debate on shares

The Debate on Shares

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IndexIndex.................................................................................................................................................2 Introduction ......................................................................................................................................3 Summary ..........................................................................................................................................3 March 10, 2006 From DI to Ml. Joosab ........................................................................................3 March 15, 2006 from Ml. Suliman to Ml. Joosab .........................................................................3 April 3, 2006 from MA to DI ........................................................................................................3 April 19, 2006 from DI to MA ......................................................................................................3 April 23, 2006 from MA to DI ......................................................................................................3 April 28, 2006 From DI to MA .....................................................................................................3 May 4, 2006 from MA to DI .........................................................................................................3 May 5, 2006 from DI to MA .........................................................................................................3 May 5, 2006 from DI to Ml. Joosab ..............................................................................................3 September 11, 2006 from DI to MA .............................................................................................3 September 13, 2006 from DI to MA .............................................................................................3 September 16, 2006 from DI to MA .............................................................................................3 September 20, 2006 from DI to MA .............................................................................................3 September 22, 2006 from MA to DI ................................................................................................3 December 5, 2006 from DI to MA ................................................................................................3 December 5, 2006 from MA to DI ................................................................................................3 December 7, 2006 from DI to MA ................................................................................................3 February 3, 2007 from MA to DI ..................................................................................................3 February 4, 2007 from MA to DI ..................................................................................................3 February 21, 2007 from DI to MA ................................................................................................3 February 24, 2007 from MA to DI ................................................................................................3 February 26, 2007 from DI to MA ................................................................................................3 February 27, 2007 from MA to DI ................................................................................................3 March 20, 2007 from DI to MA ....................................................................................................3 March 7, 2007 from MA to Siki.......................................................................................................3 March 25, 2007 from MA to DI ....................................................................................................3 April 12, 2007 from MA to some Ulama ......................................................................................3 April 18, 2007 from Siki to MA....................................................................................................3 April 26, 2007 from Mufti Salejee to MA ....................................................................................3 May 3, 2007 from MA to Mufti Salejee........................................................................................3 May 5, 2007 from Mufti Salejee to DI...........................................................................................3 May 7, 2007 -- from DI to MA ........................................................................................................3 June 29 2007 from DI to MA ........................................................................................................3

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Introduction

The following is a debate on the permissibility of trading in Shares. This has a direct impact on the permissibility of investing in Oasis Equity Fund, Futuregrowth AlBarakah Equity Fund and Fraters Equity Fund. The main players are Mufti Ashraf Saheb of Springs (referred to as MA), and Mufti Ebrahim Desai Saheb of Daarul Iftaa, Camperdown (referred to as DI). The issues will explain themselves and unfold as you read through the various correspondences. To assist the reader, the editor has taken the liberty to insert notes in {brackets}. Admittedly, some sections are boring and repetitive. The major thrust of the discussion climaxes towards the end, after much tedious reading. Although the discussion is lengthy, wealth is a trust in your hands and you have a responsibility to earn it from and spend it in only Halaal avenues. In order to do this, you need to educate and empower yourself. This debate will make you informed. Realising that some readers would not have the time or interest in perusing the entire debate, it was decided to provide a very brief summary, which follows on pg. The Editor Daarul Iftaa, Madrasah In'aamiyah Camperdown.

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SummaryThere exists a misconception in some quarters that the permissibility of trading in shares on the stock-market is an issue upon which there is consensus of the Ulama. Far from the truth, there is no such unanimity. All that has been mentioned thus far is an initial theory of some Ulama, which in the words of Hadhrat Mufti Taqi Uthmani Saheb, should "not be treated as a final verdict on this subject". Rather, what has been expressed was done for the purpose of providing "a foundation for further research" (again Hadhrat Mufti Taqi Uthmani Saheb's words.) DI attempted to undertake the further research mentioned, and could not make sense of the theory of permissibility. In order to be fair and get greater clarity on the issue, a number of pertinent Ulama were approached. Sadly, they did not respond, with the exception of Mufti Ashraf Saheb. The debate before you then ensued between DI and MA. The theory of permissibility rests upon the recognition of the "juristic person" in the Shariah. MA could not provide any conclusive proof to substantiate such recognition. MA clearly lacked a proper understanding of what the juristic person is. He nevertheless conceded that he could not provide an example of ownership vesting in an artificial being. There is no such concept in Shariah. This is one important area upon which the theory of permissibility rests. Hence the theory failed on this leg. MA was under the misunderstanding that the Directors and Shareholders own the tangible assets of the Company, and could not distinguish between a partnership and the modern company. Many attempts were made to try to explain these concepts to him, and the major part of the discussion revolves around this. DI has provided ample proof that the Directors and Shareholders do not own the tangible assets of the Company. The bulk of this debate revolved around these detail proofs. An in-depth exposition was made of the nature of the "share", and it was shown that the capital provided by the shareholder is in essence a loan to the company. Being a loan, it accrues what amounts to in Shariah as Riba (interest). Furthermore, it was highlighted that such a scheme also falls under the category of Qimaar (gambling). Sadly, when the theory of permissibility had no leg to stand on, emotional arguments were resorted to. It was hoped that the discussion be confined to academic proofs. The DI has exhausted all reasonable efforts in trying to convince those holding the opposite view, and has now presented the full details for the public. The public may then see for themselves that the fatwa of DI was after extensive research into the matter, and after engaging other Ulama on the issue. It is the ruling of DI that trading in shares on the stock-market is Haraam. And Allah Ta'ala knows best.

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March 10, 2006

From DI to Ml. Joosab

From: Daarul Iftaa Desk One To: 'Shoayb Joosab' 1 Sent: Friday, March 10, 2006 10:43 AM Subject: Request Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Maulana, We make Dua you are well. Following a query I received from a brother, I got in contact with Fraters Asset Management. I was referred to you, as I am told you are the Head of the Shariah Department. On the issue of investing on the Stock Exchange, for many years now I have been trying to get answers to pertinent questions. The essential answer I have been getting is that so and so has approved it. Full Stop. Don t ask more. The perception I got, and I certainly hope I am wrong, is that one should not ask questions on the issue, otherwise one would be left out from this lucrative industry. One must just keep quiet and go along. To press for answers would upset the apple cart, therefore these questions should just be shelved away on the excuse that the matter is one wherein there is bound to be differences of opinion, hence it should not be discussed. For me this has been extremely frustrating. I have made a number of attempts to engage in fruitful discussion, but have now become accustomed to the usual answer: Total silence. My concerns are many, and I obviously cannot include them all in this email. However as a starting point, the very theory of a Corporate Entity, accompanied with the concept of Limited Liability was of concern to me. I found the arguments mentioned in the attached booklet to be sound, and therefore was thirsty for answers to these arguments. So I used the booklet as the first step. I wanted to be fair and give those holding the opposing view [the opportunity ] to defend their view. It is only fair to listen to both sides of the argument. Perhaps my doubts would be satisfied. As a student I would definitely learn from the alternative stance. I am not here to prejudge the issue, but only want to give a fair academic evaluation of both sides. Please tell me if this is unfair or unreasonable. I approached the highly respected Mufti Taqi Uthmaani Saheb, and not surprisingly there was no reply. His respected son Mufti Imran Saheb was approached, and again, as usual, there was no reply. I wrote to the SSB of AlBaraka Equity Fund, and as you can guess by now, there was simply no reply. Mufti Najeeb Khan of Daarul Uloom Karachi, who is also the Shari'ah advisor for HZB Bank, visited our Daarul Iftaa. At the meeting I raised the issue, and that this lead to my frustration, and he assured me that whatever work I had with Daarul Uloom Karachi, he would facilitate it. He insisted that we need to discuss and debate these issues, and we all should submit to whoever has the stronger dalaa-il, irrespective who that may be. I forwarded him the booklet, and as usual it was just dead silence. In my letter to the SSB of AlBaraka s Equity Fund, I had the following to say:

The contentions found in the booklet are not new, but have been in the public domain for over ten years. The fact that the votaries of equity funds have not responded in all these years itself lends strength to the views presented. Thus far the only pathetically lame excuse we have heard is that there is a difference of opinion on the matter, and each person is free to follow his opinion. This smacks at academic honesty. If the votaries do not have proper answers, they should be honest about it.It is in quest for sound answers that I turn to you, as you have much experience in this field. You have also undertaken a detail research on the topic and written a book on the subject. Furthermore, due to your experience you sit on many Shari'ah Boards who have approved trading on the Stock Exchange. Hence I have some hope that I will not be met with the usual silence.

