The Concept of Limited Liability— Untenable in The Shariah

←Back to Section on Mufti Taqi Saheb’s Serious Error on “Islamic” Banking

THE HARAAM CONCEPT OF LIMITED LIABILITY

[By Hazrat Maulana Ahmad Sadeq Desai] [For those who are not able to study the in-depth academic refutation against those who are attempting to legalize hybrid models of Islamic and anti-Shariah concepts, see the summary here: Summary of the Limited Liability Concept ]

Rasulullah (sallallahu alayhi wasallam) said:

“The truthful and honest trader will be (on the Day of Qiyaamah) with the Ambiya, the Siddiqeen and the Shuhada (Martyrs).”

NO ABSOLUTION

“Verily, Maut (Death) does not absolve the debtor from debt. It is for this reason that the debt will be demanded from him in the Aakhirah. There is consensus (Ijma’) on this.” (Musallamuth Thuboot)

THE WORST SIN

“The greatest (worst) of sins after the major sins prohibited by Allah, with which a servant (of Allah) will meet Allah is that a man dies saddled with debt for which he has not left assets to pay it.” (Al-Jaamius Sagheer)

THE CONCEPTS OF ‘JURIDICAL PERSON’ AND LIMITED LIABILITY

The concept of juridical person and the idea of limited liability are cornerstones of the western capitalist economic system. Simply and truly a ‘juridical person’ is a non-existing or imaginary person created by western law. This imaginary or fictitious person is regarded as a legal entity supposedly having transacting and contractual ability and powers in the same or in almost the same way as a real, living human being. It is a ‘person’ existing on paper and in relation to the word ‘person’ it is pure fiction.

Although the ‘juridical person’ is acknowledged and understood to be a figment of the imagination of men, it is nevertheless accorded some consequences in the capitalist system of economics. The two main consequences of the fictitious man created by western economists are:

(1) The acquisition of capital from investors

(2) Insulating the partners of the business enterprise against the debt they owe their creditors. This safeguard which the ‘juridical person’ provides is termed the ‘principle of limited liablity’.

In terms of this principle if the business suffers a loss or becomes insolvent the partners or shareholders are absolved of their debts. The rights of creditors extend to only the amount which the shareholders have invested and whatever assets are registered in the company’s name. Beyond the assets of the fictitious person, the creditors have no claim whatsoever. They have to suffer and write off the debts even if the partners and the actual contractors/transactors who happen to be shareholders enjoy the bounty of enormous wealth in their personal names.

ABSOLUTION FROM DEBT

The theory of absolution from debt, that is, to be absolved of debt without payment or a wholehearted waiver by the creditors, is a kuffaar concept alien and unacceptable to Islam. Not only fictitious entities, the so-called juridical persons, but even living persons are absolved of their debts by virtue of the insolvency law of the western kuffaar. Thus, when a man is declared insolvent and all his assets have been possessed and disposed of to pay his creditors, he is totally set free from all remaining debts. Thereafter when he again acquires wealth, even millions, his creditors have no right in terms of western kuffaar law to pursue him for demanding what he owes them.

This same theory of arbitrary and legal absolution of debt, which denies the rights of the creditors, is extended to the fiction called ‘juridical person’. When a company (the fictitious entity) is declared insolvent, the claim of the creditors is limited to the assets registered in the name of the fictitious person or the ‘juridical person’ in the terminology of the capitalists. The debts are simply written off and cannot be claimed from anyone. Those who had incurred the debt are let off the hook to go free to earn and become rich while those who have huqooq (rights), namely, the creditors, have to simply relinquish their rights and claims under duress of kuffaar economic laws.

In his book, An Introduction To Islamic Finance, Hadhrat Mufti Taqi Uthmaani of Pakistan, presents argument in favour of the absolution of debt, juridical person and limited liability concepts of the western capitalists.

THE JURIDICAL PERSON

In his argument, he firstly presents the concept of juridical person. Henceforth we shall refer to the juridical person as the fictitious person, for it is nothing other than a figment of the imagination of the kuffaar. According to the venerable Mufti Saheb, the concept of ‘limited liability’ which gives rise to arbitrary absolution from debt, is the logical consequence of the concept of the fictitious person. Therefore, if sanction for the fiction can be acquired from the Shariah, then the concept of limited liability with its absolution from debt will be a logical necessity.

