In the name of Allah, the Compassionate, the Merciful CHAPTER - 4 LEG A LISTIC VIEW OF PARTNERSHIP

Transcription

1 In the name of Allah, the Compassionate, the Merciful CHAPTER - 4 LEG A LISTIC VIEW OF PARTNERSHIP

2 CHAPTER - 4 LEGALISTIC VIEW OF MUSHARAKAH 4.1 Definition of Partnership in Fiqh and Law T he word for partnership in Islamic law is Sharikah.1 Some jurists prefer to use the word Shirkah2, because of which the word in Urdu is Shirkat. There is however, no difference in the meaning of the different applications of the word. However this Arabic word for Shirkah or Sharikah is itself taken from the Arabic words Literary, the meaning is cooperation, firm and group. In Muslim countries where the English common law is applied, a distinction is made between partnership and companies or corporations with respect to terminology so as to identify the difference in the legal forms. In Arab countries, on the other hand, the word Shirkah is applied to mean partnerships as well as corporations4. The purpose of this chapter is to identify the meaning of partnership in both law and Islamic law and to point out some legal aspects of the various types of partnership including Musharakah. 1 Imran Ahsan Khan Niyazee, Islamic Law o f Business Organization Partnerships, Kitab Bhavan, New Delhi, 1999, p See Ahmad ibn Muhammad Ali al-muqri al-fayyuni, al-misbab al-munir, 2 Vols (al-qummi Dar al-hijrah, 1414), art. Sharikatuhu, Vol. 1, p. 311; Kamal al-din Muhammad ibn al- Human al-siwasi al-istanadari, Fath al-qadir ala al-hidayah Sharh Bidayat al-mubtadi, Vol. 5, Mustafa al-babi al-halabi, Cairo, 1389/1970, p. 6 referred to as Ibn al-humam, Fath al- Qadir. 3 Munawar Ahmad Warson, Al Munawwir Kamus Arab, Krapyak Press, Indonesia, Yogyakarta, 1996, p Imran Ahsan Khan Niyazee, o pcit., p. 13. m/mmmql I 69 I

3 We shall first examine the literal meaning of the word Sharikah and then turn the various technical meanings reflected in the definitions provided by the jurists. 4.2 The Literal Meaning of Sharikah Literally, al-sharikah or al-shirkah1 signifies a sharing, participating or participation, partaking or co-partnership.2 Legally, al-sharikah or al- shirkah originally meant simply that a property belonged to several owners, or co-proprietors, in common, in such a way that each one had ownership of every smallest part of it in proportion to the share allotted to him. This type 3 of transaction was commonly practised among Semitic tribes. In literal sense al-shirkah or al-sharikah, the synonym of partnership, is used in two meanings: Mixing or Ikhtilat. Here it means the mixing of the shares, that is, the capital contributed4. Ibn al-human describes Ikhtilat as the attribute of the property that is found in a mixed or mingled state, which is mixing of the shares so that one of them cannot be distinguished>from another5. He distinguished this meaning from Ishtirak, which is an act of the partners and the object of this act is wealth. This means participation. Thus when two partners participate, 1 Ibn Manzur, Lisan alarab.x,beirut,n.d,p , E.W. LaaeArabic-English Lexicon, II, Cambridge, 1984,p W. Heffening, The Encyclopaedia o f Islam (First Edition), vol. IV, pp See Ibn Manzur, Lisan al-arab, in Taj al-urus it is the participation of the partners. 5 Ibn al-humam, Path al-qadir, Mustafa al-babial-halabi wa awladuhu, Vol 5Cairo, 1389/1970.

4 they bring about the mingling of wealth (Khali) and the wealth is held jointly by them1. Al-Khultah, the common word for al-sharikah implies one in which the contractors offer the various services in equal or unequal shares and partake in profit or loss in proportion of their investments (which in other terms is called Musharakah). This legal theory was based on the verse of the Quran, which says: «U a ia j J \ J i «yuu i j t i j C J tll a il 1\jL> * j IjXaT I ^ \ q Zu* L -lb ) j A. J < J J f e t l i X S L «j ^j \ ± j^jia J La Truly many are the partners (in business) (al-khulata) who wrong each other: not so do those who believe and work deeds of righteousness and how few are they. The al-khulta in this verse refers to associate in a partnership4, who have the right of equal co-ownership. These * associates or partners amalgamate their properties, especially the partnership of livestock (al-mashiyyah). The division of assets, in 1 Idem 2 S. D. Goitein, Commercial and Family Partnerships in the Countries o f Medieval Islam, Islamic studies, 3(3),Karachi, 1964, pp Al-Quran, 38:24. 4 Al-Tabari, Jami al-bayan al-tawil Ayn al-quran, XXIII, Cairo,1968,p. 145; Al-Sayyid Sabiq, Fiqh al-sunnah, III,Beirut,1971, pp According to Imam Malik, if the two associates (al-khalitan) share one herdsman, one male animal, one pasture and one watering place then the two men are associates (al-khalitan) as long as each one of them knows his own property from that of his companion. If someone cannot tell his property apart from that of his fellow, he is not an associate, but rather a co-owner (al-sharik). See Malik ibn Anas, al-muwatta (the version of Yahya ibn Yahya al-laythi), Ed.by Faruq Sad, Beirut, 1983,p But Abu Hanifa held that al-khalit (the associate) and al-sharik (the partner) were the same. 1711

