Concept of Limited Liability in Islamic Law (Sharia Law)

Before explaining the concept of limited liability in Islamic law its important to explain what is the meaning of Liability itself? Liability in law means the responsibility of a person toward others in case of loss due to negligence or will-full destruction of the property held in possession.

Now, what is limited liability? To understand the limited liability, you must familiarize yourself with the concept of a separate legal entity (personality). Before you comprehend the underlying concept of limited liability in Islamic law. Both concepts derive their roots from western jurisprudence, developed in the 18th century.

Read also: Is Court Marriage Allowed In Islam – Legality of Court Wedding in Islamic Law

Debate over Limited Liability In Muslim Scholars

Our Fiqh (known as the understanding of Islamic law) is greatly influenced by modern corporations due to their significant worldwide role. In our classical Fiqh literature, these concepts were unknown and no research was carried out.

But the legal needs of today demands that such new concepts should be examined in the light of sharia. So that we can conclude, whether the concept limited liability in Islamic law affirms with the basic principles of Sharia not.

Two groups hold a different opinion on the concept of limited liability.

  • One group says that the concept of limited liability does exist in Islamic law, for which they give examples of Waqf, Bait ul Mall, Bequest and Abd al mazoon.
  • Other group does not recognize this concept by rejecting the argument given in the above-mentioned examples.

In this post, I had tried to explain the opinion of the group who does not recognize this concept of limited liability in Islamic law and I had to explain the arguments to establish my claim. There is a verse in the Quran based on ijma (consensus of Islamic jurist) which relates to this topic which is as under:

“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”.[1]

Now I will proceed with my topic.

Reviews of Books Relating to The Concept of Limited Liability in Islamic Law

I have consulted some books and read many articles on this topic to get a clear picture of this concept. Unfortunately, I was unable to get a hold on a proper book which can give me an answer so that I can write this research paper, one reason is that most of the material is in Arabic. Some of the books are as under;

An Introduction to Islamic Finance

This book is written by Mufti Taqi Usmani in the year 2007. He is currently working in a bank as a sharia adviser. In his book he has discussed many topics like musharaka, Mudarba, Ijarah, etc. and especially he has discussed the idea of limited liability in Islamic law in a whole chapter.

In his book he has given the example of Waqf Bait ul Maal etc. to give strength to his claim that such idea was already recognized in Islamic law, however, direct evidence cannot be found on it only evidence he has given are examples, and he concludes that after giving these examples that limited liability in Islamic law is accepted by the classical jurist.

Islamic Law of Business Organization: Partnerships

This book is written by the famous intellectual named Imran Ehsan Khan Nyazee in 1997. This book was the first of its kind which has given much information regarding the partnership in Islam. He has discussed various types of partnership as exercised in Islam and then he has given an opinion of different schools of thought regarding the issues involved in the partnership.

At the end of this book, he has discussed the Islamic Forms of Partnership for the Modem World. Where the author attempts to identify issues of contemporary concern in corporate law and finance with special reference to Pakistan.

The main highlighted issues were “Islamization of the modem business corporation” and issues about a partnership, such as the question of a legal or fictitious personality for partnership and the limited partnership in which one or more partners may have limited liability while sharing the profit of the partnership.

Issues Involved In The Concept of Limited Liability In Islamic Law

  1. Whether Islamic law recognizes the concept of limited liability?
  2. Is there any relation between separate legal personality and limited liability?
  3. Whether the example of Waqf given by the proponent proves that the concept of limited liability exists?
  4. Whether the example of bait ul Mall also proves the limited liability concept?
  5. Whether the example of inheritance under debt also proves this concept?
  6. What is the reality of the example of Abd al mazoon given by the proponent?

Now I will try to elaborate on these issues one by one in detail so that we can understand the reality of this concept.

Analysis of the Issues:

1.Whether Islamic law recognizes the concept of limited liability?

In Islamic law the liability of a free Muslim is unlimited. If a Muslim is under debt. And this debt is so huge that he cannot pay it. Then the creditors have the right to claim their money by taking away all of his property. Except for the house where he resides.

The creditor has a right over all of his belonging even on warm clothes.[2] The reason behind such a stance is that payment of debt is considered a sacred obligation in Islam. It is narrated that, “once Prophet (SAW) refused to offer a funeral prayer of a person who was under debt. One companion stood up and undertook the debt of deceased companion and then holy Prophet (SAW) offered funeral prayer”.[3]

There is also a hadith that says that “the greatest sin after the major sin Allah prohibited, with which a servant of Allah will meet is that a man dies saddled with debt for which he has not left the assets to pay for”.[4] The theory of absolution of debt which represents the idea of limited liability is wrong. According to which when a person becomes insolvent then the creditors have right over his property.