1

{Maulana Shoayb Joosab Saheb is: Shariah Supervisory Officer at ABSA Bank, Former Shariah Supervisory Officer of AlBarakah Bank; Former Shariah Supervisory Officer of Wesbank Islamic Finance; Member of Shariah Board of Takafol SA; Member of Shariah Board of Malawi Islamic Bank; Former Chairman of Frater Advisory and Supervisory Board; Author of "Unit Trusts"} Page 5 of 113

The Debate on Shares My humble request to you is to kindly read through the booklet, and provide sound answers to the points raised therein. After all, you must have worked out the answers before approving the various unit trusts. I understand that the booklet may be a little lengthy, and I would accommodate a reply provided in piecemeal. Even if it is just one argument at a time, it would be far better than what I usually get: Total Silence. I understand that Maulana Ahmed Suliman Saheb and Mufti Ashraf Saheb are also on the Board. Hence, should they also wish to participate in this discussion, I would be too happy. All I am looking for is good, sound, logical, authoritative answers, no matter who provides it. By authoritative I mean the established Fuqaha, and not simply the views of contemporaries. Please do share this email with them. Please overlook any overindulgence from my side. As a student, I am certain I will benefit from your input. Request for Duas. Jazakallah and Was Salaam E. Vawda for Daarul Iftaa

March 15, 2006

from Ml. Suliman to Ml. Joosab

From: Ahmed Suliman To: Shoayb Joosab ; [email protected] Sent: Wednesday, March 15, 2006 10:37 PM Subject: Re: Request Respected Moulana Assalaamu Alaikum wa Rahmatullaahi wa Barakaatuhu Jazakallah for passing the email to me. I went through a few Fataawa from Darul Ifta Camperdown's website and below are the results. It is abundantly clear that Mufti Ebrahim Desai Sahib (DB) holds the view of permissibility of investments in limited liability companies. I therefore recommend that Moulana Imran discuss this with Mufti E Desai (DB). This would be more fruitful as Mufti E Desai is more senior then the two of us and also Moulana I Vawda and Mufti Desai both reside and teach in the same area. Hence this wil be more practical. NB. Mufti Desai has qouted Hazrat Moualana Mufti Taqi Usmani (MZ) in two of the five Fataawa qouted. And Allah Ta'aala Knows Best Was Salaam Ahmed Suliman2 [Thereafter was attached a few fatawa from the AskImam site]

2

{Ml. Ahmad Suliman Saheb serves on the following Shariah Boards: Takafol South Africa; Fraters Asset Management ; Old Mutual ; Malawi Islamic Bank, and Academic Advisory Committee of Islamic Finance Institute of Southern Africa} Page 6 of 113


April 3, 2006

from MA to DI

3

3

{Mufti Ashraf Quraishi Saheb is from Pakistan. He is: Head of the Daarul Iftaa of Jameah Mahmoodiyah, Springs; Chairman of Takafol SA Shariah Board; Chairman of ABSA Bank Shariah Board; Member of Fraters Shariah Board; Member of Old Mutual Shariah Board; Academic Advisory Committee of Islamic Finance Institute of Southern Africa} Page 7 of 113

The Debate on Shares {Translation supplied by DI}

Respected Mufti Ebrahim Desai Sahib Damat Barakratuhum Darul Iftaa Madressa In aamiyya Camperdown Assalamu Alaikum Warahmatullahi Wabarakatuh We make dua you are well. The doubts you are expressed regarding Limited Company and Shares, this humble one is pondering over the issue. 1. We should first decide what is the definition of a company according the company itself and according to civil law? 2. What is the reality of the directors? 3. The loan which the bank gives, is it given to the company or to the directors? 4. If there are any loss, who is responsible of it? 5. On the demise of a director, is the company shut down or is it carried over to his/her inheritors? What is the manner for this? 6. If one of the directors leaves the company, will the company s assets decrease? You are requested to also try and figure out the abovementioned points and inform this humble one. It will be easier to answer the question after understanding these points. May Allah give you more courage and ability, Ameen. Wasallam, Muhammad Ashraf

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April 19, 2006

from DI to MA

{The Urdu is the same as the English}

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April 23, 2006

from MA to DI

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{Translation supplied by DI} Topic: Limited Liabilities Respected Mufti Ebrahim Desai Sahib Mad Zhilahu al-Aali Assalamu Alaikum Warahmatullahi Wabarakatuh May Allah accept your efforts and give us all the ability to serve Islam and the knowledge of Shariah, Ameen. Thank you, as you have answered my questions very quickly. Inshallah, it will make it easier to find out the verdict regarding Limited Company. You have asked an important question that is there an example in Shariah of something else beside Allah Ta ala or a human being that becomes an owner of something? Regarding this I have thought of a few examples. Please think over them. 1. Is it necessary to find out who is the owner of the company to give a verdict on Shareholders? 2. Allah is the owner of masjid and waqf, but what is meant by Allah being the owner? Isn t Allah the owner of our possessed items as well? 3. Who is the owner of a barren land? If Allah is the owner, then how is it possible that a person becomes the owner of that land after cultivating it? If a waqf property is being wasted and a person comes and looks after the property, then can such a person become the owner if he takes control over it and restores it? 4. Who is the owner of natural mines and petroleum? 5. You have mentioned that the bank give loan to the company and not to the directors. That means the directors and the shareholder are not indebt to the bank. If they are not indebt, how can it ask them for repayment? 6. What is the definition of Limited Company? Did the directors and shareholders make their liabilities limited or the company? You are requested to research, and send us your research in English without translation. This humble one is waiting for the reply. Request for duas, Muhammad Ashraf Jamia Mehmoodia - Springs

April 28, 2006

From DI to MA

From: Daarul Iftaa Desk One [mailto:[email protected]] Sent: Friday, April 28, 2006 8:44 AM To: 'ashraf786 ashraf'; ([email protected]) Subject: Muhtaram Mufti Ashraf Saheb.doc

Muhtaram Mufti Ashraf Saheb Assalaamu Alaykum Wa Rahmatullaahi Wa Barakaatuh I hope you are well. I was unable to respond earlier as I was abroad and just returned yesterday.Page 11 of 113


The issues of limited liability as well as that of ow nership are important in shares. In the S hari ah ownership is vested in Allah (as in the case of Waqf) or in a natural person (as in general cases). The issue under discussion is ow nership being vested in anything else besides Allah and the actual owner in order to execute the liabilities of the business. You are well aware of the laws of Iflaas in S hari ah and there are no absolute limitations in S hari ah in that regard. Attached is a detailed article on limited liabilities by M ujlisul Ulama. I hope you will go through it and let me have your response. Jazaakumullah, it is always a pleasure to engage in academics w ith you. We still look forward to your answer to the fundamental question posed earlier. and Allah Ta'ala Knows Best Mufti Ebrahim Desai FATWA DEPT

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May 4, 2006

from MA to DI

{Translation provided by DI} Topic: Limited Liabilities and Transactions of Shares Respected Mufti Ebrahim Desai Sahib, Asalamu Alaikum Hope you are well. May Allah accept you efforts and travels for the service of Deen and give you more ability, Ameen.

