The Concept of Limited Liability – Part Two

(4) INHERITANCE UNDER DEBT

Regarding the insolvent estate of a deceased, Hadhrat Mufti Taqi Saheb says:

“According to the jurists, this property is neither owned by the deceased, because he is no more alive, nor is it owned by his heirs, for the debts on the deceased have a preferential right over the property as compared to the rights of the heirs. It is not even owned by the creditors, because the settlement has not yet taken place. Being property of nobody, it has its own existence and it can be termed a legal entity.”

The aforementioned averments are not entirely correct. The following claims are incorrect:

? The property of the deceased is the ‘property of nobody’.

? The property of the deceased, according to the Jurists, is neither owned by the deceased nor the heirs.

Hadhrat Mufti Taqi Saheb arbitrarily without Fiqhi or Shar’i basis makes the following erroneous conclusion:

“Being property of nobody, it has its own existence and it can be termed a legal entity. The heirs of the deceased or his nominated executor will look after the property as managers, but they are not the owners.”

The only statement which is correct here is that “his nominated executor will look after the property as manager.” The heirs of the deceased while they too can look after the affairs of the estate, are not in the same capacity as the executor.

Regarding the ownership of the deceased’s estate, there are two views propounded by the Fuqaha. None of these corroborate the claim that ‘nobody is the owner of the deceased’s insolvent estate’.

The one view is that the estate of a person after his death and prior to division legally remains the property of the deceased. This view is stated as follows in Al-Mabsoot of Sarakhsi, page 111, Vol.28:

“The estate after death, prior to division, remains in the ‘hukm’ of the property of the murith (the deceased from whom the heirs inherit).”

Recording the same view, Hidaayah states in Vol.2, page 638:

“The ownership (of the deceased) remains after death in view of the need…….”

The other view is that the ownership of the heirs is established and confirmed simultaneously with the death of the murith. Hidaayah states:

“The right of the heirs is confirmed in the assets of the murith from the inception of the (deceased’s) illness (maradhul maut), hence he (the deceased is estopped from acting in two thirds (of his estate).” (Vol.2 page 639)

 On page 639, Vol.2 of Hidaayah also states:

The reality of ownership of the heir is confirmed at the time of death while before death only the right (of the heir) is confirmed.”

According to the Fuqaha these are then the two views, namely, (1) The ownership of the deceased remains after his death and continues until division has taken place. (2) Ownership is confirmed at the time of death.

The Fuqaha do not propound the view that nobody is the owner of the deceased’s estate. Regardless of the liabilities exceeding the assets, ownership passes to the heirs since their right of ownership is established during the maradhul maut (the last sickness) of the murith. Thus, at the time of his death it is not a question of their right or claim being established and confirmed. This right came into existence during the last illness of the deceased. On his death, they automatically become the owners of the estate.

This is not the same for the creditors. Their claim over the assets of the deceased existed from the very time he had incurred the debt. Their claim and right remain even after his death because Islam does not recognize the concepts of limited liability and automatic absolution of debt.

On the death of the murith, the heirs become the owners automatically. Hence, if the heirs distributed the assets without paying the creditors of the deceased, the distribution will be valid, not baatil. The creditors will nevertheless have the right of pursuing them to demand their rights which the heirs had usurped. Assuming that after the distribution of the assets to the heirs, the creditors waive their claim, the distribution remains valid because they had distributed what was in their ownership.

The heirs need not procrastinate the division of the estate. It is quite possible that considerable time will lapse before the rights of the various creditors are proven. It is also possible that some creditors may be absent. It is also possible that at the time of the death of the murith the financial state of the estate is not known. The debts may surface later. Some creditors may not even be aware of the death of their debtor. In view of these possibilities, the heirs will proceed with the division of the estate and take possession of their respective shares of the assets. Later when the rights and claims of the creditors are proven, the heirs will have to pay, not because the assets were in the ownership of the creditors, but on account of their rightful claims.

If it should be assumed that indeed nobody is the owner of the insolvent estate of the deceased, then too there is no compelling reason to create a ‘juridical phantom’ to assume ‘ownership’. The division and the fulfillment of rights can proceed without ownership having passed to anyone. In this case it will be said that ownership passes to the heirs and creditors after division, and for the presentation of a rationale, it will be said that the need occasions the view of ownership remaining with the deceased until division takes place. This is in fact the view stated in Al-Mabsoot.