If his property cannot satisfy the total claim of creditors, he is free from liabilities. So, he can start again and fooled more people but Islam does not recognize this idea. Islam declares that the concept of limited liability is alien which is forcefully incorporated into the Islamic legal system[5].

2. Is there any relation between separate legal personality and limited liability?

The modern jurist who favors the idea of separate legal personality strongly contends that these two concepts are connected, or we can say that these are the two faces of the same coin. To disprove one concept results in automatic denial of the other concept.

According to a famous scholar, he says that limited liability is the logical consequence if we accept the idea of a separate legal personality.[6] We can say that the western scholars just to protect the stake of investors have invented that idea of separate legal personality.

So, if we destroy the foundations, the building will also collapse. It means if we disapprove the idea of separate legal personality in the light of Sharia than there remains no possibility to accept the concept of limited liability in Islamic law.

3. Whether the example of Waqf given by the proponent shows that the concept of limited liability exists?

Those who are in favor of this concept produces the example of Waqf and proves limited liability. But what is Waqf? The Waqf is a legal and religious institution wherein a person dedicates some of his properties for a charitable purpose.

The properties after being declared as Waqf can no longer remain in the ownership of the donor. The beneficiaries of a Waqf can benefit from the corpus or the proceeds of the dedicated property. But they are not its owners as well. Its ownership vests in Allah Almighty alone.”[7]

After giving the example of waqf the scholars assert that the waqf was treated as a legal entity the same as a natural person. They say that when a property is purchased with the income of waqf it does not become part of the waqf rather this property is owned by the waqf.[8]

In reality, there exists a person who is called waqif, he is the person who dedicates his income or property and also gives direction according to which the income of waqf is utilized. The sharia law is very simple on this issue, it says that the property purchased with the income of waqf does not become waqf itself rather it becomes part of the waqf which will be used as to the directions of the waqif.[9]

Now here arises a question that, if the waqf has a separate position then who is the owner of it. It is already stated that Allah is the owner of this institution and he is not some fictitious thing. He is the only reality in this world. There is some statement of fuqaha by which we can understand the ownership over waqf.

Abu Yusuf and Muhammad said that Waqf in the Shariah is the retention of an object (or property) in the legal category of it being in the ownership of Allah Ta’ala in such a way that the benefit (of the Waqf asset) reaches the servants (of Allah). Thus, the ownership of the Waaqif terminates and passes to Allah Ta’ala. It is therefore absolute. It cannot be sold, nor pawned, nor inherited.”[10]

“The (Waqf) property is the haqq of Allah Ta’ala.”[11]

So from the above statements, it can be construed that Allah is the owner of this waqf property and the human act as the guardian over it so that the income can be used in the best way. Now if we examine the waqf with the perspective that it also has limited liability then again it is wrong.

Because the Waqf property is a tangible asset, not a piece of paper, it does not have shareholders from whom it has borrowed money which constitutes its capital nor does it have creditors who could be thwarted by some limited liability principle.

If the manager of the waqf takes debt from others for up keeping of the waqf property then the creditors are not restricted under the veil of limited liability. Instead, the owner has permitted the creditors that they can recover their debt from the incomes of Waqf[12].

So from the above discussion, it is understood that the example of waqf does not prove that it has limited liability in Islamic law.

4. Whether the example of bait ul Mall also proves that limited liability concept?

The second example that is given by those who argue that such a concept does exist is of Bait ul Maal. This is a legal institution, is also called state treasury, there are boxes and vaults in which the government stores its various fund which has to be utilized for state expenditure. It is assumed by the modern scholar that everyone has a right over it but no one can claim its ownership.[13]

From this proposition, the scholars argue that the Bail ul Maal also has a legal entity but in reality, it is wrong because the Khalifa acts as the guardian over the Bait ul Maal and spends that funds according to the commandment of Allah almighty.

Bait ul Maal has different types of funds which will be expended in various ways, but if funds are used fraudulently or erroneously than no one can sue the Khalifa. Instead, the individual has the right to go in court and enforce the directions that funds of Bait ul Maal should be used properly.

And if the Khalifa uses the fund in bad manners or for personal benefit than he is not free rather he can be sued in the court. The Bait ul Maal can take a loan from other people when the level of funds is very low in vaults now in this situation the creditors have the right to recover their money from Bait ul Maal, or from the government they can also demand it.