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Mufti Sahib, we should first decide on which aspect we want to establish a Shar ee verdict? Regarding the transactions of shares, or regarding limited company? Furthermore, to establish a Shar ee verdict on shares, is it necessary that we first ponder upon the Shar ee aspect of ownership of the company and limited liability? What is meant by ownership of Allah Ta ala and is waqf the only example of the ownership of Allah Ta ala? What other thing besides waqf are considered to be in the ownership of Allah? If the court proclaims someone to be insolvent, then would it be correct for the court to demand from him in a judicial manner? Mufti Sahib, please contemplate on these issues and let me know of your opinion. Request for duas, Muhammad Ashraf

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May 5, 2006

from DI to MA

{Translation by DI}

Respected Mufti Ashraf Sahib Mad Zhiluhu Assalamu Alaikum Warahmatullahi WabarakatuhPage 15 of 113


We received Mufti Sahib s fax dated 5/4/1427 in accordance to 4/5/2006. Jazakumullah Khairah 1. My original question was that is it possible for something besides Allah and the owner to possess ownership? Mufti Sahib is requested again to turn his attention to this question. If the position of share in the stock exchange is of a partnership, then the loss and gain have the position of the foundation in a partnership. The partnership cannot exclude itself from the partnership of gain and loss. If a partner makes a condition of not sharing the loss, is such a condition valid? 2. The Fuqaha have stated that the rulings of an insolvent person are in accordance to the laws of a debtor. Jazakumullah Khairah Wasallam, Ebrahim Yusuf Desai

May 5, 2006

from DI to Ml. Joosab

From: Daarul Iftaa Desk One [mailto:[email protected]] Sent: Friday, May 05, 2006 10:49 AM To: 'Shoayb Joosab' Subject: RE: [Spam Bayes=93,44] Fw: Request Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Maulana, Jazakallah for your email. I think I should inform you that my investigation into the issue of limited liability and the status of public companies was under the instruction of my honourable Ustaad Mufti Ebrahim Desai Saheb. It is not a solitary position different from that of Mufti Ebrahim Desai Saheb. After deliberating on the issue, we at the Daarul Iftaa all saw the need to review our previous position. It is in this light that we have attempted to engage other Ulama on the issue. The general response we have had is that the protagonists of the view of permissibility have no sound answers (in the majority of cases no answers at all), convincing us that we should retract our previous fatawa. It is sad to note some Ulama find it difficult to accept the truth even after realizing that they have no basis for their views. May Allah Ta ala save me first, and all of us from such takabbur. The only exception was the response of Mufti Ashraf Saheb, which is much appreciated. The discussion is presently ongoing, and we look forward to the outcome. After our investigation is finalized, should the need arise we will make a public retraction of our previously issued fatawa. I would like to once again express our appreciation for you raising such matters. And Allah Ta ala knows best. Was Salaam E. Vawda for Daarul Iftaa Checked and Approved: Mufti Ebrahim Desai

{Fax of MA to DI, dated 9 September 2006, is missing from file}Page 16 of 113


September 11, 200617 Sha baan 1427 11 September 2006

from DI to MA

Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Hazrat Mufti Ashraf Saheb, Sallamahullah We make Dua you are well. I am in receipt of your fax dated 15 Sha baan, and note the contents. Following a query received by a brother, the Iftaa Committee of the Jamiat (KZN) discussed the issue of Fraters. Our discussion was solely limited to the members of the committee. The conclusion of our submission was: At present our position is that as long as we do not get reasonable answers to our questions, we cannot sanction these products. I appreciate your honest admission that the core question has not been answered. The issue of Juristic Person ( ) is a fundamental issue ( , which is at the very heart of this discussion. The other issues of limited liability, and the loan given to the company are secondary ( ). We feel that the fundamental issue should be settled first. We are open to discuss this matter with you. Kindly let us know reasonably in advance should you wish to meet on this matter. Request for Duas. Jazakallah and Was Salaam Ebrahim Desai {Email of MA to DI, dated 11 September 2006, is missing from file}

September 13, 200619 Sha baan 1427 13 September 2006

from DI to MA

Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Hazrat Mufti Ashraf Saheb, Sallamahullah We make Dua you are well. Your email of 11 September 2006 refers. I am grateful for you engaging in this discussion. Unfortunately, it would be difficult to meet since I have many commitments, and will be leaving soon for U.S. Insha-Allah, we could meet after Ramadhaan. In the meanwhile, we can try to discuss the issue via email. Under the concept of Juristic Person , the person who buys shares does not own any portion of the assets of the company, nor is he responsible for any of the liabilities of the company. The questionPage 17 of 113


then arises as to, in terms of Shariah, how we classify the dealing in shares. We await your response. Request for Duas. Jazakallah and Was Salaam Ebrahim Desai {Email of MA to DI, dated 15 September 2006, is missing from file}

September 16, 2006

from DI to MA

22 Sha baan 1427 / 16 September 2006 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala) We make Dua you are well. Your email of 15 September 2006 refers. Once again I must express my appreciation that you are at least discussing the issues, unlike others who do not even attempt to do so. In the letter of 3 April 2006 a number of simple and basic questions were posed around companies. Although I did not mention it at that time, I was very surprised that such simple and fundament questions were being posed. For someone to have approved a complex and intricate product, it would only be expected that the person be aware of the simple and basic nature of the product. If the person himself was not aware of the reality of the product, how then can he tell the world that such a product is acceptable? Nevertheless, in reply to the letter we clarified some basic misunderstandings regarding companies. We stated that: A company is a fictitious and artificial entity termed juristic person . (Mercantile and Company Law, Gibson, pg. 297) Directors are mere guardians or administrators of a company. (ibid pg. 408) If a bank gives a loan to the company, it is to the company and not its directors. (ibid, pg. 298) The directors, in their personal capacity, are not normally responsible for the loss of a company. They only become responsible at the time of misconduct or fraud. (ibid pg. 249) The company continues to exist after the death of its directors. The heirs of the director do not inherit the position upon the death of the director. (ibid, pg. 298) Further to this, in our last email we stated: Under the concept of Juristic Person , the person who buys shares does not own any portion of the assets of the company, nor is he responsible for any of the liabilities of the company. The same misconception is now repeating itself. We therefore have to repeat ourselves and clarify:Page 18 of 113


The directors, in their personal capacity, do not own any of the assets of the company The directors, in their personal capacity, are not responsible for any of the liabilities of the company The shareholders do not own any of the assets of the company The shareholders are not responsible for any of the liabilities of the company The fictitious juristic person owns the assets of the company The fictitious juristic person is responsible for the liabilities of the company Therefore, the next important question was: In terms of Shariah, what is the shareholder purchasing when he buys a share ? How do we classify this deal? We look forward to your reply on this question. Request for Duas. Jazakallah and Was Salaam Ebrahim Desai {Email of MA to DI, dated 18 September 2006, is missing from file}

September 20, 2006

from DI to MA

26 Sha baan 1427 / 20 September 2006 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala) We make Dua you are well. Your email of 18 September 2006 refers. Once more, Jazakallah for engaging on the issue. We are very confident of our stance. What we have stated was with reference. For your further information, we include another reference. The characteristic feature of a corporation is that it has rights and duties apart from its members. This distinguishes it from unincorporated associations of persons, such as a partnership40 or a voluntary association (for instance, a club). If A, B and C form a partnership, they are the owners of the partnership assets and are personally liable for its debts. If A, B and C form a company, the company, being a juristic person, has its own assets and liabilities; A, B and C, the shareholders, have certain claims against the company, but the company's property is not their property and the company's debts are not their debts. If a member of a partnership dies, the partnership comes to an end. A company's existence is not dependent on the lives of its shareholders; it has perpetual succession.41 4041

R. v. Levy, 1929 A.D. 312 at 322. On the foregoing, see Webb & Co., Ltd. v. Northern Rifles, 1908 T.S. 462.

(The South African Legal System and its Background. Hahlo and Khan.1973. Pg. 106) We now leave it up to you to counter this. You should not just attempt to disprove us, but to disprove what these experts in the field of law (Gibson, Hahlo and Khan) have to say on the matter.Page 19 of 113


Request for Duas. Jazakallah and Was Salaam Ebrahim Desai

September 22, 2006 from MA to DIFrom: mohammad Ashraf [mailto:[email protected]] Sent: Friday, September 22, 2006 7:12 AM To: alinaam@inMail24 .com Subject: RE: shares assalaamu alaikum warahmatullahi wabarakatuh, Mufti sahib: you are saying that the directors and shareholders are not owners of the company. Please prove it that, they are not legal owners of the company because I found that The shareholders of a company are its legal owners, are entitled to a share in its profits which serves as proof of ownership of shares in the company shareholders who are entitled to any remaining assets of the business in the event of the company being wound up(liquidated) Dictionary of Business page 385,386. Is zakaat wajib on shareholders? if yes then how if they are not owners? if not then is buying shares istihlaak {using up of the wealth} ? Requst for duaas.WassalaamAshraf

December 5, 2006

from DI to MA

From: Desk One Daarul Iftaa [mailto:[email protected]] Sent: Tuesday, December 05, 2006 5:16 PM To: Mufti Ashraff Quraishi; ([email protected]) Subject: shares, contd

14 Thul Qada 1427 / 05 December 2006 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala) We make Dua you are well. I am in receipt of your email sent 22 September 2006. As you may be well aware, I was away from the country for Ramadhaan. Upon my return I had a huge backlog of work to attend, and was unable to attend to your email. Since we are now in the imtihaan {examination} period, I managed to find the time to attend to your email. Jazakallah for continuing the discussion. I find your view absurd, to say the least. One can be excused for misunderstanding an issue, but after been made aware of the incorrectness of such a view, one is expected to do a thorough research of the issue at hand. If after undertaking a sound research of the matter, one still draws incorrect conclusions, it really brings into question the issue of competence. To claim that the directors are owners of the company is ludicrous. Perhaps one has not understood the role of the directors, and how they fit into the company structure. To explain this I will use the following illustration.