If anyone is surprised at the claim of a dead person being an owner, then we must say that the surprise should be greater for the silly concept of a piece of paper or an abstract idea being an owner such as the fictitious creature of the western kuffaar, namely, the ‘juridical person’. At least the deceased at one stage in the very recent past was a true owner. He was an honourable insaan who is Ashraful Makhlooqaat (Allah’s noblest creation). Thus, the surprise will be totally misdirected and baseless.

There is therefore, absolutely no basis for presenting the insolvent estate of the deceased as grounds for claiming validity for the concept of juridical person with its un-Islamic consequence of absolution of debt or denial of the rights of the creditors.

ABSOLUTION OF DEBT

With regard to the insolvent estate of the deceased, Hadhrat Mufti Saheb states:

“…..the liability of this juridical person (the estate of the deceased) is certainly limited to its existing assets. If the assets do not suffice to settle all the debts, there is no remedy left with its creditors to sue anybody, including the heirs of the deceased, for the rest of their claims.”

The ability of the creditors to claim is restricted to the material assets of the deceased. It is palpably erroneous to claim that there is no remedy left for the creditors. Yes, in terms of kuffaar laws, there is no remedy. But according to the Shariah, the claims of the creditors are not eliminated on account of the insolvency of the estate. The claims remain here and will remain in Qiyaamah.

The heirs cannot be pursued because they are not indebted to the creditors of the deceased. It is not that they are absolved of the debt in terms of some limited liability concept of the Shariah. In relation to the creditors of the deceased, the heirs are outsiders just as non-heirs are. The introduction of the limited liability claim here is thus superfluous and baseless.

Perhaps Hadhrat Mufti Saheb had not reflected deeply regarding the consequences of absolution of debt and limited liability stemming from the western juridical person concept. If this concept is accepted, the implication is that the creditors will have no claim over their debtors in Qiyaamah. This is truly a dangerous theory because the Nusoos are categoric and emphatic in declaring that the creditors will be able to claim their huqooq in Qiyaamah and receive payment there. In fact, even the Shaheed (Martyr) will be held liable for debt notwithstanding the obtainal of forgiveness for all his sins. We are certain that Hadhrat Mufti Saheb will at this juncture appreciate the danger of the concept of limited liability.

To cancel clear and categoric Nusoos simply to find validity and acceptability for the western juridical person and its effect of limited liability is indeed fraught with grave perils among which is the rejection or abrogation of clear and Saheeh Ahaadith on the basis of extremely flimsy ta’weel (interpretation).

Hadhrat Mufti Taqi Saheb avers:

“If a juridical person can be treated a natural person in its rights and obligations, then every person is liable only to the limit of the assets he owns……”

There is a contradiction here. If every person is liable to the limit of the assets he owns, then it conflicts with the limited liability concept Mufti Saheb propounds because in terms of this principle every person (shareholder) is absolved of the debt incurred in the name of the juridical person. Only the assets of the company can be claimed by the creditors, not the assets the shareholders own in their own names.

Perhaps Mufti Saheb has phrased it wrongly. In view of the principle of limited liability he advocates, he refers to the assets or amount of capital which the shareholder has invested in the company. While he will lose these assets, his other assets unrelated to the company will remain unaffected and he will be absolved of the debt.

How will Mufti Taqi Saheb reconcile this automatic absolution of debt acquired from kuffaar law with the many Ahadith which clearly negate absolution and on the contrary confirm the claim and right of the creditor to continue into the Aakhirah?

Hadhrat Mufti Taqi Saheb further propounding the limited liability principle states:

“…and in case he dies insolvent, no other person can bear the burden of his remaining liabilities, however closely related to him he may be. On this analogy the limited liability of a joint stock company may be justified.”

