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The Debate on Shares

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The Debate on Shares

Index
Index.................................................................................................................................................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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The Debate on Shares

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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Summary
There 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.

{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 ; mohammadashraf759@hotmail.com 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]

{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

The Debate on Shares

April 3, 2006

from MA to DI

{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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The Debate on Shares

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:alinaam@inMail24.com] Sent: Friday, April 28, 2006 8:44 AM To: 'ashraf786 ashraf'; (mohammadashraf759@hotmail.com) 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.
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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 Wabarakatuh
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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:alinaam@inMail24.com] 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}


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September 11, 2006


17 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, 2006


19 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 question
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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:
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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 40
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) 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.
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Request for Duas. Jazakallah and Was Salaam Ebrahim Desai

September 22, 2006 from MA to DI


From: mohammad Ashraf [mailto:moharnmadashraf759@hotmail.com] 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:alinaam@inmail24.com] Sent: Tuesday, December 05, 2006 5:16 PM To: Mufti Ashraff Quraishi; (mohammadashraf759@hotmail.com) 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 the
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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:mohammadashraf759@hotmail.com] 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:alinaam@inmail24.com] 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:

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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.41
40 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:mohammadashraf759@hotmail.com] Sent: Saturday, February 03, 2007 10:12 PM To: Desk One Daarul Iftaa Subject: RE: reminder

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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:mohammadashraf759@hotmail.com] Sent: Sunday, February 04, 2007 11:27 AM To: alinaam@inmail24.com 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:alinaam@inmail24.com] Sent: Wednesday, February 21, 2007 9:03 AM To: Mufti Ashraff Quraishi; (mohammadashraf759@hotmail.com) Subject: shares continued

30 Muharram 1428 19 February 2007 Assalamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala)
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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:
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"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.
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"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, 2003
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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. "Companies
The 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 2001
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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.

Partnerships
We 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 partnership


We 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.
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(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.
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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:mohammadashraf759@hotmail.com] 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:alinaam@inmail24.com] 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, who
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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:mohammadashraf759@hotmail.com] 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:alinaam@inmail24.com] Sent: Tuesday, March 20, 2007 10:57 AM To: 'mohammadashraf759@hotmail.com'; '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 Siki


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{Mufti Ashraf Saheb asked one of his students to get some answers from Siki Ebrahim. The reply follows further on}
From: 20025666@tiscali.co.za [mailto:jameah@worldonline.co.za] 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

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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" <mohammadashraf759@hotmail.com> To: <asuliman@tiscali.co.za>; <direct@direct.za.org>; <fatwa@jamiat.org.za>; <darulum@eastcoast.co.za>; <emhsalejee@lantic.net>; <sdesail@telcomsa.net> 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: 20025666@tiscali.co.za [mailto:jameah@worldonline.co.za] Sent: Wednesday, April 18, 2007 4:40 PM To: mohammadashraf759@hotmail.com; msolaw@mweb.co.za; 'Mufti Z. Bhyat'; 'Darul Iftaa' Subject: FW: Questions from Mufti Ashraf Page 46 of 113

The Debate on Shares From: Siki Ebrahim [mailto:sebrahim@sasfin.com] Sent: Wednesday, April 11, 2007 11:37 AM To: 20025666@tiscali.co.za 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 company is subject to the extent to which those assets have been financed through the borrowing of money. 2. Is the share certificate representative of a partnership in the company s assets of the shareholder? A share certificate represents a shareholder s ownership in the issued share capital of a company. Once again his ultimate entitlement to the company s assets will depend on the extent to which a company has been geared. The share certificate therefore represents the proportion of shares that a shareholder owns along with other shareholders who have purchased share in the company. The cumulative rights of shareholders are subject to the preferential treatment of debtors. 3. Why does the shareholder receive dividends from the profits of the company? A shareholder receives dividends as a form of return for the capital which he spent in purchasing the shares of a company. Such dividends are paid from the profits of a company, which represents an amount after inter alia the interest on debtor finance has been paid. This is once again indicative of the fact that the rights of shareholders are subject to the interests of debtors. Siki Ebrahim Portfolio Manager Sasfin Frankel Pollak Securities(PTY)LTD E-mail: sebrahim@sasfin.com Tel: (+27) (12) 425-6111 Fax: (+27) (12) 425-6060 Post: P O Box 36002, Menlo Park 0102 www.sfpsecurities.co.za