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Example Zaid is a young boy of 3 years, and has no assets. Amr gives Zaid an amount of R10 000 to do business with. This amount belongs to Zaid, and not Amr. Since Zaid cannot manage his own affairs, Amr appoints Bakr as a curator (or guardian) to look after the financial affairs of Zaid. Bakr then undertakes business on behalf of the boy Zaid, and not on his own behalf. From the profits acquired a certain amount is annually set aside for Zaid's expenses. Thereafter, from whatever profit is left over, Bakr will annually decide what percentage must be kept in reserve for the future, and what must be distributed to Amr. In this way Amr will receive an amount from the business. Once Amr gives the amount to Zaid, it belongs to Zaid, and not to Amr. When Bakr purchases any item with this amount, the item belongs to Zaid, and not to Bakr, nor to Amr. Bakr is merely a wakeel (agent) for Zaid. If while undertaking any business there is any debt incurred, the debt is Zaid's, and not that of Bakr, nor that of Amr. Zaid's creditors may only claim from Zaid, and may not claim from the personal assets of Bakr or Amr. The benefit for Amr in giving the R10 000 is three-fold, a) He gets a share of the annual profits made by Zaid, b) He annually decides who the curator of Zaid will be. At no time does Amr act as a wakeel (agent) for Zaid. At the end of the year he may vote who the wakeel for the next year will be. In simple terms he has voting rights at the AGM. c) If Zaid has to pass away, and after all his debts are paid out, should there be any amount left over from his estate, Amr will receive the entire residue. Zaid is the example of a company or juristic person. There are obviously some differences, but this example is merely used for illustration purposes. Zaid is a real person whereas the company is a fictitious person. Zaid grows up to be an adult, whereas a company never develops to become an independent natural person. Amr in the example is that of a shareholder. Bakr is the example of a director. I trust that from this example you will understand that the director, although he is a natural person, can never be regarded as the owner of the company. It would be preposterous to claim that Bakr owns Zaid. Bakr merely manages the affairs of Zaid. Similarly, one can never say that Bakr owns the assets purchased. The assets belong to Zaid. In a similar light, Amr does not own Zaid. The shareholder does not own the company. The company is a separate person. In secular law, one person cannot own another person, hence the shareholder does not own the company. Amr also does not own the assets purchased. The assets belong solely to Zaid. I hope this example will clarify matters, and show that the directors and shareholders are not owners of the company. Mufti Saheb, you wrote:Please prove it that," they are not legal owners of the company"

Firstly, your tone tends to indicate that we have not provided any proof. In fact we have provided proof, which you choose to ignore. We have quoted from reliable and authentic sources that thePage 21 of 113


shareholders do not own the assets of the company, nor are they responsible for the liabilities of the company. When we have provided proof, how then can you ask for proof in a manner that suggests that no proof was provided. Secondly, should you require further proof, we are prepared to consult more reliable works of secular law, and provide quotations to substantiate our point. But then you must not ignore our proofs and pretend that it does not exist. You must take up the challenge and state clearly your response to these authorities. You must come out clear and disagree with these experts if you hold a contrary view. Thirdly, in our last letter we left the following challenge to you, to which you have not responded. "We now leave it up to you to counter this. You should not just attempt to disprove us, but to disprove what these experts in the field of law (Gibson, Hahlo and Khan) have to say on the matter." You have quoted from a book "Dictionary of Bussiness". Kindly provide us with full details of the book, so that we may look into this quotation. Please provide the author's name, the publisher and ISBN number. However, even without consulting the book, we must caution regarding the following: a) Many books of this nature are written for the layman, and hence are not technically accurate. They are merely there to bring these concepts within the grasp of the general public. b) In pursuit of simplifying technical issues, they often resort to metaphoric (majaazi) language, which is not technically accurate. To use the above example, they would metaphorically say that Amr owns Zaid because he is the one who benefits most from Zaid, and Zaid only has his financial existence because of Amr. Metaphorically this statement may be acceptable, but it is in reality (haqeeqatan) incorrect. In the quotation provided, it alludes to the fact that shareholders receive the residue upon the company being wound up. I have heard this argument previously, that since the shareholder receives the residue, it may be inferred that the shareholder is the owner of the assets. This line of argument is unsound. In secular law, the company owes its existence to the shareholders. Had the shareholders not "invested" in the company, the company would not have existed. All the financial benefits are for the benefit of the shareholders. Therefore, in law, the shareholders should benefit if the company is wound up. This in no way indicates that that the shareholders own the assets. The example of this would be that of a person who bequeaths his entire estate to his son. During the lifetime of the father, the father is the owner of the assets. Only after death, when the father is no longer there, does the ownership of the assets pass from the father to the son. During the lifetime of the father, it can never be said that the son owns the assets. The winding up of the company is like the death of the juristic person. It is at this time that it is possible that some assets may be transferred from the company to the shareholders. This does not indicate that during the existence of the company the shareholders own those assets. They only have a right to, so to say, inherit those assets from the company upon it being dissolved. If the right to inherit had to indicate immediate ownership, then one would have to conclude that the son owns the father's assets during the lifetime of the father. This is absurd.

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Mufti Saheb raises the issue of Zakaat. This issue is a secondary issue (fara'), which depends on the primary issue (asal). Once we are able to determine the primary issue, then the secondary issue will flow therefrom. We need to determine, in terms of the Shariah, how we classify the money given by Amr to Zaid. Is it Qard, hibah, maalul mudhaarabah or any other form of Islamic transaction? Zakaat on shares in not mansoos alay that we must regard it as the asl. It is something that has still to be determined. We trust this addresses the points you have raised. We look forward to your reply. Request for Duas, and maaf for any takleef. Jazakallah and Was Salaam Ebrahim Desai

December 5, 2006

from MA to DI

From: mohammadashraf759 [mailto:[email protected]] Sent: Tuesday, December 05, 2006 10:35 PM To: Desk One Daarul Iftaa Subject: RE: shares, contd wa alaikum ussalaam. thanks of allah you back after long time. i suggest that we must appoint hakams {arbitrators} between us and we send the correspondence to the hakams. finally i am saying that whoever puts his money in companey he is the owner of the assets of the company and he is responsible for debts on the assets in ratio of his money. please prove that he is not by law. you didn't yet. in your example you may ask umr in wich capicity he gave the money to a 3 years old boy and on what base he is getting the profit. wassalaam

December 7, 2006

from DI to MA

From: Desk One Daarul Iftaa [mailto:[email protected]] Sent: Thursday, December 07, 2006 8:13 AM To: 'mohammadashraf759' Subject: RE: shares, contd

15 Thul Qada 1427 / 06 December 2006 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala) We make Dua you are well. Jazakallah for your email of 5 December 2006. Unfortunately, many issues are being avoided and are not being addressed. You wrote:

Page 23 of 113

The Debate on Shares finally i am saying that whoever puts his money in companey he is the owner of the assets of the company and he is responsible for debts on the assets in ratio of his money. please prove that he is not by law. you didn't yet.

In fact we did. Perhaps we should remind you of the following quote in our previous correspondence: i) The characteristic feature of a corporation is that it has rights and duties apart from its members. This distinguishes it from unincorporated associations of persons, such as a partnership40 or a voluntary association (for instance, a club). If A, B and C form a partnership, they are the owners of the partnership assets and are personally liable for its debts. If A, B and C form a company, the company, being a juristic person, has its own assets and liabilities; A, B and C, the shareholders, have certain claims against the company, but the company's property is not their property and the company's debts are not their debts. If a member of a partnership dies, the partnership comes to an end. A company's existence is not dependent on the lives of its shareholders; it has perpetual succession.4140 41

R. v. Levy, 1929 A.D. 312 at 322. On the foregoing, see Webb & Co., Ltd. v. Northern Rifles, 1908 T.S. 462.

(The South African Legal System and its Background. Hahlo and Khan.1973. Pg. 106) You wrote:in your example you may ask umr in wich capicity he gave the money to a 3 years old boy and on what base he is getting the profit.

