The Concept of Limited Liability – Conclusion

CONCLUSION

The Shariah has made ample provision to initiate large business ventures. The Islamic systems of Shirkat and Mudhaarabah are adequate. In a truly Islamic state — and there is none existing today — these systems could be introduced and made to function correctly without the need to encumber it with the baatil kuffaar concept of ‘juridical person’ which spawns the evil creatures of limited liability and automatic absolution of debt in stark conflict with the Ahadith of Rasulullah (sallallahu alayhi wasallam).

It must be understood that a transaction in trade is valid only if the parties involved in the deal are human beings. This vital condition for the validity of transactions and contracts, effectively refutes and knocks out the bottom from the kuffaar concept of ‘juridical person’ with its concomitant evil consequences. Just as a stone cannot be accepted as a god even if it is given legal acceptance by some religions and laws, so too, can a stone and a piece of paper not be accepted as a legal person with powers of transacting in the way a true insaan (human being) contracts.

CONTRADICTING THE CONCEPT

After presenting his case for the acceptance and validity of the fictitious person termed ‘juridical person’, Hadhrat Mufi Taqi Saheb observes:

But at the same time, it should be emphasised, that the concept of ‘limited liability’ should not be allowed to work for cheating people and escaping the natural liabilities consequent to a profitable trade.”

This conclusion presupposes that ‘escaping the natural liabilities’ is acceptable if the trade is not profitable. But Islam does not accept this hypothesis. Whether trade is profitable or not, there is no escape from natural liabilities. It is wholly unjust and cruel to expect that Zaid has to pay the damages incurred by Bakr’s unprofitable trade. While kuffar law accommodates such injustice and escape of natural liabilities, Islam allows no scope for accepting such incongruities.

Hadhrat Mufti Saheb has presented purely his opinion unbacked by any Shar’i evidence. His entire case has been structured on the kuffaar concept of ‘juridical person’ for which there is absolutely not the slightest vestige of evidence and support in the Shariah. On the basis of an arbitrary assumption, further conclusions are made arbitrarily.

Everyone is aware that cheating, fraud and dishonesty are haraam. Therefore, it is superfluous for Hadhrat Mufti Saheb to raise this moral precept in this discussion pertaining to the purely juridical domain. But in view of the grave danger which accompanies the kuffaar ‘juridical person’ concept, Hadhrat Mufti Saheb is constrained to introduce the moral dimension.

Needless to say, there is widespread fraud being perpetrated under cover of the kuffaar concept of legal person with its concomitant limited liability principle. Fraud is perpetrated on a massive scale by both public and private companies. This is no secret. In all cases of such fraud which is cleverly concealed in cooked-up books, the creditors have to suffer while in most cases the shareholders and directors sit snug with huge sums of money and ‘private’ assets siphoned off clandestinely and fraudulently from the assets of the socalled ‘juridical’ ghost.

On the contrary, Islamic concepts and principles do not allow debtors to escape their liabilities whether the trade is profitable or not. In terms of the Islamic concept, the liabilities will hang on the necks of the debtors even on the Day of Qiyaamah. This very concept of Payment in Qiyaamah knocks the bottom out from the argument of limited liability and absolution of debts presented by Hadhrat Mufti Saheb.

Hadhrat Mufti Saheb is too well aware of the massive scams and cheating, dishonesty and fraud which accompany the limited liability idea, hence he felt constrained to offer his advice. But the kufr law does recognize this danger, hence it has instituted measures to check the anticipated fraud which is just natural for people who have no fear of Allah Ta’ala and no proper concept of the Aakhirah. Inspite of severe penalties prescribed by kuffaar governments for mismanipulation of the poor ‘juridical’ phantom, fraudsters are not deterred. The scope of subverting the ‘juridical’ fellow for dishonest personal gain is too wide.

Hadhrat Mufti Saheb suggests that the fraud could be blocked in the following manner:

So, the concept could be restricted to the public companies only who issue their shares to the general public and the number of whose shareholders is so large that each one of them cannot be held responsible for the day-to-day affairs of the business and for all its liabilities.”