April 26, 2007

from Mufti Salejee to MA

From: "Mufti E.M.H. Salejee" <emhsalejee@lantic.net> Sent: Thursday, April 26, 2007 8:02 AM To: "mohammad Ashraf" <mohammadashraf759@hotmail.com> Subject: Re: shares assalaamu alaikum HOPE MUFTI SB. IS WELL.
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I HAVE READ THROUGH MOST OF THE CORRESPONDENCE BETWEEN YOURSELF AND MUFTI EBRAHIM DESAI SB. HOWEVER. MY QUESTION IS WHY WAS THE MATTER NOT FINALISED BY EMPLOYING THE TAHKIM (ARBITRATION) METHOD. I FEEL IT IS NECESSARY THAT MUFTI SB. DOES NOT BACK DOWN NOW AND TAKES THIS MATTER TO THE END. ESPECIALLY WHEN MUFTI DESAI HAS ACCEPTED YOUR PROPOSAL OF HAKAMS. PLEASE DO REMEMBER ME IN YOUR DUAS. WASSALAAM E.M.H.SALEJEE

May 3, 2007

from MA to Mufti Salejee

From: "mohammad Ashraf" <mohammadashraf759@hotmail.com> To: "Mufti E.M.H. Salejee" <emhsalejee@lantic.net> Sent: Thursday, May 03, 2007 8:44 PM Subject: RE: shares

Wa alaikumussalaam. Jazakumullah. I am ready for tahkeem but i want to add brother ms omer and buzurg aalim like ml yunus patel sahib.mufti sahib did you find my anrwer in urdu?if not i will send to you. Request for dua. Wassalaam. Ashraf

May 5, 2007 from Mufti Salejee to DI


From: Mufti E.M.H. Salejee [mailto:emhsalejee@lantic.net] Sent: Saturday, May 05, 2007 10:42 AM To: Darul Iftaa Camperdown; Daarul Iftaa Desk One; camperdown Subject: Fw: shares ASSALAAMU ALAIKUM HOPE MUFTI SB. IS WELL. HEREUNDER IS GOOD NEWS. WASSALAAM {Thereafter was attached the email of 3 May 2007}

May 7, 2007 -- from DI to MA


From: Desk One Daarul Iftaa [mailto:alinaam@inmail24.com] Sent: Monday, May 07, 2007 2:51 PM To: 'Mufti E.M.H. Salejee' Subject: RE: shares

Assalaamu alaykum wa rahmatullahi wa barakaatuh Muhtaram Mufti Salejee Saheb,


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We make Dua you are well. Jazakallah for forwarding us a copy of Mufti Ashraf Saheb's email of 3 May 2007. We have already submitted to the decision of the two arbitrators mentioned in our email correspondence. As we have pointed out in our email of 7 December 2006: "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." In our email of 21 February 2007, we added: "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. 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." If the issue was purely a fiqhi matter, we would be nuts to have appointed two experts in legal matters who have no qualifications in fiqh. As for the recent suggestion of Maulana Yunus Patel Saheb, there are two issues to consider: a) Maulana Patel Saheb is extremely busy, and I wonder if he would have the time to study the lengthy correspondences in full detail. b) The issue, as mentioned, is one of secular law. If Maulana Patel Saheb says he has the necessary expertise to decide on a matter of secular law, then we have no problem in accepting him as a third arbitrator. Regarding the second suggestion of Mr. M S Omar, consider the following: a) b) c) d) In the past he has slipped up on matters of secular law. He made a mess of the MPL bill, and has admitted that "mistakes were made". We do not have confidence in him. He has a personal monetary benefit in the issue under discussion. As a member of the Shari'ah Board of Futuregrowth AlBaraka Equity Fund, he is paid to approve the fund, and indirectly to support the permissibility of shares.
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e) We had attempted to discuss the matter with him, but he refused. f) We have made it clear that we require a neutral person. g) He has the opposite view as ours, and this is well known. Therefore, he should be sitting on the opposite end of the debate. He cannot be the judge in the matter, as he will serve as both the judge and the one being judged. This is obviously against justice. h) We shall be at his mercy and will be bound by whatever decision he comes to. This is the meaning of arbitration. In these circumstances, would you think the suggestion of Mr. Omar is fair? Could you perhaps suggest the name of any expert in secular law, perhaps a professor or judge. Request for Duas. Jazakallah and Was salaam E. Vawda, for Daarul Iftaa Checked and approved: Mufti Ebrahim Desai Saheb.