This analogy is fallacious. The venerable Mufti Saheb has simply stated what is so obvious. Relationship and family ties do not produce liability. The one who has liabilities is responsible for discharge of his obligations. As mentioned earlier, the heirs are not liable for the debts of the deceased for the simple reason that the debts are not their liability. The question of limited liability and absolution of debt is thus not directed to them. There is therefore no analogy whatsoever on which to base the limited liability principle of the kuffaar.

(5) ABD-e-MA’THOON

Hadhrat Mufti Taqi Saheb presentin g another example to substantiate limited liability, states:

Here I would like to cite another example with advantage, which is the closest example to the limited liability of a joint stock company. ……The slaves of those days were of two kinds………There was another kind of slaves who were allowed by their masters to trade. A slave of this kind was called abd-e-ma’thoon. The initial capital for the purpose of trade was given to such a slave by his master, but he was free to enter into all commercial transactions. The capital invested by him totally belongs to his master. The income would also vest in him, and whatever the slave earned would go to the master as his exclusive property. If in the course of trade, the slave incurred debts, the same would be set off by the cash and stock present in the hands of the slave. But if the amount of such cash and stock would not be sufficient to set off all the debts, the creditor had a right to sell the slave and settle their claims out of his price. However, if their claims would not be satisfied even after selling the slave, and the slave would die in that state of indebte dness, the creditors could not approach his master for the rest of their claims. Here the master was actually the owner of the whole business, the slave being merely an intermediary tool to carry out the business transactions. The slave owned noth ing from the business. Still, the liability of the master was limited to the capital he had invested including the value of the slave.”

In this example, there is no substantiation for either the juridical person or for the principle of limited liability in the meaning of the concept of the capitalist economists. Sight should not be lost from the fact that Hadhrat Mufti Taqi Saheb has presented the principle of limited liability with its consequence of automatic absolution of debt as the logical effect of the acceptance of the juridical person. Without the existence of a ‘juridical person’ there is no basis for the principle of ‘limited liability’. In fact, the creature known as ‘juridical person’ was spawned specifically for the principle of limited liability.

But, in the example of Al-Abd-ul Ma’thoon (the slave who is permitted by his master to trade), the question of juridical person does not feature. The slave is not a juridical person. His master is not a juridical person. In this example are only real human beings.

With regard to limited liability, it does not apply at all to the actual trader, namely, the Abd-e-Ma’thoon. The actual trader, dealer, transactor and contractor is the Abd-e-Ma’thoon, not the master. Hence, Abde- Ma’thoon is not absolved automatically of the debts he has incurred. He has to pay the debt he has incurred even if it takes him a lifetime. If at the end of his lifetime, the debt is not paid, the right of the creditors will extend into Qiyaamah where they will have the right to pursue him and demand payment.

If the Abd-e-Ma’thoon is unable to pay his debts, whatever wealth and stock he has in his possession will be possessed by the creditors. After this, if the debts are not fully discharged, the creditors have two options:

(1) To compel him to work and pay his debts.

(2) To sell him and take the proceeds of the sale as payment on his debt account.

If after selling him, the debts are not fully paid, the creditors can still pursue him after he has been emancipated. The better option, ofcourse, is to induce him to work and pay. He is not absolved of the debt. Limited liability does not apply to the slave, the slave, who is the actual trader and transactor.

The master is responsible for only the amount which he had initially invested and the price of the slave. But this is not due to any limited liability principle as advocated by Western theory. This ruling of the Shariah is based on another principle, namely, the principle of Taukeel (the Shariah’s system of Agency) is the principle which governs the relationship, rights and obligations of the parties to a transaction. The liability and obligation of payment devolve on the actual transactor/ contractor who had incurred the debt. In relation to the creditor/seller, the obligation of payment is not the responsibility of the Muakkil (the Principal) who had appointed the Wakeel (Agent). The Shariah states this principle as follows:

“He (the Wakeel) is the transactor (or contractor), hence, the huqooq (the obligations) relate to him.” (Hidaayah, page 505, Vol.2)

“Verily, the huqooq (rights and obligations) of a transaction relate to the Aaqid (the transactor).” (Hidaayah, page 163, Vol.2)

“The huqooq (rights and obligations) of every transaction the Wakeel relates to himself, e.g. selling, leasing, relate to the Wakeel not with the Muakkil (Principal)………The Wakeel is the actual transactor (Aaqid) in reality……Since he is the actual transactor the huqooq of the transaction apply to him.” (Hidaayah, page 163, Vol.2)