Again this suggestion presupposes that public companies by far and large are honest and do not perpetrate fraud, hence only such companies should be rewarded with the “benefit” of the ‘juridical’ man with ‘his’ limited liability attribute. That public companies perpetrate scams and fraud on massive scales is not a secret to those who are abreast with developments in this sphere. They commit the worst acts of fraud. Thousands of small shareholders lose their life’s savings. Huge companies and conglomerates suddenly collapse. Both the shareholders (the general public) and creditors suffer.

Restricting the concept to public companies does not solve the problem of fraud and cheating. The bigger the company, the greater is the fraud and the more difficult to curtail and detect. They are too clever for the stupid trustees which a court appoints as inquirers into the rotten affairs of the collapsed company.

In the aforementioned conclusion made by Hadhrat Mufti Saheb, the following two items have been propounded:

(1) In view of the large number of shareholders, each one of them cannot be held responsible for the day-to-day affairs of the business.

(2) In view of No.1, the shareholders cannot be held liable for the debts exceeding the assets.

In so far as averment No.1 is concerned, the Shariah accepts this in even a small partnership of just two persons. The sleeping partner cannot be held responsible for the day-to-day affairs of the business because he simply is not active in the business and is not aware thereof. But averment No.2 is not a necessary corollary of No.1. According to the Shariah, even the dormant partner (shareholder) is liable for the debts in proportion to his percentage shareholding.

However, the Shariah makes one concession. While not absolving the dormant partners of the liabilities of the business, the creditors cannot demand payment from them. The right of demanding is vested in the partners who had actually transacted and incurred the debts. The creditors can demand from the transactors, and the latter can demand from the dormant partners. This is the effect of the operation of only the principle of Wikaalat (Agency) in Shirkat (Partnership), not of Kafaalat (Suretyship).

In conflict with Shar’i principles, Hadhrat Mufti Saheb argues in favour of total absolution of debt, and for this serious issue he presents as daleel only the fact of the large number of shareholders. But the Shariah does not accept the number or large number of shareholders as a basis for absolution of debt and for escaping liabilities.

Commenting further on this issue, Hadhrat Mufti Saheb avers:

“As for the private companies or the partnerships, the concept of limited liability should not be applied to them, because practically each one of their shareholders and partners can easily acquire a knowledge of the day-to-day affairs of the business and should be held responsible for all its liabilities.”

It is acceptable according to the Shariah that the large number of shareholders who have no active role in the affairs of the business be exonerated from the malpractices of the active culprits. But, the Shariah does not accept the hypothesis that they be absolved of the liabilities which their agents had incurred. If anyone claims the contrary, it devolves on him to produce Shar’i evidence, not opinion, regardless of how rational and acceptable such opinion may appear on the basis of the economic principles propounded by western or any other kufr system of economics.

Pursuing his argument, Hadhrat Mufti Taqi Saheb states:

“As for the private companies or the partner ships, the concept of limited liability should not be applied to them, because, practically, each one of their shareholders and partners can easily acquire a knowledge of the day-to-day affairs of the business and should be held responsible for all its liabilities.”

The concept of limited liability is a purely kuffaar concept for which attempts are being made to make it acceptable to the Shariah. After accepting the validity of this concept, Hadhrat Mufti Saheb seeks to deny the full consequence of the ‘juridical person’. If the ‘juridical person’ concept which is alien to Islam, is accepted, then its effects should not be divorced from it. To apply the limited liability principle to only public companies and to debar private companies from its ‘benefit’ is in conflict with this concept for whose ‘Islamic’ validity much argument has been tendered, albeit fallacious.

Non-Muslims who had originated this concept apply it logically and uniformly to both public and private companies. To restrict it to only public companies is unintelligent and illogic after the validity of the ‘juridical man’ has been accepted. This type of incongruity and conflict develops when Muslims endeavour to give Shar’i legality and status to the ideas of the kuffaar. The concept in the western capitalist system is original, uniform and workable since it conforms to their nafsaani behests. But when it is introduced into Islam, it is artificial, incongruous and unworkable because it has to be subjected to a process of abridgement since even in the opinion of the votaries of this concept, it is fraught with perils. But then the abridgement results in a hybrid concept unacceptable to both the Shariah and the capitalist system.

