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Limited Liability Companies

Answered according to Hanafi Fiqh by Mahmoodiyah

Question:

Does Islam accept the notion of “LIMITED LIABILITY” as envisaged under prevailing corporate structure of the global economy? According to Mufti Taqi Usmani we accept “LIMITED LIABILITY” of a company

Muhtaram Mufti Sahib cites the examples of (i) WAQF, (ii) Baitul-Maal, (iii) Joint Stock, (iv) Inheritance under debt, & (v) Limited liability of master under Master-Slave business relationship on a Pakistan-based Islamic Bank’s [Meezan Bank] website [http://www.meezanbank.com/knowledge-islamic-section-7-3.asp]to substantiate his views. Although, he does admit that these are only initial thoughts & he points out the need of further research on this specific issue.

If Islam does accept the notion of “LIMITED LIABILITY” then what are the obligations of a person running a company.
E.g. what would be the status of a person who is the Chief Executive Officer or Chairman of a private limited company, and he/she dies whilst his/her company is highly indebted. What if these debts are caused due to:
(i) His/Her negligence & laziness & not taking interest in the business.
(ii) Unforeseen causes beyond his/ her control e.g. business slump?

What if the person is only a member of the board of directors and is not the Chief Executive Officer or Chairman?

Would they fall under the rubric of the warning of Rasoolullah SAWS for a person who dies whilst in debt & no one is there to take care of his debts?

Would the ruling be different if its a PUBLIC LIMITED COMPANY?


Answer:

 

                  

 

After falling in debt, there are only two ways of freeing oneself.

1. Either the person himself pays off the debt or someone pays on his behalf or takes the responsibility of paying off the debt.

2. The creditor absolves the debtor from paying.

Besides these 2 mentioned ways, the debtor cannot be absolved of his debt and will therefore be answerable both in this world and the hereafter. if the debtor wrongfully and neglectfully misuses the debt, whereby wasting it and he does not remain in a position to reimburse the creditor or he has no intention to repay the debt, he will be a sinner. Since he failed to repay the loan, he will be included amongst those with regards to whom punishment was mentioned in the Ahaadith. If this person intended to repay the debt but was unable to do so and he also did no appoint someone to pay on his behalf, he will not be sinful; however, he will be deprived of entry into Jannah until he either repays the debt or it is waved.

In today’s times, this ruling will apply to loans taken from banks by a limited company. Those overseeing the limited company, they are the ones  taking loans in order to do the work of the company and are responsible for either the gain or loss of the company, be he the director or chief executive, they all fall in this category and   none of them are saved from the punishment in the hereafter.

The notion of limited liability means that in this world, there is no possible way whereby one can regain his full amount of money, In my opinion, since this does not comply to the laws of Islam, it would not be correct. Its permissibility is something that needs to be looked at. Analyzing it to a master-slave business relationship it is not correct, since a slave given permission to conduct business is not absolved of debts; In fact, when he gains freedom, it can be demanded from him. In a master-slave business agreement, after the slave falls in debts, the master’s rights in his earnings becomes restricted. If the wealth in the possession of the slave is not sufficient to repay the debt, then that amount of money will be taken back from the master which was given to him from the slaves earnings after he fell in debt. The reason why nothing will be demanded from the master is because he did not make the agreement, and when the slave fell in debt, he and his wealth (earnings) became like strangers to the master. (Hidayah Vol.3, Page 368-369, Ad-Durrul Mukhtaar Vol. 5, Page 115-117)

The company appointing a legal person so that the company director can free the company of debts is not correct, since the company was not responsible for making the agreements. The director signs agreements on behalf of the company. The company in itself does not have life. Profit and loss of the company is the responsibility of the director. In court, the directors are summoned, not the company. The directors are praised when the company progresses. They in turn benefit from its profits and losses. When the company is functioning at a loss, why are the directors not responsible? Why do the directors receive benefits from the company’s wealth and things when the company falls in debt? On what grounds do they acquire these benefits? An important rule outlined in Hadith and Fiqh is whatever has no risk, taking benefit from it is not permissible.

Long ago, animals were mounted. Occasionally other people would get hurt. Shari’ah explained in detail with regards to this that in some conditions the rider of the animal would hold responsibility for the deficiency caused. In other conditions the deficiency caused will be linked to the animal. In some situations, the owner of the animal will have to pay the deficiency, whilst in other situations, no demands will be made because the deficiency caused was neither the fault of the master nor is the animal itself intelligent; therefore no one will be responsible. These rulings will be applied in present day situations only with regards to animals. Instead of an animal, if a vehicle (collides with another) causing an accident, it would not be given the resemblance of the animal situation mentioned above. Mufti Taqi Uthmaani said, “The driver of the vehicle will have to pay for the deficiency caused, since he is the one in control of the car which is only a machine, he will have to pay for the deficiency caused. There is a great difference between an animal and a vehicle. An animal can make its own movements, while a car needs the driver to mobilize it’. (Buhooth fee Qadayaa Fiqhiyya Mu’aasara Page 310)

Making Qiyaas of limited liability upon Waqf of and Baytul Maal is not correct, since Waqf and Baytul Maal are not possessions of anyone. The responsible ones are not the owners of the wealth. They only oversee that the wealth is utilized in the correct manner. They act as mere helpers or employers. Waqf and Baytul Maal are properties which endure. If such a time comes when it suffers or falls in debt, after a period of time as the wealth increases, it can be paid off, even though those in responsibility have changed. The workers can be reshuffled but the debt remains payable.

In conclusion, those responsible for the company will be responsible for the debt of the company. The debt can be demanded from them. If they did not pay off the debt, they will be answerable to Allah.

And Allah Ta’ala knows best

Mufti Muhammad Ashraf

Darul Iftaa

Jameah Mahmoodiyah

Springs

                  

16 June 2005

09 Jumaadul Oola 1426

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