This is the way the system was designed, and Amr merely contributes according to a system that has already been designed in the secular world. According to the contract, if he contributes in this manner to Zaid he will be entitled to a share of the profits earned by Zaid. Amr did not design the system, but is merely using an existing secular system. What is important is not what impression Amr may have, but what the Shari'ah will classify it as. This is what we would like you to answer without avoiding the issue. Given that this is the system already in place, how will the Shari'ah view this "investment"? Is it qardh, hibah, or any other form of transaction recognised in Shari'ah? Please answer this question. Nonetheless, we accept your suggestion that we appoint a person to decide between the two points of view. Our divergent views are regarding a legal matter, and not a fiqhi one. Kindly suggest the name of an impartial expert in secular law. Once we agree on a neutral person, we will forward our full correspondence to him. We look forward to your reply. Request for Duas, and maaf for any takleef. Jazakallah and Was Salaam Ebrahim Desai

February 3, 2007

from MA to DI

From: mohammad Ashraf [mailto:[email protected]] Sent: Saturday, February 03, 2007 10:12 PM To: Desk One Daarul Iftaa Subject: RE: reminder

Page 24 of 113

The Debate on Shares Assalaamu alaikum. Sorry for delaying in answering. Actuallay the discussion on the matter of share between you and me is difficult and non beneficial. You think that the share holder is not the owner of company'assets but i think he is,both of us have some proof but we are not agreeing with proofs, so we need another person who may satisfy us. Please look any suitable person for us and let me know. I got your quistion about takaafol, insha allah i will do. Wassalaam. M ashraf

February 4, 2007

from MA to DI

From: mohammad Ashraf [mailto:[email protected]] Sent: Sunday, February 04, 2007 11:27 AM To: [email protected] Subject: RE: reminder assalaamu alaikum. I got some more profes for owning the shareholder of assets of company. Please check it below. Shares in public company Here are some quotations about shares and company from the book internet- linked dictionary of Business (ISB-N-0-00-720583-X) Collins

1-SHARE a financial security issued by a joint-stock company as a means of raising long-term capital. Purchasers of shares pay money into the company s bank account and in return receive a share certificate signifying that their ownership of the shares and have their ownership recorded in the company s share register. The shareholders of a company are its legal owners and are entitled to a share in its profits. (Page 385) N.B. All know that the Share s mean the some unallocated part (sahmun musha n) in the assets of the company, not the paper of certificate. The paper is the recite of the share. If the shareholders are not the owner of the assets of the company in ratio of their capital then what is the meaning of the words ownership, legal owners . (Ashraf) 2-Shareholders the individuals and institutional, investors who contribute funds to finance a joint-stock company in return for shares in that company. There are two main types of shareholder: a)holders of preference shares who are entitled to a fixed dividend from a company s profits(before ordinary shareholders receive any thing),and who have first claim on any remaining assets of the business after all debts have been discharged; b)holders of Ordinary shares who are entitled to a dividend from a company s profits after all others outlays have been met and who are entitled to any remaining assets of the business in the event of the company being wound up (liquidated). Generally only ordinary shareholders are entitled to vote at Annual General Meetings and elect Directors, since they bear most of the risk. (Page 386) INSOLVENCY OR BANKRUPTEY When a joint-stock company s assets are will be paid fully to firstly, preferential creditors (the inland revenue for tax due, employees for wages owed etc.); secondly, other creditors(banks for loans and trade creditors);thirdly ,preference shareholders; and finally ,ordinary shareholders, if any funds still remain. (page 215) Joint-stock company A form of company in which a number of people contribute funds to finance a firm in return for shareholders are able to raise funds by issuing shares to large numbers of shareholders and thus are able to raise more capital to finance their operations than could a sole proprietor or even a partnership .Once a joint Page 25 of 113

The Debate on Shares stock company is formed then it becomes a separate legal entity apart from its shareholders, able to enter into contracts with suppliers and customer. Joint-stock companies are managed by the BOARD OF DIRECTORS appointed by shareholders. The directors must report on the progress of the company to the shareholders at an ANNUAL GENERAL MEETING where shareholders can in principle vote to remove existing directors if they are dissatisfied with their performance.The development of joint-stock companies was given a considerable boost by the introduction of the principle of LIMITED LIABILATY which limited the maximum loss which a shareholder was liable for in the event of company failure. This protection for shareholders encouraged many more of them to invest in companies. ----------Most big firms are public companies since this is the only practical way of obtaining access to large amounts of capital. Although the shareholders are the owners of a public company, very often it is the company s management which in fact controls its affairs.(page 234). LIMITED LIABILITY An arrangement that limits the maximum LOSS which a SHAREHOLDER is liable for in the event of company failure to the SHARE CAPITAL which he originally subscribed. The principle of limited liability limits a shareholder s maximum loss in the event of his company failing to the original share capital which he invested, no further claims by creditors against the shareholder s other assets being permitted. Once shareholders were protected in this way many more people were encouraged to invest in companies and JOIN-STOCK COMPANIES grew rapidly. To warn potential creditors that any claims by creditors will be limited in total to the amount of the company s share capital, such companies carry the term: Limited (ltd) or Public Limited Company (plc) after their names. (Pg 246) N.B. [edit] Shares and share capital Main article: Stock Companies generally raise capital for their business ventures either by debt or equity. Capital raised by way of equity is usually raised by issued shares (sometimes called "stock" (not to be confused with stock-in-trade)) or warrants. A share is an item of property, and can be sold or transferred. Holding a share makes the holder a member of the company, and entitles them to enforce the provisions of the company's constitution against the company and against other members. Shares also normally have a nominal or par value, which is the limit of the shareholder's liability to contribute to the debts of the company on an insolvent liquidation. Shares usually confer a number of rights on the holder. These will normally include: voting rights rights to dividends declared by the company rights to any return of capital either upon redemption of the share, or upon the liquidation of the company in some countries, shareholders have preemption rights, whereby they have a preferential right to participate in future share issues by the company Many companies have different classes of shares, offering different rights to the shareholders. For example, a company might issue both ordinary shares and preference shares, with the two types having different voting and/or economic rights. For example, a company might provide that preference shareholders shall each receive a cumulative preferred dividend of a certain amount per annum, but the ordinary shareholders shall receive everything else.

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The Debate on Shares The total number of issued shares in a company is said to represent its capital. Many jurisdictions regulate the minimum amount of capital which a company may have, although some countries only prescribe minimum amounts of capital for companies engaging in certain types of business (e.g. banking, insurance etc.). Similarly, most jurisdictions regulate the maintenance of capital, and prevent companies returning funds to shareholders by way of distribution when this might leave the company financially exposed. In some jurisdictions this extends to prohibiting a company from providing financial assistance for the purchase of its own shares. Voluntary liquidations occur when the company's members decide voluntarily to wind up the affairs of the company. This may be because they believe that the company will soon become insolvent, or it may be on economic grounds if they believe that the purpose for which the company was formed is now at an end, or that the company is not providing an adequate return on assets and should be broken up and sold off. Some jurisdictions also permit companies to be wound up on "just and equitable" grounds.[14] Generally, applications for just and equitable winding-up are brought by a member of the company who alleges that the affairs of the company are being conducted in a prejudicial manner, and asking the court to bring an end to the company's existence. For obvious reasons, in most countries, the courts have been reluctant to wind up a company solely on the basis of the disappointment of one member, regardless of how well-founded that member's complaints are. Accordingly, most jurisdictions which permit just and equitable winding up also permit the court to impose other remedies, such as requiring the majority shareholder(s) to buy out the disappointed minority shareholder at a fair value. Where a company goes into liquidation, normally a liquidator is appointed to gather in all the company's assets and settle all claims against the company. If there is any surplus after paying off all the creditors of the company, this surplus is then distributed to theOwner of one or more shares of stock in a corporation or one or more shares or units in a mutual fund. A common shareholder is generally entitled to three basic rights of ownership: 1. claim on a share of the company's undivided assets in proportion to the number of shares held, 2. proportionate voting power and 3. dividends when earned and declared. www.activafunds.com/investor_education_glossary.jsp

Economist.com Financial SECURITIES, each granting part ownership of a company. In return for risking their CAPITAL by giving it to the company s management to develop the business, shareholders get the right to a slice of whatever is left of the firm s revenue after it has met all its other obligations. This money is paid as a DIVIDEND, although most companies retain some of their residual revenue for INVESTMENT purposes. Shareholders have voting rights, including the right to vote in the election of the company s board of directors. Shares are also known as equities. They can be traded in the public FINANCIAL MARKETS or held as PRIVATE EQUITY.