Hadhrat Mufti Saheb’s averment that the ‘benefit’ of limited liability should be denied to private companies and partnerships, presupposes that all or most small companies or their shareholders and partners are crooks and frauds while all or most of the directors and shareholders of large public companies are honest gentlemen. The reality is the opposite. Whatever the reality may be, the suggestion ventured by Mufti Saheb is illogic and untenable. He has no valid basis, neither logical nor Shar’i, for his suggestion.

The arbitrary implication that the partners/shareholders of small partnership businesses are dishonest and frauds is lamentable to say the least. Furthermore, such an arbitrary opinion unbacked by evidence cannot be presented as a basis for the illogic proposition of differentiating between public and private companies.

The claim that ‘each one of the shareholders and partners ’ of small private companies and partnerships ‘can easily acquire a knowledge of the day-to-day affairs of the business’ cannot be a valid basis for creating a difference in the obligations of partners in a small partnership and a big or public partnership/company. Besides personal opinion, there is no basis for this, neither in the Shariah nor in the western capitalist system.

The determinant in the duty of fulfilling obligations is the haqq (right) of others. In this case the huqooq (rights) of the creditors are at stake. Denial of the rights of the creditors on the flimsy pretext of ignorance of the day-to-day affairs of the business is untenable, unacceptable and palpably unjust as well as in conflict with Islam’s declared principle of Payment in even the Aakhirah.

The directors of big companies and the active partners of small or private partnerships can easily pull wool over the eyes of the shareholders. It is only when the bubble bursts or is about to burst will the dormant partners realize the truth. In fact, the Shar’i rationale for the need to validate partnership enterprises is that while some people have money, they are ignorant of the ways of utilizing the money constructively to generate profit. On the otherhand, some people lacking money do have the expertise of using the capital to generate profit. But Islam does not validate absolution of debt and shirking of obligations on the basis of such ignorance of the capitalists who advance the initial capital.

The clever one, if he is dishonest, has the ability to conceal the real state of affairs of the business whether the enterprise is a public or a private one— a business with innumerable shareholders or a small business with just two partners. Honesty and dishonesty are not the attributes of quantity. It does not follow that a large company with numerous shareholders will operate honestly, hence it should be privileged with ‘limited liability’ while small partnerships are run by dishonest partners hence they should be deprived of this privilege. This proposition is unreasonable.

It is illogic and unintelligent to penalise a partnership if it is small or private, and to award it if it is large or public Just as partners of small partnerships cannot be exonerated from their liabilities, so too may the partners of large partnerships or companies not be let off the hook. They enjoyed the profits of the business, so they are Islamically, legally and morally obligated to share the burden of the liabilities proportionately.

The criterion of honesty is not the largeness or the smallness of the partnership/company nor the numerical factor of its partners or shareholders. Neither does Islam accept this criterion nor does western or capitalist economics accept it. The argument of Hadhrat Mufti Saheb and the consequences ensuing in its wake thus have no validity.

Hadhrat Mufti Saheb worked himself into a tight corner in the endeavour to produce a hybrid concept of ‘limited liability’ which does not satisfy either the Shariah or western economics, Hadhrat Mufti Saheb thus states:

“There may be an exception for the sleeping partners or the shareholders of a private company who do not take part in the business practically and their liability may be limited as per agreement between the partners. If the sleeping partners have a limited liability under this agreement, it means, in terms of Islamic jurisprudence, that they have not allowed the working partners to incur debts exceeding the value of the assets of the business. In this case, if the debts of the business increase from the specified limit, it will be the sole responsibility of the working partners who have exceeded the limit.”

Hadhrat Mufti Saheb has again lapsed into a self-contradiction in the idea of ‘limited liability’ which he has posited. In this averment, Hadhrat Mufti Saheb has implied an analogy for securing the exoneration from liability of the sleeping partners of a small partnership or private company. The analogical argument implied is as follows:

? The numerous shareholders of a public company are sleeping partners.