5 such cases, should be effected by giving an equal share of profit in accordance with the capital and their works in the partnership1. The Contract of Partnership: Ibn al-humam describes the second meaning of Sharikah as the contract of partnership itself, because it is the cause of Khalt. Thus, when the phrase Sharikat al-'aqd is used, it serves as an elaboration2. In so far as a contract is the union of two statements and the legal effects that flow from it, the emphasis in this meaning is upon the relationship that exists between two (or more) partners Technical Meaning of Sharikah We have seen that there are two literal meanings of the term Sharikah. The meaning assigned to the word by the jurists does not go beyond these meanings, because partnership arises either through a contract or through the mixing of wealth. It is for this reason that the jurists have divided the partnership into three main types: Sharikat al-ibahah (Common sharing of things) > Sharikat al-milk (Propriety partnership or co-ownership) Sharikat al- Aqd (Contractual Partnership)4 After a thorough search in fiqh literature, a definition that covers all three types was not found. Abd al-aziz al-khayyat feels that the reason for 1 Cf. Al-Muzani, Kitab al-mukhtasar, in al-shafri s Kitab al-umm, VIII, pp ; Cf. Ibn al- Athir, Kitab al-nihayah fi Gharib al-hadith wal Athar, II, Ed.Tahir Ahmad al-zawi and Mahmud Muhammad al Tanahi, Cairo, 1963, p Idem 3 This is the basis of a partnership in modem law and has been emphasized by the Hanafi jurists. The emphasis on this relationship between the partners is inadequate with the majority schools. 4 Majallah, Article 1045.

6 this is the difference between the rules and conditions for the various types of partnerships1. The Muslim jurists have offered various definitions of partnerships with regard to its important features: Maliki Definition It is permission from each of the partners to the others for transactions in his wealth and on their behalf, while retaining the right to transact personally (in such wealth). There is another definition given by al-dasuqi: Partnership is the permission by each partner to his companion for transacting for the partner and for himself in wealth. Hanbali Definition Ibn Qudamah has defined partnership as Sharikah is the participation of two or more persons in the entitlement of a thing and disposition. 4 In another place he defines it as participation of two or more persons in transactions. 5 1 Abd al-aziz al-khayyat, al-sharikat, Amman: Wizarat al-awqaf, Vol. 1, 1971, p. 33; Isa Abduh, al-uqudal-shariyah al-hakimah, Dar al-itisam, Cairo, 1977, p. 48, has also expressed a similar opinion. He says that the technical meaning varies with the type of partnership. 2 The definition is from al-mukhtasar by Khalil as quoted in Al-Khayatt, Sharikat, vol.l, p. 42. A similar definition is found in al-khirashi, Sharh al-makhtasar, vol 6, p Muhammad ibn Ahmad ibn 'Arafah al Dasuqi, Hashiyat 'ala al-sharh al-kabir li-abi al- Barakat Sidi Ahmad al-dardir 'ala Mukhtasar al-khalil, 'Isa al-babi al-halabi wa-shurakah, vol 2, Cairo, , p. 348, quoted by Nyazee, Imran Ahsan, Islamic Law o f Business Organization, p Abu Muhammad Ibn Qudamah, Al-Mughni, Edited by Muhammad Salim Muhaysin and Shaban Muhammad Ismail, Cairo, Riyadh, n.d, vol. 5, p 1. 5 Ibid. p

7 Hanbali definition Al-Khayyat has taken from al Mughni is Joint right of ownership or transaction.1 ShafiH Definition Sharikah is an establishment of a right in a single thing held in common between two or more persons 2. Al-Ramli says in the Nihayat al- Muhtaj that Sharikah in its literal meaning is single thing or it is a contract implying this. Imam Shafi i (d. 820) defines the function of partnership as the expansion of capital. (Nama al-m alf. However, a later writer, Kasani (d. 1191) defines partnership as a method for augmenting or creating capital (tariq nama al-mal aw tahsilihif. He distinguishes the creation of capital from its further expansion, arguing the need for the creation of capital takes precedence over the need for its augmentation 6. So the main aim of Musharakah partnership is the creation or conception of capital for the establishment of a business. Hanafi Definition The Hanafi definition al-khayyat chooses to produce a general definition defining sharikah as exclusive right of two or more persons to 1 Al -Khayatt, al Sharikat, vol. 1, p Al Khatib al-shirbini, Mughni al-muhtaj, Vol. 3, Dar al -Ma'rifa,1997,p Shams al-din Muhammad ibn Abu al-abbas al-din Ahmad ibn Ahmad ibn Hamzah al-ramli, Nihayat al-muhtaj li-sharh al-minhaj, Cairo, 1967, Vol. 5, p Abraham L. Udovitch, Partnership and Profit in Medieval Islam, Princeton, 1970, p. 81, Augmentation of the Capital Investment. 5 Udovitch, op. cit., pp Ibid., p. 82. i 74 1

8 single subject-matter 1. Sharikah is a contract between two or more people for participation in capital and its profit 2. Of all the preceding definitions, the last one may be said to be the most comprehensive, as it encompasses all the necessary ingredients of a partnership, namely, agreement, business, involving investment from the partners and sharing of expected profit. 4.4 The Formation of a Sharikah The art of convincing was fairly developed in Islamic law. The title of this discipline was shurut. Al-Tahawi, the Hanafi jurist, wrote two voluminous books on the topic called al-shurut al-sughir and al-shurut al- Kabir.3 Al - Sarakhsi also discussed the discipline in his book al - Mabsut. We may now look at some of the ways in which partnership is formed is Islamic law. The Oral Agreement According to the Hanafi school, there is a single rukn (element) of the contract of sharikah, and this is the form (sighah) or offer and acceptance (ijab and qabuf).4 This is true for all contracts according to this school. The majority of the schools maintain that there are five elements of the contract of sharikah. These are the two parties to the contract, the 1 Al-Khayyat, Al-Sharikat, Vol. 1, p Ibn Abidin, Radd al-mukhtar, op. cit., Vol. 3, p Abu Ja far Ahmad ibn Muhammad ibn Salamah al-hajri al-tahawi, Kitab al-shurut al- Kabir, Baghdad, 1966, p. 172 Jeanette Wakin has written a book on the topic called Function o f Documents in Islam, Albany, Al-Sarakhsi, op. cit., vol. 11, op. cit., p 168.