June 29 2007

from DI to MA

13 Jumaaduth Thaani 1428 29 June 2007 Assalaamu alaykum wa rahmatullahi wa barakaatuh 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 fax of 21 March 2007, and note contents. We would like to once more express our gratitude to you for taking out the time and providing us with a detail response. It is appreciated. 1) Let us start by commenting on the reply you received from Tim of Sasfin4. I think the words "in a simplistic sense" gives you sufficient clue that this is not technically correct. If you have a doubt in what we are saying, kindly present the following table to Tim, and ask him to tick in the appropriate block.
This statement is: A shareholder is the owner of a company s tangible assets in ratio to his capital invested. 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.
4

Technically correct

Technically incorrect

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Once we receive a reply from Tim, if need be, we can take up the matter further with him. We await his response. 2) As previously indicated, we do not deny that the shareholder owns the share. We will explain further on, insha-Allah, what this means. 3) We take note that both Mufti Zubair Bhayat Saheb and Mr. M S Omar are part of this discussion from behind the scenes, hence your email was forwarded to them as well. We are glad they are on board. They are both members of the Shariah Board of Futuregrowth AlBarakah Equity Fund. In this respect, we wrote to them via the bank on 10 September 2005. In this letter technical arguments were presented based on which we differ with them. We had urged them to respond and provide us answers to the strong arguments presented. Further to this, we sent a reminder on 3 October 2005. Having not received a reply, we sent yet another reminder on 16 November 2005. This was followed by two more reminders, of 24 January 2006 and 13 February 2006. After this lengthy wait, we were informed on the 30th June 2006 that they do not wish to discuss the matter. It is the policy of Al Barakah Bank to ignore criticism and pretend that all is well. It one is able to pretend well, the public is bound to get the impression that the bank is 100% Shari'ah Compliant. We are nevertheless happy that they are assisting you from behind the screen, and that they are involved in this discussion, albeit surreptitiously. We will insha-Allah forward them a copy of the debate. 4) Now to your fax of 25 March 2007. Unfortunately, we think we are going in circles and not much is being achieved because you are avoiding the real issues. Nevertheless, we will not evade the issues you have raised in your fax, and will attempt to address them. We will start off by addressing some of the points raised by you5, and thereafter present further substantiation for our point of view6. Lastly, we wish to comment on the status of this debate7. The points presented by you are repetitive and makes boring reading. However, in order to avoid the charge of being evasive, we are compelled to hereby address them. 5) No where did we ever claim that the Share Certificate itself is the item being sold. In fact we did not even say that a sale is taking place. Hence we do not understand the need for your statements "Share Certificate is not itself a mabee (sold thing)" and "the certificate is merely the piece of the paper". Hence your point of the value of the share fluctuating has no relevance. 6) Your words "shareholder is the owner of some unallocated parts of the tangible assets (sahm mushaa ) of so and so company" are a repetition of the same old contention without any substantiation. 7) You claim that the majority of Ulama approve trading in shares. Firstly, is there any empirical proof for this? Secondly, the Haqq does not follow the majority; rather it follows the stronger daleel (proof).

5 6

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If you had to follow the majority of those on earth they would lead you astray from the path of Allah. (Surah An'aam, 116) Thirdly, the majority can also be wrong. Does it mean that if the majority is incorrect, we must abandon the truth and follow the majority? There is no guarantee that if the majority have a view, it is necessarily the correct view. Fourthly, we had hoped in entering into an academic discussion with you. However, you now resort to emotional points which are not academic. The gullible public are easily swayed by such emotional arguments. Academics are not influenced by emotional arguments. They prefer discussing academic points. For the average man in the street, if one has to take the name of some famous Aalim and say that he approves so and so scheme, this is sufficient. He is easily influenced by such contentions. For the ignorant it ends there and he does not question further. One cannot blame him because he is not learned in the field; hence he has no reason to doubt the famous Aalim. However, the situation is completely different in the case of another Aalim who is an academic. He is not the least convinced by the dropping of one or two big names. It makes no difference whose name is used. What he is concerned about is valid arguments. If the scheme is supported by sound arguments, he accepts it. If not, he rejects it even if famous Ulama may support it. His conscience does not allow him to side with what he is convinced is incorrect merely because so and so has approved it. The first method of argumentation may be effective amongst the masses, but it has no value to us. Hence, we think you chose the wrong method when addressing us. You should have adopted the second method, and not the first. We attach no value to the sentimental but shallow grounds advanced by you. If fact we scoff at it, as this is not becoming of true academics. Fifthly, the style adopted by you is the style adopted by most of the votaries of shares, i.e. they prefer hollow emotions bereft of academic worth. In fact, at the very outset we informed you of this. We had stated:
"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."8