? The sleeping partners in the public company are and should be exonerated from liability exceeding the assets of the company (which in reality are the assets of the shareholders).

? The determinant for this exoneration is dormancy (or being a sleeping partner).

Now it is seen that this same factor of dormancy exists in the sleeping partners of a small partnership or private company. Thus, the logical consequence of exoneration from full liability should be extended to the sleeping partners of a small partnership or a private company as well.

So far the logic appears to be sound, i.e. if the determinant in the abovementioned syllogism is accepted as valid in the Shariah. In fact, it is not valid, but we have assumed its validity for a moment in order to bring to the fore the incongruency of the whole argument.

In his averment, while Hadhrat Mufti Saheb exonerates the sleeping partners from full liability, whether such partners happen to be the partners/shareholders of a small business enterprise or of a big public company, he distinguishes between the active partners (who may be the directors) of a public company and the active partners of a small partnership or the active shareholders (who may be the directors) of a private company. In relation to the private company, Hadhrat Mufti Saheb states explicitly that the debts will be the “sole responsibility of the working partners who have exceeded the limit”. But the venerable Mufti Saheb does not pass this same fatwa for the working partners/ shareholders of public companies.

In so far as the working partners or shareholders of a public company are concerned, Hadhrat Mufti Saheb applies the western concept of the ‘juridical person’ fully thereby exonerating the working partners from their debts. But in relation to the private company, Hadhrat Mufti Saheb formulates an entirely new principle which conflicts with the ‘juridical person’ he is at pains to validate and offer Shar’i legality. And, this new and arbitrary principle is that the same exoneration is not applicable o the active partners of a small partnership or private company.

There is no justification to apply the concept of ‘juridical person’ partially to a private company when the natural, logical and legal (legal in kufr law) consequence of the application of this concept is identical for even a private company. The concept does not provide for differentiation between a public and a private company. The shareholders of both are legally allowed to escape their liabilities. But Hadhrat Mufti Saheb selectively applies the western concept of absolution of debt, described deceptively as ‘limited liability’.

But, for this selection there is no basis in either the Shariah or in the western system of economics. In fact, rationally the selective process adopted by Hadhrat Mufti Saheb is seriously flawed with the defect of incongruity. This is indeed not surprising. When an attempt is made to create a fusion of Haqq and Baatil, the logical consequence is incongruity which the Shariah rejects.

With regard to the agreement between the sleeping and active partners of a small partnership which Hadhrat Mufti Saheb equates with a private company, the attempt has been made to show that the Shariah accepts the concept of limited liability. Let it be clearly understood that wherever in the Shariah the idea of ‘limited liability’ appears, it is not the capitalist concept of absolution from debt. It never means that the debt is automatically wiped out with the creditors having no relief and no further claim of demanding their rights. It simply means that a specific partner or partners is/are fully responsible for the debts to the creditors while the others are in turn liable to the active transactors for their share of the liabilities. It does not mean that the creditor’s claim lapses or falls away as the kuffaar limited liability concept propounds.

The ‘limited liability’ of a partner or partners in an Islamic partnership (Shirkat) business is not the same as the ‘limited liability’ concomitant to the western concept of the ‘juridical person’. In fact the term ‘limited liability’ is foreign to Islamic jurisprudence. In the Islamic sense it means the full liability for which the partner had assumed responsibility. Prior to the commencement of the business the partner stipulated with his active partner that he (the active partner) should not incur debts in excess of x amount, and if he does, he is responsible. Thus, when the active partner incurred debts in excess to the x amount, he himself is liable since the excess is not the debt of the sleeping partner. The Shariah clearly stipulates that in a partnership, each partner while being the Wakeel (agent) of the other partner is not his Kafeel (guarantor). The creditors can demand from only the one who had contracted and transacted with them, not from the other partner whether he happens to be dormant or active.

However, the one partner can demand payment from the other partner since he had acted in the capacity of his agent. But he cannot demand from his principal (his partner whose agent he is) more than the amount which was stipulated and agreed on. Thus, it is not the western concept of ‘limited liability’ which operates here. It is full liability for the amount agreed on.

