There is no reason to think of Islamic law as inherently un-changeable. True, the Islamic heritage at some point of time in history started harboring elements that promote conservatism, and generations of Muslims have invoked scripture and perceived precedents to block institutional change. However, reformers have been able to draw legitimacy from the very same sources. Had a significant demand emerged for expanding the organizational options of the mercantile community, religious sensibilities would NOT have posed an impregnable barrier.
A fundamental principle of company law, being practiced today, is that it sets a company structure to enjoy the personality of a distinct legal person, which is separate from its shareholders. It has the same legal rights like an individual to enter into contractual arrangements, own property, sue and be sued in its own name rather than in the name of its shareholders. This characteristic applies irrespective of whether the company is a private limited company or a public limited company.
Islamic law is much wider than the western understanding of ‘law’, and governs ‘a Muslim’s way of life in literally every detail and, also regulates commercial transactions. Abdul Qadir Audah in a profound argument says that, ‘The Islamic Law has, since its dawn, recognized the existence of juristic persons. The state treasury and waqfs have been considered as juristic persons. Similarly, schools, orphanages, hospitals, etc., have been considered as juristic persons and competent to hold and exercise the rights’. As a result of modern thinking, the possibility of adapting the shariah to evolve modern world institutions has been considered and is in focus.
Historical Background
ANCIENT ROME (Societas Publicanorum)
The coming together of individuals associating into groups and pursuing a common goal extends to time immemorial. Under the Romans, the state was empowered to hold property and transact with natural individuals as though it was itself a person. Collectively held Roman tax firms could outlive their individual partners; organized as special partnerships called ‘societas publicanorum’, they separated ownership from management, had representatives who acted for the company as a unit, and allowed the trading of their shares. The historical evolution of the Roman societas publicanorum allowed the better understanding of political and economic preconditions for the development of the business corporation in modern history.
ISLAMIC (Sirket-i-Hayriye)
The year 1851 saw the founding of the first predominantly Muslim-owned joint-stock company of the Ottoman Empire: the Sirket-i-Hayriye, a marine transportation company, literally meaning ‘Auspicious Company’. Headquartered in Istanbul, its ownership was divided into 2,000 tradable shares. At the time, the empire was just beginning to install the requisite legal infrastructure and organized stock exchanges did not exist even in concept. Nevertheless, Sirket-i-Hayriye began operating under the patronage of Sultan Abduilmecit, its largest shareholder with the rest purchased by high government officials (almost all Turks) and other prominent financiers (mostly Armenians).
Company (Shirkah) under Islamic Law
A Company (Shirkah) is regarded as an arrangement between two or more people to do some type of work in order to make a profit and such profit is distributed among the contractual parties as dividend rather than salary. Islamic law defines ‘shirkat’ or partnership in general as an underlying idea of mixing shares in such a way that one of them cannot be distinguished from the other. The principle of legal entity has evolved from common law jurisdiction in the case of Salomon v. Salomon & Co Ltd, but the three institutions such as Bait-ul-Mal, Waqf and Masjid are based on the concept of legal person in Islamic system (Shariah) since the beginning.
Types of Company
The corporate personality of a company was implied, particularly in references made to the settlement of the company accounts and the company’s profits and losses. Under the rules of Islamic Law (Shariah), companies are sub-divided into two categories i.e., Inan (limited) and mufawadah (unlimited). Shirkat al-Uqood means two or more people coming together to make a contract for the investment of their capital and labour or reputation.
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Company of Capital (Shirkah-al-Amwal)
- Shirkat al-Amwal by way of mufawadah: Partners invest a sum of money equally in a business with equal footing in their capabilities and share its profit and loss according to agreement and will be responsible for each other’s transactional acts.
- Shirkat al-Amwal by way of Inan: Partners invest their capital not necessarily with equal proportion of shares and run their business representing each other with no responsibility of loss.
2. Company of Bodies/Labour (Shirkat-al-Amal/Abdan)
- Shirkat al-Amal or Shirkat al-Abdan by way of mufawadah: People come together with their skills such as consultants, doctors, engineers, craftsmen, lawyers and constitute the company with equal proportion of profit and loss and equal responsibility in business transactions.
- Shirkat al-Amal or Shirkat al-Abdan by way of Inan: People come together with their skills such as consultants, doctors, engineers, craftsmen, lawyers and constitute the company with different proportions of shares in profit and loss e.g., 1/3 and 2/3 or 1⁄4 and 3⁄4 or any negotiated settlement.
