Subject : Ruling on Debts for which Modern Corporations are Liable
Fatwa Number : 3448
Date : 13-01-2019
Classified : Partnership in Business
Fatwa Type : Search Fatawaa

Question :

What is the stand of Sharia on investing in a corporation, which trades in lawful goods, and has a separate legal entity? And the fact that partners aren`t required to pay off that corporation`s debts from their own wealth as they are the liability of the corporation itself?

The Answer :

Praise be to Allah, the Lord of the Worlds.

  From the perspective of Islamic Sharia, laws, and trade practices, a human being is viewed as a natural person. Therefore, every individual is an independent person who has rights and duties. However, Islamic Fiqh (Jurisprudence) went beyond that and pictured an entity that has the ability to possess, has confirmed rights and doesn`t belong to a particular person. As a result, some public bodies were given separate entities apart from the persons benefitting from them, such as the Waqf (Charitable endowment) and the treasury.

  With the rise of private organizations and corporations and the pressing need for attracting more savings, enlarging projects and minimizing risk, the perspective of that legal entity has developed. Consequently, a form of contractual relationships, which takes the legal entity of those corporations into consideration, has surfaced where the liability, when it comes to corporation`s financial transactions, is limited to the corporation`s money, and not those of the partners (Limited Liability).

  This limited liability is an offshoot of the liability theory in Islamic Fiqh. Liability describes a human being, but could also describe an entity that is fit to be financially committed and committing; if approved by trade practices and laws. Based on this, the Fuqaha`(Jurisprudents) have established some rulings for the Waqf and the treasury in which they stated that the treasury is an independent legal entity which is separate from the ruler's wealth and that the personality of the Waqif (Endower) is separate from that of the Waqf itself. Therefore, there is no harm in reconsidering the contractual framework of modern corporations since trade practices, times, and places have changed. Being suitable for every time and place, Islamic Fiqh (Jurisprudence) isn`t restricted to certain forms or contractual frameworks. Rather, it is flexible enough to address new issues and regulate them in a manner that prevents injustice, deception, and disputing.

  Al-Imam al-Kharafi (May Allah have mercy on him) said, "Applying Sharia rulings on basis of trade practices, which are constantly changing, violates the consensus of scholars and reflects ignorance in religious matters. Rather, the rulings should change in compliance with the change in those practices."{Al-Ihkam Fi Tamieez Al-Fatawa An Al-Ahkaam, P.218}.

  In modern time, trade practices, which govern the objectives, terms and conditions of corporations, are the special laws issued by the state to regulate this vital sector. If the corporation`s code stipulates that the liability extends to the partners`, then they have to pay off that corporation`s debts, even from their own money. As regards partners` liability for the debts of the corporation, clause (26 A) of the Jordanian Companies Law stated, "Taking provisions of clause(27) into consideration, a partner-in a partnership-is jointly and severally liable, along with all partners, for the debts and obligations due on the corporation so long as he is a partner. He should be liable, with his own money, for those debts and obligations. In case he died, those should be settled by his heirs from his estate."

However, Clause (65/B) stated, "The financial liability of a shareholder company is separate from that of shareholders. Thus, debts and obligations are to be covered from the company`s money and assets, and the shareholder will be liable in accordance with their share in the capital."

The laws and regulations, which control the affairs of the company, are tantamount to pre-conditions, which are referred to in case of disputes and the like. Umar Bin al-Khattaab (May Allah be pleased with him) said, "Sorting out claims is bound by stipulations, and yours is what you have stipulated." If it was registered as a partnership, then debts are its liability along with its partners. However, if it was a shareholder, then they are the liability of the corporation itself, because, in this case, partners aren`t obliged to pay them off. And Allah knows best.



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