If the principal sends his agent to buy one loaf of bread, but he goes and buys two loaves, he cannot claim payment for two loaves. The principal will pay for only one loaf. It will be baseless to argue that he pays for only one loaf by virtue of some ‘limited liability’ concept. It is simply the principle of Wikaalat (Agency) which operates here.

In the argument presented by Hadhrat Mufti Saheb the terms partners and shareholders are used. He uses the term ‘shareholders’ for the investors in a public company while the word ‘partners’ is used for the investors in a private company. This implies that Hadhrat Mufti Saheb differentiates between a public and a private company. It was necessary for Hadhrat Mufti Saheb to imagine a differentiation. This differentiation is the effect of the partial acceptance of the consequence of the ‘juridical person’ concept. Hadhrat Mufti Saheb applies it fully to the public company so that the ‘shareholders’ ma y derive the full benefit of absolution of debt which ‘limited liability’ means. On the other hand, Hadhrat Mufti Saheb strips the ‘juridical man’ of this power of absolving debt in relation to the ‘shareholders’ or partners of a private company. Yet there is no difference whatsoever in the partnership concept as it relates to a public company or to a private company, neither according to the western concept nor according to the Shariah.

The verdicts of both the Shariah and western kufr law are uniform. The same rules apply to the shareholders (partners) of public and private companies. Although the effects of the two systems are opposites, they nevertheless are uniform. The ‘juridical man’ concept of the kuffaar absolves the shareholders of their liabilities whether they happen to be shareholders in a public or private company. The Shariah on the contrary, holds all shareholders responsible for their liabilities—full liability — whether they are shareholders of a public or private company.

However, Hadhrat Mufti Saheb has landed himself in the unenviable situation of having to borrow from both systems to produce a new concept which is unacceptable to both the Shariah and to the western economic system.

In the new concept which stems from Hadhrat Mufti Saheb’s arguments, the limited liability principle of the ‘juridical person’ applies fully as envisaged by its formulators to the public companies while it does not or should not apply to private companies or the partnerships. Thus Hadhrat Mufti Saheb states: “As for the private companies or the partnerships, the concept of limited liability should not be applied to them…..”

ANOTHER ASPECT

Another aspect apart from the limited liability discussion, is the ambiguous manner in which Hadhrat Mufti Saheb uses the terms private companies and partnerships. Does Hadhrat Mufti Saheb differentiate between private company and partnership (Shirkat)? Are the shareholders of a public company partners in an Islamic Shirkat enterprise? Or is a public company some other type of a venture? Does Mufti Saheb use the words shareholders and partners synonymously in relation to a private company? Is a private company the same as an Islamic Shirkat enterprise? Islam has clear concepts on these issues. Perhaps Hadhrat Mufti Saheb has different concepts formulated by blending the two diametric opposite systems. If so, we would like to say that any such fusion produces greater confusion which cannot be substantiated with Shar’i evidence.

In concluding his discussion, Hadhrat Mufti Saheb makes the following sweeping statement:

The upshot of the foregoing discussion is that the concept of limited liability can be justified, from the Shariuah viewpoint, in the public joint-stock companies and those corporate bodies only who issue their shares to the general public.”

This sweeping statement is indeed the product of an arbitrary opinion. Neither is there justification for its application to the public companies nor to corporate bodies. To say that the Shariah permits this concept for ‘only’ the public companies is absolutely baatil in the Shariah. It being baseless in terms of the western ‘juridical person’ concept is glaring. Hadhrat Mufti Saheb has not produced a single valid argument based on the Shar’i principles of Qiyaas to substantiate his claim for the validity of the ‘juridical’ mirage.

In conclusion, we can safely claim that this concept of the western kuffaar is a conspicuous example of chicanery and legal deception in the wake of which ensues massive fraud and denial of fulfilment of the huqooq of the creditors.

And, Allah knows best.

[Maulana A S Desai]

Mujlisul Ulama of South Africa 

Back to Contents

Leave a Reply

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