5. Whether the example of inheritance under debt also proves this concept?

While giving this example one scholar of Pakistan says that;

“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 the property of nobody, it has its 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.”[14]

His conclusion on this point is wrong and the only correct part is that “the heirs of deceased or his nominated executor will look after the property as managers”. If we talk about the ownership of deceased property there are two views. The first view is that

“The estate after death, before division, remains in the ‘hukm’ of the property of the murith (the deceased from whom the heirs inherit)”[15].

And the other view is that the ownership of the heirs is established and confirmed simultaneously with the death of the murith. The wording of the faqih is

“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).”[16]

The fuqaha do say that ownership devolves on to something, but they don’t say that such property is ownerless. With the example of inheritance under debt, the modern scholar establishes that such property is ownerless and recognizes as a separate legal entity, so it also has limited liability.

Meaning is that the creditors don’t have a chance to claim their debt, but Islam does not recognize this idea and says that it devolves into murtih or to the legal heirs. The creditors have a claim over that property because their claim arises at the time when the owner was alive but after his death, this does not dissolve the right, and they can still recover their debt.[17]

If the heirs have distributed the property without giving back the loan than such an act is not batil, however when creditors come to the heirs, they are duty-bound to repay the debt. There is also some situation when the creditors have forgotten their debt, or they are living so far that the news of death is not reached to them and the heirs have distributed the property proportionately, in this situation when it came into the knowledge of the creditors than the heirs have to return the debt.

So it can be easily said that the inheritance under debt does not have a separate entity hence limited liability idea also is not attracted, because under Islam the absolution of debt theory is unacceptable. The person who was under debt and dies by leaving the property the debt will be recovered from his property.

6. What is the reality of the example of Abd Al Mazoon given by the proponent?

A very famous example is given by the proponent is of Abd al mazoon. They strongly contend that this example shows that the idea of limited liability has existed in Islam long ago. Now what is meant by Abd al Mazoon we can understand by quoting this following statement? And whether this example proves the existence of a limited liability or not?

“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 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 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 the 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 indebtedness, the creditors could not approach his master for the rest of their claims. Here the master was the owner of the whole business, the slave being merely an intermediary tool to carry out the business transactions. The slave owned nothing from the business. Still, the liability of the master was limited to the capital he had invested including the value of the slave”[18].

In this example, there is no such proof of either the separate entity or for the principle of limited liability. Sight should not be lost from the fact that scholars have presented the principle of limited liability with its consequence of the automatic absolution of debt as the logical effect of the acceptance of the juridical person. Without the existence of a ‘separate legal personality,’ there is no basis for the principle of ‘limited liability’.

The concept known as a separate personality was specifically introduced for the principle of limited liability. Now if we talk about the separate entity thing such notion is irrelevant in this example because both the person namely the master and slave are human beings not some airy or non-existence things.

Now, as far as the idea of limited liability is concerned it can be said again that such a thing does not happen in this case. Why, because the original trader is Abd al Mazoon, not the master he is the one who incurred debt, now all the creditors have a right to recover their debt from the slave even by way of selling that slave or creditors can compel the slave to work for them until and unless all the debts are not cleared.

They can also sell the slave to recover their debt, but they cannot come before master for the rest of their debt which is unable to recover from the slave[19].

However, the master is only responsible for the extent of the investment and the price of the slave beyond that he cannot be persuaded to pay. This is not because of the limited liability which the modern scholar talks about but it because of the ‘Taukeel’ agency relationships that exist between the master and slave. Concerning the creditor or 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;

“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 applies to him[20].”

“He (the Wakeel) is the transactor (or contractor), hence, the huqooq (the obligations) relate to him.”

The opponents of this concept apply the rules of Taukeel in this example and say that the slave was appointed by the master to do business on his behalf as an agent and that agent is responsible for the debts to the third person.

They can recover it from him by whatever he has in his hand in the type of cash, and if he is not able to recover than their right is extended in Qiyaamah. But he is not absolved from this duty, on the other hand, the master is responsible only to the investment due to the rules which apply to the Muakil[21].

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 with businesses such as Shirkat-e-Annan 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.

The situation in the Hanafi School of thought is also very important to discuss this example. The Hanafi Fuqaha says that;

“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. And 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[22].”

After giving enough explanation we can say that the western idea of limited liability is not attracted in this example and the view held by the modern scholars is wrong or we can say that it is against the basic principles of sharia.