Despite being aware that this is our very complaint, you preferred to repeat the same error and resort to the angle that has public appeal. Sixthly, this change of tact is indicative of weakness from your side. From the outset both of us were aware that there exists a difference of opinion on the issue. You did not raise it at the beginning, but rather began engaging in the proofs. Now that you find you have no sound arguments, you retreat in defeat to the safe-haven of 'difference of opinion'. The example of your change of heart is like a boxer who enters the ring, but when he finds himself against the ropes, he calls out: Brothers are not suppose to fight. It is definitely true that brothers are not suppose to fight, but this should have been raised before entering the ring, not after the fight has begun. Such a call is indicative of cowardice. Similarly, it is true that there are Ulama that hold shares to be permissible. However, we were looking to engage on the reasons and proofs. You
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initially did profess to have sound reasons declaring it permissible. Now when the counter arguments were too strong to handle, you scuttle into the comfort of 'difference of opinion'. This is unbecoming of an academic. He should stand his ground and take up the challenge, and not flee from the battlefield. 8) You then make mention of five names. Firstly, some of these scholars mentioned by you are the clean shaven suit-and-tie type, to whose views we do not attach much importance. Their liberal attitudes are well known. Secondly, it does not matter if it is five, ten, twenty, fifty or hundred Ulama (proper Ulama) who hold this view. What is important is the daleel. If a hundred Ulama make an error, the number does not make the error correct. On the other hand, if a single Aalim presents a correct daleel, then he is on the truth even if a hundred Ulama differ with him. Everything pivots around the daleel. Allow me to present a comparison. The function of a pen is to write, which depends primarily on the nib. If the nib does not work, then it does not matter how fat and long the pen is. On the other hand, even if it is a small pen, but if the nib works one can write. Everything narrows down to that small but vital point, the nib. Similarly, the whole issue of trading with shares narrows down to the daleel. 9) You state:
"Your sent quotation is proving that a company is a separate entity and it is juristic person. However, it does not effect on the above opinion. Because a) There is no physical entity of this juristic person; its existence depends on directors and shareholders."

Unfortunately your circular argument, which you have repeated often, has no merit. You assume that the juristic person has to have a physical existence, otherwise it would not exist. Therefore you assume that the only way we can give the juristic person some physical form is through directors and shareholders. However, your premise is incorrect. The juristic person is an artificial person. It is assumed, and exists merely in the mind. It is fictitious, and does require a physical form. It is something made up in the contemplation of the mind. It is not real. It is imaginary and an illusion. It has a notional existence. It is an intellectual concept. It is abstract and theoretical.9

Legal concepts (for example, corporations or property rights) are supernatural entities which do not have a verifiable existence except to the eyes of faith. A fiction is something which, although false, is accepted as true for the sake of convenience. Jurisprudence, as an autonomous system of legal concepts, rules and arguments, many of which rely on such fictions, was for legal realist, Felix Cohen, akin to a special branch of the science of transcendental nonsense . This phenomenon might be better described as the metaphysical burden of social reality . Searle points to social facts (in no way limited to the legal system) and explains: [T]here are portions of the real world, objective facts, in the world, that are only facts by human agreement. In a sense there are things that exist only because we believe them to exist these things are objective facts in the sense that they are not a matter of your or my preferences, evaluations, or moral attitudes Similarly, the corporation has often been characterized as a legal fiction. Brennan J, in Northside Developments Pty Ltd v Registrar-General, comments that [a] company, being a corporation, is a legal fiction. Its existence, capacities and activities are only such as the law attributes to it . Cohen, on the other hand, laments the fact that: Nobody has ever seen a corporation To be sure, some of us have seen corporate funds, corporate transactions, etc. But this does not give us the right to hypostatize, to thingify the corporation. Page 53 of 113