9 subject matter (capital); work with capital, and the sighah.1. Except for the form (sighah); the rest of these elements are conditions according to the Hanafis. The distinction lies in the fact that, according to the Hanafis, if there is something wrong with the sighah, the contract is void (batil), but if there is something wrong with the conditions, the contract is not void, but vitiated (fasid). A fasid contract is unenforceable, unless the offending conditions are removed. Once removed, the contract can become valid. A void contract, on the other hand, cannot be set right or reformed. A new contract will have to be concluded where possible. The fasid category may, in some cases, save a lot of unnecessary expense. As the majority schools do not have a category called fasid, they cannot make the distinction made by the Hanafis and are bound to consider all the essential conditions as elements. In addition to the use of the absolute term as the sighah for a type of contract, it is important to note that Islamic law follows the objective theory of contracts and not the subjective theory. In Western systems following the English common law, the objective theory is given importance, while in the > French system and those following it, the subjective theory are given priority. Following the objective theory means that words used in a contract are assigned their ordinary meanings and the law will not try to dig into the inner intentions of the parties, unless the words used are contrary to the very objective of the contract. Parties will, therefore, be bound by the terms used. This highlights the use of absolute terms for contracts by Muslims jurists, because the use of such terms favours the objective theory. 1 Abu-al-Wahid Muhammad ibn Ahmad ibn Muhammad ibn Rushd (Averroes), Bidayat al - Mujtahid wa - Nihayat al-muqatasid vol. 2 (Beirut, n.d) p A violation of a condition will naturally render the contract void.

10 There are, in fiqh books, detailed discussions about what type of words are suitable for concluding the contract of partnership. A good source for these is the Fatawa 'Alamgiri.xAll these words are intended to convey the meaning of sharikah, in their ordinary meanings or when used in a specific context. There is no dispute among jurists, however, that sharikah, is concluded by words for the past tense. Some even permit its conclusion through words used for the present and future tenses. The interrogative form is not considered suitable for concluding a contract of partnership. Writing Down the Contract The jurists considered the writing down of contracts or conveyancing as an independent discipline called al-shurut. The leading jurist in this field, whose books have reached us, was al Tahawi. He says in his book al-shurut al - Saghir: Allah, the Mighty, the Glorious, has said in His Book about debts that are delayed by some for other, O ye who believe, when you deal in debts delayed for a stated period, write them down. He, therefore, ordained for the believers the writing down of such debts, so that it may be a protection for the wealth of the creditors and the rights of the debtors. He then said immediate debts, Unless it be spot trade that you transact among yourselves; there is no blame on you if you do not record them in writing.4 He, thus, granted flexibility in the relinquishment of writing, but without rejected the right to record them, because the removal of blame is the granting of 1 Commission of Sultan Muhiy al-din Awrangzeb Alamgir ( ), al-fatawa al- Alamgiriyah, 6vols, Bulaq, 1310 A.H. 2 Imran Ahsan Khan Niyazee, op. cit., p 28 3 Qur an 2 : Qur an 2 : 282 I 771

11 an option and freedom without a prohibition... He, then, said, Witness [your contracts], 1that is, for them to become a proof of what they have written, because a document in itself is not a proof; it becomes (admissible as) evidence when it is proved (by the testimony of witnesses)...he further said, He (the scribe) should not avoid the recording of it as he has been directed by Allah. This indicates that He intended by a document the best way that they can record it...2 About the number of copies of a document, he says: If each one of the them demands... that he be in possession of a document recording what has been transacted among them, in accordance with what we have mentioned, he ( the scribe) should make two identical documents (copies) without there being the * 3 discrepancy of a single word, and without loss of meaning. Partnership is a contract that extends (into the future). Recording of a deed is, thus, recommended in such a contract so that it becomes a decisive proof between them in case of dispute 4 In early Hanafi books we find specimens of the contract of partnership. We record here a contract mentioned by Muhammad ibn al- Hasan al-shaybani and transmitted by al Sarakhsi and other Hanafi jurists. The contract is one of sharikat al inan that is general. This is what is agreed upon by so and so. They have participated in this partnership with the fear of Allah in fulfilling their trusts. The katib 1 Qur an 2: Al-Tahawi, al-shurut al-kabir along with al-shurut al-saghir in the margin, vol. 1, p. 3 3 Ibid, p Al-Sarakhsi, al-mabsut, vol. 30, op. cit., p 155.