3. Company of Reputation (Shirkat-al-Wujooh)
- Shirkat al-Wujooh by way of mufawadah: The capital is provided by a silent partner and the reputation is used by the active partner and both of them are responsible/liable and have equal proportion of the profit and loss. The partners could be rich merchants having guarantee for payment of debts.
- Shirkat al-Wujooh by way of Inan: In this type of business the capital is provided by the silent partners and reputation, standing and respect is used by the active partner having no responsibility/liability for each other and both having different proportions shares, profit and loss.
Transferability of Shares
A traditional Islamic partnership becomes null and void at the withdrawal, incapacitation, or death of even a single partner. Wherever commerce was conducted under Islamic law, this vulnerability seriously discouraged investment in large and long-lasting ventures. Sirket-i Hayriye’s key contribution lay in its tradability of shares. Authorized to issue tradable shares, Sirket-i Hayriye could survive changes in membership; the shares of exiting partners would simply switch hands, without re-contracting.
As significant, however, is that Sirket-i Hayriye was not declared a corporation. Established as an unincorporated joint-stock company, it lacked legal personhood. Why the Sultan did not charter Sirket-i Hayriye as the first Ottoman recognized corporation is unknown. It is clear, however, that a corporate charter would have lacked immediate practical value, because the empire’s Islamic courts, even its nascent secular courts, lacked familiarity with the corporation. By contrast, the tradability of Sirket-i Hayriye shares was a credible characteristic, for Istanbul and a few other cities already had bustling informal markets in shares of foreign companies.
Concept of Liability
The concept of Company limited by shares as prevailing in modern corporate scenario is not repugnant to the injunctions of Islam because the status of an institution as a legal person is not prohibited. A company limited by share is incorporated by group of natural or artificial persons. They subscribe different number of shares with equal denomination and therefore their liability is limited to the extent of their shares subscription. Further, a company as a legal personality has unlimited liabilities to its creditors which is not against the Shariah or Islamic injunctions.
Conclusion
Islamic Law was initially organic, dynamic, practical and pragmatic in its form and practice to meet the need and demand of the ever challenging and changing world. But some developments of history upsetting the Islamic centers of learning like Baghdad and intellectual reaction to it created a movement which was not dynamic and proved very unscientific. Its non- specific discussion on juristic person in the vast Islamic literature is compensated with a vast concept on entity that gives and limits the rights, power, responsibility, obligation and liability. Here, it is pertinent to note a well-settled principle of law and Islamic Jurisprudence that an action, deed or thing which is not ‘specifically prohibited’ by Injunctions of Islam (Quran and Sunnah) is considered to be permitted/allowed in Islamic system. An incorporation of company or company limited by shares being an artificial and legal person can do any business that is not prohibited by Islam and should not be considered un-Islamic or against the Shariah. But legal fraternity existing in Islamic countries or otherwise could not develop the basic structure for an entity like company.
The possibility of adapting the shariah to the modern world and developing commercial institutions and vehicles is being considered when, as a result of the Islamic revival, there was a call for a return to the totality of the shariah, including its commercial aspects. Today’s Islamist movements do not want to limit legal standing to natural persons, and they are not bothered by organizational longevity. Although corporation in its modern form did not develop within Islamic countries, but once it was borrowed from abroad along with supporting institutions, it got absorbed into local legal systems and now faces no further resistance.
The author is Partner in Global Law & Liaison Services with a Masters in Commercial Law from Aligarh Muslim University.
References
Nicholas HD Foster, Islamic Commercial Law: An Overview (I), University of London, InDret 4/2006.
Abd Al-Qadir Audah: Al-Tashri Al-Jinni, Dar Al-Khatibi; Beirut; vol.1, p. 392.
Ulrike Malmendier, Roman Shares, in The Origins of Value: The Financial Innovations that Created Modern Capital Markets 32-40 (William N. Goetzmann & K. Geert Rouwenhorts eds., 2005); Herbert F. Jolowicz & Barry Nicholas, Historical Introduction To The Study Of Roman Law 296-97 (3d ed. 1972) as mentioned in TIMUR KURAN, ‘The Absence of the Corporation in Islamic Law: Origins and Persistence’, Oxford Univ. Press, Amer.. Jr. of Comparative Law, v. 53, n.4, 2005.
Eser Tutel, Sirket-e-Hayriye 18-24 (1997); Murat Koralturk, Kentlesme, Kentici Ulasum, Istanbul ve Sirket-e-Hayriye’nin Kurulusu, 10 MARMARA Universitest Iktisadi Ve Idari Ilimler Fakultesi Dergist 97-101 (1995) as mentioned in TIMUR KURAN.