A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares. In the past, shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Today, brokerages have electronic records that show ownership details. Owning a "paperless" share makes conducting trades a simpler and more streamlined process, which is a far cry Page 27 of 113

The Debate on Shares from the days were stock certificates needed to be taken to a brokerage before a trade could be conducted. While shares are often used to refer to the stock of a corporation, shares can also represent ownership of other classes of financial assets, such as mutual funds. Investorwords.com One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors. also called stockholder. Stock An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. also called equity or equity securities or corporate stock. babylon Shareholder A shareholder or stockholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. The shareholders are the owners of a corporation. Companies listed at the stock market strive to enhance shareholder value. Stockholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, stockholder's rights to a company's assets are subordinate to the rights of the company's creditors. This means that stockholders typically receive nothing if a company is liquidated after bankruptcy (if the company had had enough to pay its creditors, it would not have entered bankruptcy), although a stock may have value after a bankruptcy if there is the possibility that the debts of the company will be restructured.

February 21, 2007

from DI to MA

From: Desk One Daarul Iftaa [mailto:[email protected]] Sent: Wednesday, February 21, 2007 9:03 AM To: Mufti Ashraff Quraishi; ([email protected]) Subject: shares continued

30 Muharram 1428 19 February 2007 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala)Page 28 of 113


We make Dua you are well. Jazakallah for your emails of 3rd and 4th February 2007. While we may have our different views, I truly appreciate the fact that you are following up this discussion in a very cordial manner, and I express my shukr to you for continuing the discussion. Unlike other Ulama who are afraid that the truth may turn out against them, you are prepared to take up the issues directly. May Allah Ta'ala reward you for your courage. Initially, I got the impression from your email sent 3rd February 2007 that you are not prepared to discuss the substantive issues. However, this was followed by your email of 4th February 2007 in which you presented further "proofs". In the light thereof, I assume you now wish to ignore your previous email, and the issues are still open to discussion. Hence, I intend continuing the discussion. I have requested our Mufti Emraan Vawda to research the issue and respond to you. His submission follows hereunder. I hope this research will bring the matter closer to finalisation. Request for Duas. Was salaam Mufti Ebrahim Desai

Assalaamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Saheb, We make Dua you are well. As indicated above, I have been requested to respond to your email. In the quotation provided by you, it states: "ownership of shares". We have no doubt that the shareholders are owners of the shares. However, as to what this implies we differ. If a person holds a share in a company, it does not imply he owns the assets of the company. He simply has a right to receive funds from the company. The term used to refer to this is a "share", which is a word that can be confusing, looking from a Shar'ee perspective. You state:N.B. All know that the Share s mean the some unallocated part (sahmun musha n) in the assets of the company, not the paper of certificate. The paper is the recite of the share.

This is your interpretation, with which we respectfully disagree. As explained above, the word "share" can be misleading. You are applying the Shar'ee meaning of sahmun musha'un {undivided portion}to the term "share", which is not the intended meaning in the context of a public company. You state:If the shareholders are not the owner of the assets of the company in ratio of their capital then what is the meaning of the words ownership, legal owners

We have dealt with this issue in our previous correspondence. We had stated:Page 29 of 113


"In pursuit of simplifying technical issues, they often resort to metaphoric (majaazi) language, which is not technically accurate. To use the above example, they would metaphorically say that Amr owns Zaid because he is the one who benefits most from Zaid, and Zaid only has his financial existence because of Amr. Metaphorically this statement may be acceptable, but it is in reality (haqeeqatan) incorrect." "Ownership" refers to the right to receive a return, and is used metonymically. It does not refer to factual ownership of something tangible. We have no doubt that the shareholders are the "legal owners" of the shares. The question is: What does it entail. Does it imply ownership of the tangible assets? This is our point of contention. Instead of getting broiled in semantics, we feel that we should be concentrating on realities. You claim that the shareholders and directors are owners of the tangible assets of the company, and we differ. Let us approach the matter from a different angle. Let us examine whether shareholders have the very same rights that flow from ownership. If they have the same rights as owners should have, then we are prepared to accept that they own the tangible assets, otherwise not. Some of the rights that flow from ownership are: a) The right to use at free will. An owner of an asset does not require any person's permission to use his own asset. Let us apply this to the case of a public company. Zaid and Amr, for example, each own 50% of the shares of a public company, called xyz holdings. The company owns a car. Zaid and Amr cannot walk onto the premises of the company and use the car at free will. The car belongs to the company, and they require the permission of the administrators of xyz holdings, i.e. the board of directors, to use the car. Although, they can vote for or appoint a board of directors at the AGM, they cannot override the authority of the board of directors. b) The right to destroy. An owner of an asset does not require any person's permission to destroy his own asset. The owner is not liable to anyone for having destroyed his own asset. Following from the example above, if Zaid and Amr jointly destroy the car, the company will have a legal claim of damages against them. They cannot overrule the authority of the board of directors. If it were their own property, they would not be liable to the company for destroying the car. c) The right to alienate. An owner may alienate his asset at free will, without requiring any other person's permission. Zaid and Amr may not jointly sell the car, and such a supposed sale would be void ab inito. Similarly, they may not give the car as a gift, or transfer ownership thereof by any other means. d) The right of preventing others from using. Zaid and Amr may not prevent the company from using any of the assets. Rather, to the contrary, the company has the right to prevent Zaid and Amr from using any of the assets. These are just a few examples of the contents of the right of ownership. These substantive issues show very clearly that the company is the owner of the assets, and not the shareholders. These entitlements are confirmed by the legal authorities, of which the following is an example.Page 30 of 113


"ENTITLEMENTS OF THE OWNER The following entitlements are usually distinguished: (a) Entitlement to control is the entitlement to physically control and keep a thing. (b) Entitlement to use is the entitlement to use and benefit from a thing. (c) Entitlement to encumber is the entitlement to grant limited real rights in respect of the thing. [1] (d) Entitlement to alienate is the entitlement to transfer the thing to someone else."

We have already offered an explanation for the quotations you have presented as your "proof". On the other hand, you have offered no explanation for the succinct and self explanatory quotations we have presented from reliable legal authorities. Since you have chosen to augment your argument with further quotations taken from internet, we would like to present further support for our well established point that the shareholders are not owners of the assets. 1. "The juristic person, as a legal subject, enjoys a legal existence independent from that of its member or the-natural persons who created it. Naturally the juristic person must always act through its functionaries. For example, in the case of a company the directors act on behalf of the juristic person (the company). However, when the functionaries act on behalf of the juristic person, it is the juristic person who acquires rights, duties and capacities and not the functionaries themselves in their personal capacities. For example, through its functionaries a company can bind itself by contract, be the owner or lessor or lessee of things, commit certain delicts and even certain crimes and be held liable for these, sue its debtors, be sued by its creditors, and so forth."[2] 2. "We already know that the law regards a human being as a legal subject the natural person. But the law also provides for the recognition of entities, called juristic persons, which may take the form of a company or close corporation in the commercial world. (An "entity" can be described as something that exists independently, that is, apart from the members of which it consists. Note that a partnership is not a juristic person, because it does not exist as an entity apart from its members.) It is important for you to realise that a juristic person is not a human being. The only similarity between a natural person (human being) and a juristic person is that a juristic person also has legal capacity and is therefore the bearer of rights and duties. Furthermore, you must remember that it is not the human beings within, for example, a company, who are the juristic persons; it is the company itself that is the juristic person. The company a juristic person exists as an independent entity. Thus, in the case of the company and the close corporation that the Mothibes were thinking about for their dry-cleaning business, the entity is a juristic person in the eyes of the law (persona Juris). It has an identity that is separate from its shareholders or members and it owns the assets and incurs the obligations of the undertaking (the company or close corporation). If the undertaking (the company, close corporation, or whatever form the undertaking takes) becomes insolvent (goes bankrupt), only the assets or property of the undertaking (respective company, etc) will be seized, and not the assets of any shareholder or member, because the undertaking is a separate entity. Other examples of juristic persons are a municipality, a university like Unisa and a church like the Roman Catholic Church. A juristic person becomes a legal subject the moment it comes into existence. This can happen in various ways, and usually in terms of statutory provisions (the provisions of the relevant act). However, it can also happen in terms of common law. If you are not sure what common[1] [2]