12 then explicitly states the amount of capital contributed by each one of them, and says that this is now in their joint possession (ownership), and with which they can both buy jointly as well as severally. Each one of them will operate in accordance with his considered opinion and will sell on cash as well as on credit... [He then writes] whatever the profit arising from it will be shared by them in proportion to the contributed capitals so also the loss and whatever is consequential to it... they have agreed to enter into this partnership in such and such month and such and such year{he then records the date}. We also find specimens of such contracts in?d-shurut al-saghir.1 From the foregoing statements we conclude that the contracts of partnership and their recording was not too different from what it is today; in fact, the stipulations about writing are almost identical. There is one important point that needs to be elaborated and this pertains to the deed as admissible evidence in itself without any further supporting evidence in the shape of testimony of witnesses who attested the document. This point has been mentioned by al-tahawi. The positions is almost similar in the law for partnerships. For example, in Pakistani law, the rights of partners, and duties owed to each other, do not come into operation by the mere recording of the partnership deed. The law requires that the partnership with its deed 25 be registered with the registration authority for these rights to be secured. Further, such registration enables the partnership to transact business in its own name and also seek the recovery of its claims in its own name. Most other documents require to be notarized in order to be admissible. All these conditions can be added to the partnership deed of an Islamic partnership, 1 Al-Sarakhsi, al-mabsut, vol. 30, op. tit., pp

13 because they seek to help the judicial system and cut down lengthy judicial procedures.1 Partnership by Act of the Parties Contracts are concluded in Islamic law by the gestures of parties. Modem writers discuss such acts within the sighah as if it is useful only for dumb people or in simple situations. It is, however, an important rule. If accepted in a wider form, it will grant the courts the right to determine whether a contract or a quasi contract existed between the parties. This is done for partnerships too in the law where the court may determine whether the relationship existed between the parties as evidenced by their acts, even if a formal contract had not been concluded. The jurists, however, are reluctant to accept the conclusion of partnerships through the acts of the parties Definition of Partnership in Law In the field of Islamic law, we have scholars from different legalsystems contributing to scholarship in the field of Islamic business organization. Even economists are participating in the ongoing discourse. It is, therefore important to clarify what we mean by law. For the present discussion, law means legal systems based upon the English common law. In most Arab countries, the law is based mainly on the French legal system. This may not cause problems in communication, but the terminology employed in Arabic may not have its equivalents for the systems following the English common law. The use of the term sharikah in modern Arab law 1 Imran Ahsan Khan Niyazee, op. tit., p Idem. 8 I

14 is one term that is likely to cause some confusion. We should, therefore, make an effort to clarify the terms at the outset. The word sharikah is applied in Arab law to mean all kinds of business organizations, whether these are partnerships or corporations with their own fictitious personality. The precedent for employing the term in this manner is found in fiqh itself: the use of the term sharikah and then its qualification with terms like Ibahah, milk, aqd, a mal and wujuh. The situation is further complicated when one examines Scottish law, which assigns a legal personality even to partnerships.1 The new American Uniform Partnership Act attempts to do the same, that is, it assigns legal personality to partnerships. In American law, there has been a long debate about the entity and aggregate concepts, that is, whether a legal personality can be assigned to a partnership. It appears that the entity concept is now going to prevail because of the pressures of business and the ease of the going concern. We shall first examine the definition of partnership in systems that follow the English common law. The meaning of sharikah as used in modem Arab law will then be looked at briefly to indicate that there must be some precision in the use of the terms. The word partnership is generally used, in English common law systems, to identify the form of business organization that is based on the aggregate concept. In such a form, individuals pool their resources for sharing the common profits arising out of their venture. The property of such an organization is owned by the partners as a co-ownership. As distinguished from this, the form of business organization called the 1 Earnest H. Schamell, Lindley on the Law o f Partnership, 12th ed., Sweet and Maxwell, London, 1962, p. 121 (hereinafter referred to as Lindley; The Law o f Partnership) i811

15 company or the cooperation is a legal entity in its own right. The property of such an organization is owned by the entity itself, and the claims of the shareholders are represented by share certificates.1 In Arab law, the word sharikah is used for both kinds of organizations, that is, whether they are organized around the aggregate concept or around the entity concept. Additional qualifying names are than used for making distinctions. Let us look for the meaning of partnership first. Partnership is a contract; the emphasis, however, is always on the relationship that arises from this contract, whether the contract has been concluded expressly or is implied by the relationship. The word relationship means the rights and duties that exist among the partners and are owed to each other as well as to the third parties dealing with their joint partnership. Over time, there have been many definitions for partnership. Thus, the English Partnership Act of 1890, in #1 defined it as: Partnership is a relationship that subsists between persons carrying on a business in common with a view to profit. The Civil Code of New York defined it as Partnership is the association of two or more persons for the purpose of carrying on business together and dividing its profits between them. Lindley has quoted other definitions too. For example, the definition given by Parsons is: Partnership is the combination by two or more persons o f capital, or labor, 1 The share certificate is property in its own right and the owner has the full right of disposal over it. 2 As quoted in Lindley, Law o f Partnership, op. cit., p Idem. w/mmw/m 82 1

16 or skill, fo r the purpose o f business for their common benefit.1 This definition is similar to the definition that we have arrived at for Islamic law above. The definition given by Pollock, also quoted by Lindley, is: Partnership is the relation which subsists between persons who have agreed to share the profits o f a business carried on by all or any o f them on behalf o f all them.2 This is an expanded form of the definition given in the English Partnership Act of The (Pakistan) Partnership Act 1932 defines partnership in #4 as: Partnership is the relationship between persons who have agreed to share the profits o f a business carried on by all or any o f them acting for all.3 Most of these definitions are similar, so let us attempt to analyze the last definition and list its major characteristics: Partnership is the relationship subsisting between two or more people and is not merely an agreement or a contract between them, even though this relation may have been established on the > basis of an agreement or contract. The purpose of the formation of a partnership must be trade and, therefore, clubs and associations cannot be considered partnerships There has to be an agreement or a contract between the partners, and the relationship known as partnership cannot arise prior to such agreement or contract. This excludes co - ownership. 1 Ibid., p As quoted in Lindley, Law o f Partnership, p Partnership Act 1932, section 34 yr/.w/mm/*r 83 1