Conclusion on Findings

In Islam there exist the system of Shirka which in my humble opinion is enough it can be used in a larger commercial lever if we regulate it on the principles of Sharia. There is no need to insert the idea of limited liability in our legal system.

In Islam, there is a legal requirement that both the transacting parties must be a human being who can understand and has the desires to fulfill their obligation and also know the consequences of the breach of the transaction. It is the same as the stone which is accepted as a God in some religions but in Islam, this is not the case same is the situation in the concept of limited liability.

The finding on the above issues are as under:

  1. Firstly the idea of limited liability in the unknown in Islamic literature because Sharia says that a person is liable till his death and even after his death on that day of Qiyaamah debt will be recovered from him.
  2. Both the concepts of separate legal personality and limited liability are connected in the western legal system to reject one idea also renders another as valid.
  3. In waqf, the property is dedicated by the human and the ownership over that property lies to Allah and human acts as a supervisor over it. The income of waqf is not obtained from the public hence if it incurs some debt the creditors can recover it from the incomes of waqf.
  4. Bait ul Maal is the department of government which is controlled by the Khalifa if he misappropriates the income he is liable to the public in the court. If bail ul maal takes some debt from a person in case of deficiencies in funds this debt is repaid to the person on the non-payment of the debt the creditors can enforce his right by going in the court.
  5. When a person dies and his property is not distributed among his heirs than it does not mean that the property belongs to no one rather the right of heirs is established once the Murtih is dead. And if such property is under debt and property is distributed among the heirs than it does not constitute that the right of creditors is abolished, no they can still claim it from the heirs.
  6. The example of Abd al Mazoon does not prove the idea of limited liability because rules of Taukeel are applied in this matter and only that person who transacts with others is responsible.

Bibliography

  1. The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa
  2. An introduction to Islamic finance by Mufti Taqi Usmani, publisher Maktaba Maariful Quran, year 2007.
  3. Badaaius Sanaai by Imam Abu Bakar Ala al-Din Kasani.
  4. Hidaayah by Burhan Ul Deen Al Murgnani
  5. Fiqh ul Hadith by Hafiz Imran Ayub Lahori, Fiqh ul hadith Publication 2004. Lahore.
  6. Sukhani (D.1250 .H) Neel il outar, Urdu translation, dost associates, Lahore.
  7. Al-Fatawa Al-Hindiyyah Al-Ma’arufah Bi Al-Fatawa Al-‘aalamkiriyyah Fi Math’hab Al-Imam Abi Hanifah An-Nu’man, Published by, Dar Al-Kotob Al-Ilmiyah, Beirut, Lebanon.

[1] Al-Quran

[2] Fiqh ul Hadith by Hafiz Imran Ayub Lahori, Fiqh ul hadith Publication 2004. Lahore.

[3] Sukhani (D.1250 .H) Neel il outar, Urdu translation, dost associates, Lahore

[4] Al Jaamius sagheer

[5]The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, p. 4

[6] An introduction to Islamic finance by Mufti Taqi Usmani, publisher Maktaba Maariful Quran, year 2007 page.154

[7] ibid

[8] Al-Fatawa Al-Hindiyyah Al-Ma’arufah Bi Al-Fatawa Al-‘aalamkiriyyah Fi Math’hab Al-Imam Abi Hanifah An-Nu’man, Published by, Dar Al-Kotob Al-Ilmiyah, Beirut, Lebanon. ch.5, v.2, p.417

[9] The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, p.9

[10] Al-Jauharatun Nayyirah, page 21, Part 2

[11] Hidaayah by Burhan Ul Deen Al Murgnani Vol.1, page 622

[12] The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, p 14,15

[13] An introduction to Islamic finance by Mufti Taqi Usmani, publisher Maktaba Maariful Quran, year 2007 page.155,156

[14] An introduction to Islamic finance by Mufti Taqi Usmani, publisher Maktaba Maariful Quran, year 2007, p.157

[15] Al-Mabsoot of Sarakhsi, Vol.28, page 111

[16] Hidaayah by Burhan Ul Deen Al Murgnani Vol.2 page 639

[17] The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, page 28

[18] An introduction to Islamic finance by Mufti Taqi Usmani, publisher Maktaba Maariful Quran, year 2007 page. 159.

[19] The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, page.33

[20] Hidaayah by Burhan Ul Deen Al Murgnani, Vol.2, page 163.

[21] The Concept of Limited Liability Untenable in The Shariah by Mujlisul Ulama of South Africa, page 35.

[22] Badaaius Sanaai by Imam Abu Bakar Ala al-Din Kasani, Vol.7, page 197

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