Introduction to the law of property, Pg. 46, third edition, Van der Walt and Pienaar, Juta and Co. 1999. The South African Law of Persons, Second Edition, Pg. 5, Cronje and Heaton, LexisNexis Butterworths, 2003Page 31 of 113


law is, go back to study unit 4 of Module 1 (ILW101-4) where you will find the information you require. For example, a company will come into existence in terms of the statutory provisions of the Companies Act 61 of 1973, and a university in terms of the statutory provisions of the relevant University Act. However, an association like a church comes into existence in terms of common law. Our courts have determined that such an association (e.g. a church) which is a juristic person should continue to exist even though there is a change in membership possess or be able to possess property that belongs to the association as such and over which individual members have no rights of ownership not be a profit-making association A juristic person may cease to exist in a number of ways. (Usually, however, it continues to exist for an unlimited period.) Juristic personality normally comes to an end with a court application. You may find it difficult to understand the concept of the juristic person. We shall try to make it a little easier for you to understand by looking at another scenario. Karel and a friend, Amos, establish a company called AK Investments (Pty) Ltd. Karel and Amos are the only shareholders and they are the only directors of the company. Here we have two human beings, namely Karel and Amos, who are legal subjects (natural persons). The company, an entity which exists independently from its members, is also a legal subject (juristic person). All of them have legal capacity, that is the capacity to be the bearer of rights and duties. ii) If the company has two motor cars, this does not mean that Karel has one and Amos has one. The company owns the two cars. If Tom now wishes to buy one of the cars, he cannot buy it from Karel or Amos. He must buy it from the company and this means that he must conclude a contract with the company to do this. The car is the property of the company, an entity that exists independently, and therefore it is the company (juristic person) that must enter into the contract for the sale of the car to Tom. As a juristic person, the company has legal personality which means that it has legal capacity and can decide whether to sell the car or not, what the price be, et cetera. Once the car has been sold, it is the company that will have a right to the purchase price and it is the company that will have a duty to deliver the car to Tom. Of course, Karel and Amos will enter into the contract in the name of the company. The role they play in this case is that of the organs of the company, that is the instruments through which the functions of the company are carried out. Just as the arms, legs and brains of the natural person are its organs and carry out some of the necessary functions of the body, Karel and Amos play the role of the organs of AK Investments. Therefore, they perform the functions of the company. They themselves, however, are not the company. If Karel and Amos die, company will continue to exist. Even if Karel sells his share to Tom, company will continue to exist as AK Investments (Pty) Ltd."[3]

3. "CompaniesThe third aspect of commercial law that is contained in our little scenario is the law relating to companies. You will be studying company law in greater detail in further modules of the LLB curriculum. For now we will only look at some aspects of company law.

[3]

Pg. 61-62, Introduction to the Theory of Law, Unisa study guideILW102-5, Unisa 2001Page 32 of 113


Do you remember that you learned in study unit 5B that entities other than human beings can have legal personality? In everyday business the company registered in terms of the Companies Act 61 of 1973 is by far the most important form of juristic person in use today. The most important characteristic of a company is its legal personality. Because the company is a person in the eyes of the law, it acquires rights and incurs duties. Although it does not have a mind of its own like a human being, it functions with the assistance of human beings (natural persons). Thus, its business transactions (both internal and external) have to be carried out by its organs and by the employees or agents who act on its behalf. The organs of the company are the directors and the general meeting of its members or shareholders. Companies with share capital are by far the most common and important type of company. If such a company is wound up because it is "bankrupt", that is if it is liquidated, the members can lose only the amounts they have paid to the company for their shares, and no more than that.

PartnershipsWe have already mentioned that the most important characteristic of a company is its legal personality. As a juristic person it exists separately from its shareholders. This has important legal consequences which become clearer when we compare a company with a partnership. A partnership is not a juristic person. It is a relationship between two or more people who agree to carry on business together in order to make a profit. They agree to contribute their money and labour to their undertaking for the purpose of making and sharing a profit.

Differences between a company and a partnershipWe will now consider the differences between a company and a partnership. The fact that a company exists separately from its shareholders has important consequences. This becomes clear when the legal position of the company is compared with that of the partnership. (1) A company is a juristic person, while a partnership is not. (2) In the case of a juristic person, the law makes an absolute distinction between the estate of such a juristic person (in this case a company) and the estates of the shareholders, that is all their money and property. The estates of the shareholders are separate from the estate of the juristic person (here, the company). The law does not make this distinction in the case of a partnership, although the assets of a partnership are, for practical purposes, kept separate from the private estates of partners. This means that the partners may lose their (personal) assets in case of bankruptcy. Although mention is made of a partnership's estate, it is not a separate estate in law. (3) Because a partnership is not a juristic person there is no separate legal subject which can be the bearer of rights and obligations. What this means is that all the partners together are the bearers of the partnership's rights and obligations. All the partners are joint owners of all the assets and joint co-debtors in respect of all the obligations. On the other hand, the members of the company are not personally the bearers of the company's rights and obligations the company, as a juristic person, is itself the bearer. (4) Each partner is personally liable for the partnership debts and there is no limitation on the liability of the partners (there may be exceptions, but you will learn more about them later on in your studies). Because a company is a separate, juristic person, it is responsible for its own debt. (5) When a company is liquidated (wound up), this does not mean that the estates of the shareholders will be sequestrated. However, when a partnership estate is sequestrated, this generally though there are exceptions means that the estates of the individual partners will also be sequestrated.Page 33 of 113


(6)

(7)

(8)

(9)

The sequestration of the estate of a shareholder (that is, his personal estate) has no effect on the continued existence of a company. The opposite is true of a partnership. In a partnership, partners generally have authority to bind the partnership (to act on behalf of the partnership) in all matters falling within the sphere of activities connected with the business. In a company, on the other hand, the shareholder has no authority to act on behalf of the company. The aim of a partnership is the acquisition of gain, that is, to make a profit. This cannot be changed. In a company this is usually also the case, but a company may be founded whose object is not the acquisition of gain, for example, a company which aims at the advancement of cultural values. A partnership cannot consist of more than 20 persons. There is, on the other hand, no limit on the number of members which a limited liability company may have, except that a private company's membership may not exceed 50."[4]

4.

"Consequences of separateness Important consequences of the fact that a company is a separate entity existing apart from its members are the following: (a) The company estate is assessed apart from the estates of individual members; consequently the debts of the company are the company s debts and not those of its members. The sequestration of the estates of members will not lead to liquidation of the company and, conversely, the liquidation of the company will not necessarily entail the sequestration of estates of the members. The position is different with a partnership which does not exist as a separate person: the estates of the partners and that of the partnership are sequestrated simultaneously. (b) The profits of the company belong not to the members, but to itself. Only after the company has declared a dividend, may the members, in accordance with their rights, as defined in the articles of the company, claim that dividend. (c) The assets of the company are its exclusive property and the members have no proportionate proprietary rights therein. Only on liquidation of the company are members entitled to share in a division of the assets of the company. (d) No one is qualified by virtue of his membership to act on behalf of the company. Only those who are appointed as representatives of the company in accordance with the articles can bind the company. A partner, however, can normally bind the partnership towards third parties in regard to everything within the scope of the partnership business. "[5]

Coming back to your original suggestion of appointing an arbitrator between us, we had agreed to this suggestion, and requested you to suggest a name. Your response was that we in turn should suggest a name. Accordingly, we got into contact with two experts. One is a senior advocate, Brother Muhammad Saleem Khan of Durban. The other is an attorney, Brother Zeyn Bhayat of Johannesburg. We informed both of them that we have an academic debate with another Mufti, and we now wish to appoint them as arbitrators purely to settle a point of secular law. We said that this will be by means of writing only, where they would not have to appear in person. Both have agreed to offer their expertise for this purpose.