17 The Contract must indicate as its main purpose participation in profits, whether this indication is express or implied. It is not necessary to indicate participation in loss, because the creditor in certain cases may be considered a partner in profits.1 It is not necessary that all the partners contribute by way of labour or skill. Similarity of the subject matter of the partnership is not necessary. Thus, one of the partners may participate with his labour when the other is participating with his property. Actual mixing of capitals is not required when the participation is by way of property or wealth 4.6 Types of Partnership in English Law In this section, a brief study is made in the types of partnerships in English Common Law, especially in Pakistani law. A list of some of the partnerships that all go under he broad title of Sharikat in Egyptian law, which is a representative of the Arab law is also made. > 4.7 Types of Partnerships and Companies in English and Egyptian Law Partnerships are divided into two broad types: ordinary partnerships and limited liability partnerships. The Pakistani law does not have limited liability partnerships; however, a new Section 6-A introduced into the 1 To understand this, an examination of 6 of the Partnership Act, 1932 is necessary. 2 In other words, some partners may even be sleeping partners. 3 While Islamic law treats mingling of capitals as essential for determining the issues of liability, modem law treats it as an accounting problem

18 existing law attempts to create limited liability for banks participating in partnerships1. The ordinary partnership is divided further into two types depending upon whether the agency is incorporated in it is general or special. The limited partnership, on the other hand, has general partners, who have unlimited liability, and limited partners, whose liability is limited to the extent of their shares, and who do not interfere in the management of the firm. This type of partnership was introduced into the English law in The idea was borrowed form the French law. The American law too has this form2. In Egyptian law, the word Sharikat is applied to mean companies as well as partnership3. The Sharikat are first divided into civil and commercial (Madniyah and Tijariyah). This division is linked to the division in the courts under the same name4. The Sharikat are then divided with respect to their formation into Sharikat al-askhas and Sharikat al-amwal. Our focus will be on the commercial Sharikat. Commercial Sharikat that are formed as Sharikat al-ashkha s are of several types. First is the Sharikat al-tadamun this is a company having corporate personality in which the liability of the members is unlimited. It is therefore, similar to company with unlimited liability in Pakistani law. Next comes the Sharikat al-tawsiyah al-basitah. This is a limited liability 1 See 6 A of the Pakistan Partnership Act, Imran Ahsan Khan Niyazee, opcit, p The distinction between Partnership and companies is based upon the concept of legal personality. Partnerships have a legal personality while companies do not. 4 For the details of such classification see al Khayyat, al-sharikat, Vol. l,p.32. t 85 %

19 partnership, but this type has another variation in which the capital is divided into shares with a face value, which moves it into the next classification of commercial Sharikat under the name of Sharika al- Tawsiyayah bi al-ashum. The latter type is merely an administrative arrangement under the limited liability partnership. We then have the Sharikat al-muhassah. This is what has been called by Lindley an undisclosed partnership 1 The second types of commercial partnerships are called Sharikat al- Amwal. The first type in this category is called the Sharikat al-musahamah. This is what is called a public limited company. In Pakistani law and a public corporation in American law, we then have the Sharikat al- Tawsiyyah bi al-ashum. It is a variation of the limited liability partnership, as mentioned earlier. Finally we have what is called as al-sharikat Dhat al- Mas uliyah and Mahadudah. This is what we call a private limited company in Pakistan and in the USA it would be a corporation that has not gone public Features of modern partnerships Following are the main features of modem partnership: Agreement There must be an agreement between he parties concerned, without agreement partnership cannot be formed. The agreement may express or implied. It is however, preferable to reduce to writing so that any future dispute may be settled in accordance with provisions of the agreement. 1 Lindley, Law o f Partnership, op. cit., p Imran Ahsan Khan Niyazee,op. cit., p. 49. yr/m/jr/jr/m I 86 I

20 Number There should be more than one person to form a partnership. However, there is a restriction on the maximum number of the partners. In case of ordinary business, the partners must not exceed 20 partners and in case of banking contracts it must not exceed 10 partners. Business The object of partnership is to carry on any type of business as long as it is lawful. Profit sharing The basic purpose of the formation of partnership is to earn profit. The profit is to be shared as agreed between the partners. If there is no such agreement they will share profits equally. The contribution towards the losses will be in the same proportion as the sharing of profits unless there is contract to the contrary.1 Carried on by all or on behalf of all The business of partnership is conducted by all the partners or any of them acting for all. But each partner is allowed to participate in the agreement by law. Unlimited liability Each partner is liable to the full satisfaction of the liability of partnership jointly and severally. However, one or some of the partners with the agreement of other partners may have limited liability. However, all the partners in a firm can not be with limited liability. 1 M.Tahir Mansuri, Islamic Law o f Contracts and Business Transactions, IIU, Islamabad. 2005, p I

21 Investment Each partner contributes his share in the capital according to the agreement. Some persons may become partners without investing any capital to the business. They devote their time, energy, skill, judgment and ability to the business instead of capital and receive profits. Transferability of share The interest of partner in a firm cannot be transferred, assigned to a third person without the consent of other partners. Position of partners Every partner is an agent as well as principal to the other partner. In this capacity he can bind the other partners by his acts as well as will be bound by the acts of other partners if they were carried out during the normal conduct of business by his act. In the position of an agent he can enter into a contract with another person or parties on behalf of his partner or partners1. Duration Partnership may be for an indefinite period of time. It may also be for a definite period. Some partnerships are formed for completion of a single venture Types of Partnership in Islamic Law The Muslim jurists, considering the nature of the contract and the amount of the capital involved therein, have classified partnership (Al- Sharikah) into three main categories: 1 Partnership Act 1932 Section Partnership Act 1932, Section 18 & 19.