Outlining his postulate, Mufti Taqi Saheb states:

The basic question, it is believed, is whether the concept of a juridical person is acceptable in the Shariah or not. Once the concept of ‘juridical person’ is accepted and it is admitted that, despite its fictive nature, a juridical person can be treated as a natural person in respect of the legal consequences of the transactions made in its name, we will have to accept the concept of ‘limited liability’ which will follow as a logical result of the former concept.”

The ‘logical result’ postulated by Mufti Taqi Saheb will be correct if the Shariah is made subservient to the laws of the kuffaar economists who fabricate theories and laws according to their thinking. Assuming that the concept of a fictitious person does exist in Islamic Law independently from kuffaar economic law, then too there is no logical necessity to latch onto this concept the idea of limited liability and arbitrary absolution from debt.

Limited liability and automatic absolution from debt as logical consequences of the fictitious person theory will have to be proven on the basis of Shar’i evidence. It is a mere arbitrary conclusion to assert that if the concept of a ‘juridical person’ is accepted, then liability and arbitrary absolution from debt are logical consequences. There is no basis and no proof for this other than to tender the assertion that according to western economic law limited liability is inseparable from the concept of a ‘juridical person’. But this hypothesis is baseless in the Shariah and repugnant to Islamic intelligence.

Hadhrat Mufti Taqi Saheb, as substantiation for his claim of ‘logical result’, argues that:

“The reason is obvious. If a real person, i.e. a human being dies insolvent, his creditors have no claim except to the extent of the assets he has left behind. If his liabilities exceed his assets, the creditors will certainly suffer, no remedy being left for them after the death of the indebted person.”

The presentation of this analogy in support of the contention that limited liability is a logical consequence of the concept of the fictitious person indeed staggers the mind.

There is absolutely no scope for the general idea of limited liability and absolution of debt in the effect and consequence of the insolvent estate of the deceased.

In respect of the insolvent estate of a deceased, the question of ‘limited liability’ simply does not feature. The creditors cannot claim from persons other than the deceased because others are not the debtors. The rights of the creditors are restricted to the assets of the person who is the true debtor, namely, the deceased. The creditors cannot claim from the heirs for the simple and obvious reason that they are not the debtors and they inherit no part of the insolvent deceased’s assets which will be entirely possessed by the creditors.

Furthermore, the unfulfilled amount of the debt is not waived nor arbitrarily cancelled by the Shariah. It does not follow from the insolvent estate of the deceased that he is automatically absolved from his debt. The claim and rights of the creditors remain valid and will extend right into the Aakhirah where they will be entitled to lodge their claims and demand payment or fulfillment of their rights in the Divine Court which is NOT a fictitious institution like the kuffaar concept of a ‘juridical person’. The Divine Court has greater reality than this material world in which we live. Hadhrat Mufti Saheb is fully aware of the consequences of unpaid debt, especially if the non-payment is willful. The rights and demands of creditors — even non-Muslim creditors — will be satisfied and fulfilled in full measure in the Divine Court on the Day of Qiyaamah.

The Divine Court, the Aakhirah and Allah Ta’ala are inseparable from the Muslim way of life and thinking. These fundamental Entities are REAL and a Muslim is not allowed to formulate laws, theories, etc. in isolation from these REAL Entities.

ARE THESE ‘JURIDICAL PERSONS’ IN THE SHARIAH?

Hadhrat Mufti Taqi Saheb presents the following Shar’i masaa-il in substantiation of the western concept of the fiction called ‘juridical person’ which is a legal entity supposedly possessing all contractual powers and abilities which a real human being is capable of in Islam:

(1) Waqf

(2) Baitul Maal

(3) Joint Stock

(4) Inheritance under debt

(5) Al-Abd-ul Ma’zoon

Insha’Allah we shall proceed to discuss each one of these examples which the venerable Mufti Saheb presents as his basis for the validity and Shar’i acceptability of the capitalist system of ‘juridical person’ with its consequence of limited liability and arbitrary absolution of debt.

CONTENTS

The Concept of Limited Liability – Part One

The Concept of Limited Liability – Part Two

The Concept of Limited Liability – Conclusion

←Back to Section on Mufti Taqi Saheb’s Serious Error on “Islamic” Banking

Leave a Reply

Your email address will not be published. Required fields are marked *