“If the Muakkil (Principal) demands payment from the buyer (to whom the Agent sold the item), he (the buyer) has the right to deny payment because in regard to the transaction (aqd) and the rights of the aqd, he (the Muakkil) is a stranger in view of the fact that the huqooq relate to the aaqid (the transactor) (Hidaayah, Vol.2)

This makes it abundantly clear that in terms of the Shariah, the creditors can demand payment from only the Aaqid (the one who incurred the debt). In this case it is the Abd-e-Ma’thoon (the slave whom the master permitted to trade). Furthermore, while the creditors cannot demand payment of the debts from the owner of the Abd-e-Ma’thoon, the latter is not protected by any limited liability principle which absolves him from the debts. He has to pay with whatever stock and cash he has on hand. Then he has to work and pay the balance of the debts. In fact, if the creditors decide, they can sell him and divert the proceeds towards payment of his debt. Should the master emancipate the slave, he (the slave) will be pursued by the creditors for any outstanding debt and he will be compelled to pay. And, if he dies insolvent, the claims of the creditors will apprehend him in the Divine Court in Qiyaamah.

This should be sufficient to convince any impartial student of the Deen that the principle of limited liability does not pertain at all to the Abde- Ma’thoon. In so far as the master is concerned, limited liability applies in its literal meaning, not in the technical meaning of the kuffaar concept which gives rise to absolution of debt and to the fictitious person.

The master’s liability is limited to the initial stock and the price of the Abd-e-Ma’thoon because he (the master) undertook liability to this extent. In other words, the master was the Kafeel (guarantor) of this amount. Thus, on the basis of the Shar’i principle of Wikaalat, the creditors have the right to demand full payment (not limited payment) from the Abd-e-Ma’thoon, and not from the master who happens to be the Muakkil. And, in terms of the principle of Kafaalah (Suretyship), the creditors can demand from the master the amount which he had undertaken to pay.

This then is the explanation for the limited liability of the master. The limited liability in this case is not the product of the concept of a jurid ical person, for there is no such fictitious person involved in the contract between the Abd-e-Ma’thoon and the creditors nor in relation to the master who is the Muakkil.

The principle of Taukeel (Agency) is not confined to the specific example of the Abd-e-Ma’thoon. The same principle governs a Shirkat (Partnership) enterprise as well. In partnership businesses such as Shirkat-e-Anaan and Shirkat-e-Wujooh, the creditors can demand payment and pursue only the actual partner who had transacted and had incurred the debt. In these types of Shirkat ventures, each partner is the Wakeel of the other partner, not the Kafeel. Hence the huqooq of the aqd apply to only the transacting partner. Yes, the Wakeel can demand payment from his partner and pursue him until the end of his life and if necessary, into Qiyaamah.

According to Imaam Shaafi (rahmatullah alayh) the problem is more difficult for Hadhrat Mufti Taqi Saheb because the Shaafi Math-hab teaches that the huqooq relate to the Muakkil. Explaining the rationale underlying the debt being solely the liability of the Abd-e-Ma’thoon, the Hanafi Fuqaha state:

“If they (the creditors) wish, they may pursue the Abd (Abd-e-Ma’thoon)for the entire debt because the factor (or reason) of the obligation (of the debt) emerges from him in reality, and that is the transaction.” (Badaaius Sanaai’, Vol.7, page 197)

The master cannot be compelled to settle the debts because he was not the transactor and he had declared the amount which he guarantees, hence the excess debt is not his liability. The Hanafi Fuqaha state in this regard:

“If after the Abd has been sold (by the creditors), there remains unsettled debt, this cannot be demanded from the master because there is no debt on him. The slave has to be pursued after his emancipation to settle the debt because the whole of the debt is his liability.” (Badaaius Sanaai’, page 197, Vol.7)

The aforegoing explanation should be adequate to dismiss the claim of juridical person, limited liability and absolution of debt read into the relationship which the Abd-e-Ma’thoon and the master have with the creditors.

Next: The Concept of Limited Liability – Conclusion

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