22 1. Shirkat al-milk (propriety partnership) 2. Shirkat al-aqd (contractual partnership) 3. Shirkat al Mufawadah (universal partnership) 4. Shirkat al-'inan (general partnership) Shirkat al-milk: is defined by the Majallah, as the existence of a thing in the exclusive joint-ownership of two or more persons due to any reason of ownership, or it is the joint claim of two or more persons for a debt that is due from another individual arising from a single cause 1. In this type of Shirkat each and everyone has ownership in every smallest part of the capital. The property, which is difficult to divide and distinguish, forms the subject matter of a proprietary partnership. Thus this joint ownership of two or more persons in a particular property is of two kinds a) Compulsory partnership: it is a partnership, which becomes effective without any action on the part of the partners, such as inheritance. b) Optional partnership: it is a partnership which becomes effective through the act of practices e.g., joint-purchase or joint-acceptance of gift or a bequest, joint seizure of an article in enemy s country in the course of war or where they unite their respective properties in such a way that one is not distinguishable from the other, such as mixture of wheat with 1 Islamic Financing, Majallah, Article M.Tahir Mansuri, Islamic Law o f Contracts and Business Transactions, p Ibid., p

23 barley1. Thus in this type, the Shirkah comes into existence at the option of the parties out of their own choice. Rules relating to Shirkat al-milk a) Each partner is a stranger with respect to the share of the others. b) The partners are not allowed to undertake any act of disposal with respect to the other s share except with the latter s permission. c) Each partner can sell his own share without the other partners consent, except in cases where share of one partners can not be distinguished from the other. d) The share of one partner in the possession of another coowner is governed by the rules of Wadiah (deposit). If one coowner further deposits such property with a third party without the permission of his partner, he is liable for daman (compensation) if the property is destroyed. e) Right to demand the recovery of a debt belongs to each coowner jointly and severally. A debt possessed by one partner is governed by the rules of Sharikat-al-Milk. Further postponement of the recovery of a debt can not be granted by by one co-owner, without the permission of the other2 1 ibid. Articles 1063, See Imran Ahsan Khan Niyazee,.Islamic Law o f Business Organization Partnerships, Islamabad, The International Institute of Islamic Thought and Islamic Research Institute, 1997, pp 36-37; and M.Tahir Mansuri,op.cit., p I 901

24 Shirkat al-(aqd/ Uqd This is the second type of Shirkah which means a partnership effected by a mutual contract. For further purpose of brevity it may also be translated as joint commercial enterprise 1. Shirkat A l- Aqd or partnership through contract is the same thing as partnership in law2. Majallah defines it as It is a partnership which comes into being as a result of agreement between two or more persons in order to share the profit3. Conditions for Shirkat al- Aqd The following are the basic conditions common to every type of Shirkat al- Aqd (contractual partnership). Basic elements: Shirkat al-aqd should include all the basic elements of a valid contract, i.e., > Offer and acceptance. > Competence of parties: only legally competent person capable of disposing property and conferring mandate can be a party to a contractual partnership. > Subject matter: It is also necessary that the subject matter of partnership be a lawful trade than partnership in trade of wine, and other illicit things in invalid4. Agency Each kind of contractual partnership should contain a contract of 1 M.T. Usmani,, The Concept of Musharakah and its Application as an Islamic Method of Financing, Arab Law Quarterly, vol. 14, No. 3,Brill, 1999, p Imran Ahsan Khan Niyazee, opcit., p Majallah, Article See M.Tahir Mansuri, opcit,,p. 243.

25 agency. Each partner is an agent of the other partners in all dispositions made by him, in trading and in accepting work1. Divisions of profit It should be declared in what way the profit is to be divided between the partners. Known portion of profit Shares of profit to be divided between the shareholders must be known by division, for instance, one half (1/2) one third (1/3) or one fourth (1/4). No fixed amount or portion of the profit can be stipulated for any of the partners. The loss is to be borne in proportion to the respective capitals of the partners. Entitlement to profit According to the Hanafi Jurists a partner in a contractual partnership becomes entitled to profit in one of three ways: > By capital > By work > By liability incurred by the partner3. According to the majority of Muslim jurists, however, a partner becomes entitled to the profit by capital and labour only, according to the Hanafi Jurists, it is lawful that the capital of each4 partner be equal and yet the profit be shared unequally. Zufar, Shafi, and Malik do not subscribe to 1 Ibid Idem 3 Kasani, Bada 7 al-sana opcit., vol. 6, p. 62: Ibn al-haman, Fath al-qadir,opcit., vol. 5, p Muhammad ibn Ahmad Ibn Juzayy,Qawanin al-ahkam al-shar'iyah wa-masa'il al-furu' alfiqhiyah. Beirut, 1979 p I 92I

