either sale by auction or rescission.

Legal Basis and Conditions for Acceptance of Rescission Requests

Previously, pursuant to directives issued by the Central Bank of the Islamic Republic of Iran and resolutions of the High Council of Banks, banks were obliged to accept rescission requests submitted by applicants whose properties had residential use, provided that all outstanding claims of the bank, including principal, interest, and penalties, were fully settled.

With respect to properties used for commercial, administrative, industrial, or other purposes, authority to approve such requests was, depending on the case, delegated to the managing directors or members of the board of directors of banks in accordance with their articles of association.

However, Note 2 of Article 8 of the Regulation on the Disposal of Non Essential Assets of Banks, approved by the Council of Ministers on 20 January 2008, makes no distinction between different types of property use and provides that if, before the sale of collateral, the customer fully satisfies all claims of the bank, including principal, interest, and accrued penalties, the bank is obligated to release and return the collateral through rescission. In such cases, the bank has no right to grant installment arrangements or waive penalties.

Banking Practice in Calculating Customer Debt in Rescission

In practice, banks generally apply a uniform method to calculate customer debt in rescission cases. Under this method, the bank assumes that the property has not been acquired and calculates the total debt from the facility’s disbursement date until the rescission date, which is also the settlement date.

This calculation includes principal up to the maturity date and principal, interest, and delay penalties accrued after maturity, regardless of whether the property remained in the customer’s possession following acquisition. This is often referred to as a notional or assumed debt.

In this regard, the following considerations are typically raised:

Proponents of this approach argue that since the facility was disbursed, the bank’s capital has remained unutilized due to non-payment of installments and outstanding claims. Consequently, the customer must bear the consequences and compensate the bank for the loss resulting from immobilized capital.

Additionally, it is argued that any increase in the property’s value, particularly due to rising real estate prices, should be credited to the bank.

This perspective appears consistent with principles of capitalist economic systems and classical banking models. However, it is appropriate to re-examine this issue within the framework of Islamic economic principles and Iranian law.

Frequently Asked Questions Regarding Rescission in Banking