[4]

Pg. 178-180, Introduction to the Theory of Law, Unisa study guideILW102-5, Unisa 2001 [5] Entepreneurial law, 3rd Edition, Pg. 60, Benade et al, LexisNexis Butterworths, 2003.Page 34 of 113


None of the two are aware of the issue under discussion. We deliberately did not inform them thereof so that they may remain impartial, and offer their objective and fair academic opinion. We are prepared to present our full correspondence to them, following which they will offer their decision based on their expertise on the subject. We are willing to abide by their decision as to the question of secular law which is being debated. Please let us know if this is acceptable to you. Should you wish to suggest the name of any other expert in secular law, we are willing to consider your suggestion. We look forward to your reply. Request for Duas, and maaf for any takleef. Jazakallah and Was Salaam E. Vawda, for Daarul Iftaa

February 24, 2007

from MA to DI

From: mohammadashraf759 [mailto:[email protected]] Sent: Saturday, February 24, 2007 10:43 AM To: Desk One Daarul Iftaa Subject: RE: shares continued Assalaamualaikum.Sorry i am not agree with your explaination and i am still have opinion that the share certificate is the reciet and representing the mushaa' {undivided} ownership of company's assets in the ratio of his capital in the light of those profes which i sent before.You know that partner cann't use maale-mushtarak {jointly owned property} without the permition of other partners and he is zamin {liable} for any damage specially in mushaa'{undivided property} case.Wassalaam

February 26, 2007

from DI to MA

From: Desk One Daarul Iftaa [mailto:[email protected]] Sent: Monday, February 26, 2007 4:51 PM To: 'mohammadashraf759'; Mufti Ashraff Quraishi Subject: RE: shares continued

8 Safar 1428 26 February 2007 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala) We make Dua you are well. We are in receipt of your email sent 24 February 2007, and note contents. You are aware that we had approached many Ulama, expressing that we have some concerns on this topic of shares and hoping that they would engage on the issues.

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We are grateful of the fact that from all of them, you are the only one who responded and was brave enough to discuss the actual issues. The impression we have is that this issue of shares has far reaching consequences. It is precisely for this reason that those Ulama in general who are involved in this field are afraid of touching on the subject. If it is proved that shares in a public company is unislamic, many Ulama employed by these unit funds will have to: a) apologise to the public for having mislead the masses, and b) resign from these highly paid jobs. Hence, the acceptance of the view that this form of shares is impermissible is obviously extremely difficult on these Ulama. Therefore, they rather offer silence than jeopardise their lucrative positions. Knowing fully well what is at stake, we were not surprised by their silence on the issue. This industry dealing with "Shariah approved shares" probably runs into billions of dollars worldwide, hence it is only expected that there would be hesitation to put this massive industry into danger of being closed down. A lot more is at stake than that which meets the eye. On the other hand, if it is proved that shares are permissible, all we have to do is publicly retract from our view. Not a single cent is at stake; hence we are not afraid if the truth may turn against us. Many of these Ulama who are employed by these funds are pinning their hope on you. They are aware of the discussion we are having, and look forward to the outcome. They trust you would be able to prove their point of view, hence absolving them of putting their personal reputations at stake. Hence the discussion we are having should be seen to be much larger than it appears. Since you are convinced that your position is correct and we are in error, I am sure you would not mind if we expose our error to the public and publish our correspondence on our website. While the hesitation of these other Ulama to take up the issues is indeed regrettable, we were very pleased that you were bold enough to do so. Initially we got the impression that you were in search of the truth, at any cost, even though the outcome may be to your disadvantage. We thought you were interested in the truth, even if it be bitter. However, looking at your last email, we are now beginning to have doubts on the spirit of your engagement. The reasons for our doubts are the following: a) We have repeatedly provided proofs for our contention, which you conveniently choose to ignore. You only address some issues which you decide may be relevant, while pretending that the other issues raised do not exist. b) You have not provided any explanation for the clear texts we have provided that the shareholders are not owners of the assets. You still assert that all these authorities are wrong, while providing no explanation whatsoever as to why you say they are wrong. You simply repeat your misunderstanding of the issue. c) It was your suggestion that our deadlock be solved by appointing an arbitrator. We then requested you to suggest some names, but you turn the tables and asked us to provide the names. When we took the trouble to get two experts to serve as arbitrators, you are now silent on the matter. Bear in mind that it was your suggesting in the first place. We have already stated that we will abide by the decision of the arbitrators. Why is such an undertaking not forthcoming from your side? Are you perhaps afraid that this may turn against your interest in the matter? d) You have not read our last email with a fair and open mind, rather with a preconceived notion. If you had read it with a fair mind you would have noticed that we said: "Zaid and Amr, for example, each own 50% of the shares of a public company". There are only two shareholders, whoPage 36 of 113


jointly own all the shares of the company. Yet, despite the fact that they are acting jointly, they are not allowed to transact regarding the assets of the company. Therefore your comment of "You know that partner cann't use maal-e-mushtarak without the permition of other partners and he is zamin {liable} for any damage specially in mushaa' {joint but undivided} case." is totally out of line. It has no relevance to the issues raised. Jointly means together. When two people are acting together, it means that they are in agreement with each another. The permission of one to the other, and vice versa is an obvious given. We look forward to you allaying our various doubts on the issues. Request for Duas. Was salaam Mufti Ebrahim Desai

February 27, 2007

from MA to DI

From: mohammad Ashraf [mailto:[email protected]] Sent: Tuesday, February 27, 2007 10:59 PM To: Desk One Daarul Iftaa Subject: RE: shares continued Assalamualaikum.please wait,i will give the answer in detail.wassalaam.ashraf

March 20, 2007

from DI to MA

From: Desk One Daarul Iftaa [mailto:[email protected]] Sent: Tuesday, March 20, 2007 10:57 AM To: '[email protected]'; 'Mufti Ashraff Quraishi' Subject: FW: shares continued Assalaamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Saheb, We make Dua you are well. We await your reply to the email below. {The above email was attached} We had made arrangements with the two lawyers to arbitrate on the issue. We cannot make them wait indefinitely. Request for Duas. Was salaam Mufti Ebrahim Desai.

March 7, 2007 from MA to SikiPage 37 of 113


{Mufti Ashraf Saheb asked one of his students to get some answers from Siki Ebrahim. The reply follows further on}From: [email protected] [mailto:[email protected]] Sent: 07 March 2007 04:44 PM To: Siki Ebrahim Subject: Questions from Mufti Ashraf Assalamualaikum Daddy Mufti Ashraf wants clarification with regards to the following regarding shares: 1. Is the shareholder the legal owner of the company s tangible assets in the ratio of his capital invested? 2. Is the share certificate representative of a partnership in the company s assets of the shareholder? 3. Why does the shareholder receive dividends from the profits of the company? Jazaakallah Wassalaam Munir

Page 38 of 113


March 25, 2007

from MA to DI

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{The English at the beginning of the fax is a summary of the Urdu}

April 12, 2007 from MA to some Ulama{Mufti Ashraf Saheb forwarded some material to a few Ulama} From: "mohammad Ashraf" To: ; ; ; ; ; Sent: Thursday, April 12, 2007 7:03 AM Subject: shares

Muhtaram muftiyaan- e-kiraam, Assalaamu Alaikum, Myself muhammad ashraf and mufti ebrahi desai sahib were in discussion regarding shares certificates for a public company for an year.We did not reach at any final decision.My opinion is that trading in shares certificate is jaaiz provided by some conditions although it is juristic person and has > limited liablety.I am attaching all coresponding please find it. Wassalaam. Ashraf.

April 18, 2007

from Siki to MA

From: [email protected] [mailto:[email protected]] Sent: Wednesday, April 18, 2007 4:40 PM To: [email protected]; [email protected]; 'Mufti Z. Bhyat'; 'Darul Iftaa' Subject: FW: Questions from Mufti Ashraf Page 46 of 113

The Debate on Shares From: Siki Ebrahim [mailto:[email protected]] Sent: Wednesday, April 11, 2007 11:37 AM To: [email protected] Subject: RE: Questions from Mufti Ashraf Salaams muftisaheb, Herewith answers as per your question. Please apologise to mufti ashraf for the long delay, but our people in the legal dept have been asway Hope this is clear salaams Hi Siki We ran your questions by compliance and these were the answers from Tim: 1. Is the shareholder the legal owner of the company s tangible assets in the ratio of his capital invested? A shareholder, in a simplistic sense, can be viewed as the owner of a company s tangible assets in ratio to his capital invested. However his ultimate entitlement on the liquidation of a company is subject to the preferential treatment of debtors. Consequently, one would have to establish the extent to which a company is geared, prior to establishing the ultimate rights of a shareholder to share in the liquidated assets of a company. Therefore the ownership of a shareholder in the tangible assets of a

debate on shares

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