26 this view because according to them the share in the larger portion of profit is earned without any responsibility since the responsibility is in proportion to capital which one advances. The arguments of the Hanafi scholars on this issue are two fold: First: The Prophet has said The profit between partners should follow the agreement between them and the loss should be borne in proportion to their investments 1. In this precept of the Holy Prophet J** no distinction is made between the equality and inequality of their properties. Second: In the same manner as a person is entitled to profit by virtue of capital, he is also entitled to it by virtue of labour as in the case of Mudarabah. It may happen sometimes that one of the partners is more skillful and expert in business than the other; consequently he will not agree to the other sharing equally with him in the profit2. Kinds of Shirkat al- Aqd Shirkat al- 'Aqd is broadly divided into three types: > Shirkat al-amwal: (investment partnership) where all the partners invest some capital into a commercial enterprise. > Shirkat al-a mal: where all the partners jointly undertake to render some service for their customers and the fee charged from them is distributed among the partners according to an agreed ratio. For example, if two persons agree to undertake tailoring services for their customers on the condition that the wages earned will go to a 1 Jamal al-din Abd Allah Zayla i, Nasb al Raya, Dar Al-Hadith, Cairo, 1st ed. 1938, vol. 3, p. 478; Quoted by Mansuri, Islamic Law o f contracts and Business Transaction, p Idem. \93 1

27 joint pool which shall be distributed between them irrespective of the volume of the work each partner has actually done, this partnership will be a Shirkat al-a mal which is also called Shirkat al-taqabbul and Shirkat al-sana 7 and Shirkat al-abdan\ > Shirkat al- Aqd is Shirkat al-wujooh: Here the partners have no investment at all. All they do is purchase the commodities at a deferred price and sell them at spot. The profit so earned is distributed between them at an agreed ratio2. Each of the above kinds is further divided into Inan (limited) or Mufawadah (unlimited). Thus they are of following six categories: Shirkat al-amwal by way of Mufawadah Shirkat al-amwal by way of Inan Shirkat al-amal by way of Mufawadah Shirkat al-amal by way of Inan Shirkat al- Wujuh by way of Mufawadah * i Shirkat al- Wujuh by way of Inan Since it is the Shirkat al-amwal (investment partnership) which is assigned as the type of Shirkah in which Musharakah can be categorised, so an attempt has been made to description on a Shirkat al-inan and Shirkat al-mufawadah. But before that let us see the specified conditions for 1 M.T. Usmani, The Concept Musharakah and its Application as an Islamic Method of Financing, Arab Law Quarterly, vol. 14, No. 3, Brill, 1999, p Idem 1 Zayla i, Tabiyin al-haqaiq, vol. 3, p. 313, and quoted by Mansuri, op. c i t., 247. I 941

28 Shirkat al-amwal which are applicable to both Inan Shirkat al-amwal and Mufawadah Shirkat al-amwal1. These conditions are as follows: a) Presence of capital : The Hanafi s stipulate that the capital of Shirkah must be an ascertained commodity (ayri) and not dayn i.e., wealth that is absent. Present wealth, in their view is wealth available for transactions and not necessarily present physically on the spot. Hence, in the opinion of the Hanafi Jurists, the absence of capital, at the time contract is negotiated, does not invalidate the partnership as long as the capital is in hand, when the joint purchase is made Kasani says. Among these conditions is the availability of the wealth in the form of an ayn (ascertained commodity). It should neither be receivable (dayn) nor absent wealth. Otherwise, the partnership will not be permissible, either as Inan or as Mufawadah. The reason is that the purpose of the partnership is profit and this is achievable through transactions in the capital. Such transactions are not possible in a dayq or in wealth that is absent. The purpose cannot be achieved. The presence (availability of the goods), however, is stipulated at the time of the transaction and not at the time of the contract. The contract of Shirkah is completed with the purchase transaction. The availability of the goods comes into operation then. 1 See Kasani, Badai al-sanai,opcit., vol. 6, p See Kasani, Badai al-sanai, opcit,vol. 6, p. 60.

29 According to Imam Malik the capital should be present at the time of the contract is concluded. The jurists are also unanimous that Mufawadah or Inan partnership cannot be concluded on debt1. b) Intermingling of capitals: The majority of Muslims do not stipulate mixing of capitals (Khali) prior to the conclusion of the contract. In this regard Imam Sarakhsi says: In our view, Inan does not require the intermingling of investment. However, according to Zufar and Shafi s mingling is pre-requisite for a valid partnership. In the Shafi s view proprietary partnership (Sharkat al- Milk) is the underlying principle of all partnerships and that contractual partnerships must be based on it2. Absolute currency: It is also a condition for a valid Shirkat al-amwal that its investment is in the form of money. Assets in the form of merchandise are unsuitable for partnership investment. According to the majority of legal scholars, a partnership in which the investment consists of goods is invalid. Imam Malik holds that capital in the form of currency is not a pre-requisite and that partnership in goods is permissible if their value is determined on the day the contract is concluded. Agency According to the majority, agency is the necessary attribute of partnership and agency is unrealizable in goods and investment Kasani says: It is not permissible for one person to say to another sell your goods so that we may share its price. And since agency which 1 Ibn Rushd, Bidayat al-mujtahid, opcit,vol. 2, p Al Sarakhsi, al-mabsut,opcit., vol. 11, p ft/.w/m/m/49. t 96 I

30 is one of the indispensable features of partnership is not permissible, partnership is also not permissible. It is however, permissible for one to say to another. Buy goods with hundred dirhams belong to you on the conditions that what you buy be shared between us1. He further writes: The partnership in goods is not permissible because it leads to ignorance regarding the profit at the time of division. For the amount of the investment will consist of the value that will not be known except with conjecture and estimation. The amount of profit will, therefore, be unknown and this will lead to dispute at the time of division2. iii) Shirkat al-mufawadah: According to some scholars, literally a/ Mufawadah means al-musawat (the equality)3. According to some of them, legally, the term al-mufawadah derives from al-tafwid (delegation of authority), for each partner empowers his colleague to act freely with the entire partnership capital. Ibn Abidin defines Mufawadah as participation in each thing with equality, but technically it has a narrower meaning, because it applies to equality in real estate and goods4. The author of Hidayah defines it in the following words: It is a contract of partnership between two or more persons, 1 Al Kassani, Badai al-sanct 7, vol. 6, p Idem 3 Al-Zamakshari, Al-Faiq fi Gharib al-hadith, II, p. 304; Al-Sarakshi, al-mabsut, XI, p. 152; Al-Kasani, Kitab Badai al-sanai f i Tartib al-sharai, VI, p Ibn Abidin, Radd al-mukhtar,opcit Vol. 4, p. 402.

31 with the condition of complete equality with respect to capital, profit and status, for working with their own wealth or with their labour and another s wealth, or on the basis of their credit worthiness, so that each partner is a surety for the other1. Shirkat al-mufawadah may be best translated as a universal or unlimited investment partnership2. In this partnership, the partners have equal right (al-musawat) in the capital, profits, loss of disposal and so on. Each partner in this partnership, have full power and liability, the partnership amounts to a mutual procreation and surety ship and it is made with equal shares and it engages in the whole property of both partners except their food and clothing for themselves and their families and there are no separate social capital between the partners3. This form of partnership was already commonly practiced among the Arabs before the advent of Islam4.However, only the successors recognized the legality of Shirkat al-mufawadah5, a type of partnership which had been known during the time of the Prophet JLa or his companions6. According to Udovitch, this partnership had similar features to those of the medieval European family compagnia7. But according to Heffening, 1 Marghinani, Al-Hidayah,opcit, Vol. 3, p Ibn Al-Athir, Kitab al-nihayah fi Gharib al-hadith walathar, I I I,opcit p Sachacht, Joseph A n Introduction to Islamic Law, Oxford University Press,Oxford, 1964,p Jawad Ali, Al-M ufassalfi tarikh al-arab Qabl al-islam, opcit.,vu, p This type of partnership is strongly disapproved by al-shafi; See Al-Shafi, Kitab al-umm, IV, p It is also disowned by Abu Hanifah. But it is recognized by Abu Yusuf, al-shaybani and Ibn Abi Layla. In contrast, Sufyan al-thawri ruled that even a legacy to one of the shareholders becomes the property of the company, lacrum ex fortuna, which suggests the societas omnium bonorum; See W. Heffening El,opcit., Vol. IV, p Al-Sanani, Al-Musannaf, VIII, pp Udovitch, op. cit., pp

32 Shirkat al-mufawadah (Societas quaestus) appears to have originated from Roman Byzantine law1.. According to Hanafi s Mufawadah contains the following elements: > Equality in wealth (capital), profit and loss and participation in the affairs of the partnership. > Each partner is an agent of other partners. > Each partner is also responsible on behalf of their acts and deeds, i.e., he is surety for his partner. According to Maliki the term Mufawadah is applied to an arrangement in which each party confers upon his colleague full authority to dispose of their joint capital in any manner intended to benefit their association. For them it denotes a general type of partnership in which capital and profits are distributed in indefinite shares. The Maliki jurists lay emphasis on the tafwid and not on equality as is the case in Hanafi law. To them tafwid means the delegation of discretionary authority to conduct the trade with each other s agents and can act in all commercial matters with respect of his own and his colleague s property without the latter s approval. The liability of the Mufawadah is joint. Thus any obligation incurred on behalf of the partnership towards other parties by one of the associates can be claimed in full from any of the other partners. There is no requirement of equality in the personal and financial status of the prospective partners2. ' W. Heffening, The Encyclopaedia ofislam, 1st Edition, Vol. IV, p Ibn Juzayy ^Al-Qawanin al-fiqhiyyah,opcit., p. 283.

33 Shirkat al-inan According to some scholars inan, literally, means the rein of a riding animal which is held by only one hand of a rider so that the other hand is free.legally, it implies that a partner offers or gives the right of disposal in some particular property to his partner but not the other or exclusive of the rest.'it is a partnership involving collective capital of the partners, where any two persons become partners in any particular business or where they become partners in all matters of commerce indifferently. It is contracted by each party, respectively, becoming the agent of the other and not his surety. Sharikat al-inan signifies a limited liability company or investment partnership. This partnership or company is equivalent to a mutual procuration,each partner is answerable to third persons for his own transaction, and he has the right of recourse against the other partner in relation to the proportion of his share. This engages the invested capital -3 only, and may be limited to specific kinds of transaction. Sharing of Profit and Loss in Sharikah Sharikat al-inan does not require equality among partners. It is, therefore, possible for partners to form partnership with unequal capitals. Further, no partner is required to contribute his entire wealth to the partnership, as may be required in a mufawadah contract. The contribution of capital is left to the discretion of the partners in the 'inan contract.4 In 1 Al-Sarakhsi, almabsut,opcit., XI,p 151;.Lane,E.W.Arabic -English Lexicon,II,Ope/7,p Muhammad Ayub,Understnding Islamic finance, Wiley Finance,2007,p Cf. al Mabsut,Opcit. XI, p ; J. Schacht, An Introduction to Islamic Law, Opcit,p.156; cf. W. Heffening, The Encyclopaedia o f Islam (first edition), Opcit., Vol. IV, p Majallah,opcit., 1365