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We have already opened the debate as to what the role of the directors and shareholders are. You are of the opinion that the directors and shareholders own the assets and are responsible for the liabilities of the company. As we have made it abundantly clear we differ on this. To support our view, we have provided the quotations, which are clear, unambiguous and decisive on the issue. The quotations we provided prove, inter alia, that: a) the company is a separate entity, b) the shareholders do not own the assets, and c) the shareholders are not responsible for the liabilities of the company. Now, in your statement, you concentrate only on the first of these three and ignore the other two. Both (b) and (c) are proven from the quotations, which bring out the full meaning of juristic person. We have over and over again challenged you to counter these quotations. You neither affirm nor deny their meaning. You should have at least said you disagree with these experts, and you consider them wrong. Instead of doing so, you repeatedly avoid the issue. Further more, you have not provided a shred of evidence to support your contention that the directors and shareholders own the assets of the company and are liable for the debts of the company. Be clear on what your opinion is of these experts. If you feel they are wrong, then you should not be shy of it. Come out and be bold about it. If you feel the author of this statement: "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." is wrong, then why not say so. Instead of doing so, you have chosen to ignore these important quotes. These references clearly support our contention. Why is it that you are unable to present a single quotation that unambiguously supports your view that the directors and shareholders own the assets of the company. Instead of resorting to your interpretation of some quotes, provide a clear-cut quotation. Why is this difficult? From reading your submission, we get the impression that you have not understood the real and true nature of the juristic person. To illustrate our point, we will present two examples. EXAMPLE A Zaid and Ahmad have a box, which they call box z. They each put a R1000 in box z, and tell the public that we as partners will be dealing with you only from box z. Box z and its contents always belong to Zaid and Ahmad. It would therefore be correct to say that the R2000 belongs to Zaid and Ahmad. However, it would be incorrect to state that the R2000 belongs to box z and not Zaid and Ahmad. The R2000 has only one owner, i.e. the partners Zaid and Ahmad. The only difference is that it is kept separately from the rest of their wealth, and administered differently.

Realist acerbity notwithstanding, the fictionalists firmly believe a corporation is nothing more than a creature of the state and this view is consistent with and supported by the provisions of the Corporations Act 2001 dealing with the creation of a new corporation in the form of a registered company. (When legal fictions collide: The primacy (or otherwise) of the separate entity principle of corporate law in intellectual property cases, Rhonda Chesmond, Deakin Law Review, Vol. 11 No. 2, 2006, pp. 71-72) Page 54 of 113

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Zaid and Ahmad then take some money from box z, and purchase some goods, which they put into box z. Anything they purchase from the R2000 goes into box z. Similarly, if they have to sell anything from box z, the money goes into box z. There is no mixing of anything from box z and their other personal wealth. All their business dealings are done to and from box z. Even if they have to purchase something on credit, they make it clear that we will only pay from box z. Somehow, business from box z falls on hard times, and box z is unable to pay its debts. Its funds are depleted. The business run from box z owes Bakr R100. Bakr approaches Zaid to claim the R100. Zaid responds that I made it clear that I will be dealing with you solely from box z. Since there are no more funds in box z, I do not owe you anything. I am not responsible to pay you from my personal funds the amount owed to you by box z. In other words, my other funds are administered separately from box z. Box z is administered independently. If you dealt with box z, you have no claim over me. EXAMPLE B Amr has no money at all. Hasan and Yunus each give Amr R2000 to do business. It is agreed that Amr becomes the owner of the R4000 immediately upon receipt, and will use it to trade in his (Amr's) own name. They further agree that, from time to time, Amr will give Hasan and Yunus the profits he has gained via trading. There can be only one owner of the R4000, i.e. Amr. One cannot say that all three own the R2000. Nor can one that Hasan and Yunus own the R4000. Amr takes the R4000 and purchases some goods. It is Amr purchasing it for himself, and not Amr purchasing it on behalf Hasan and Yunus. Since Amr has become owner of the R4000, he is now using his own money to purchase the goods. Therefore, whatever goods there are belong solely to Amr. Neither does Hasan nor Yunus have a share in the goods. In this manner Amr goes on and trades. Amr purchased something from Zubair on credit. After some time Amr's business fails and he is unable to meet his commitments. Zubair demands his money from Amr, who declares bankruptcy. Since Amr's coffers are empty, Zubair has no recourse in claiming his dues. He decides to approach Hasan. Hasan's reply is that you are approaching the wrong person. Your dealings were with Amr and not with me. He is a separate person. The fact that I gave part of the money he had does not make us one and the same person. He is a separate individual, and I am someone else. Do not confuse each one of us with the other. Therefore Zubair will just have to accept his losses. (End of example) We gather, and please feel free to correct us if we are wrong, that you are under the impression that example A is an example of a juristic person, and not example B. You are under the impression that in example A, box z represents the public company. It is Zaid and Ahmad who are buying and selling, but through box z. Since they have made it clear to the public that they will be dealing with the public only through box z, the public cannot claim anything more than what is found in box z. Thus limited liability comes about. The truth of the matter is that, from the two examples, example B reflects the public company, and not example A. The meaning of a juristic person is a separate being that exists in the mind. It is an assumed person. Like how a natural person can own, a juristic person may also own. In the same light, since a natural person can make a claim, so to can the juristic person. Similarly, the juristic person may be
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sued (a claim may be made against it). This assumed person can transact in a manner that a real person does. The juristic person can buy, sell, take a loan, etc. for itself. It is not transacting on behalf of any natural person, rather it is transacting for itself. It has an existence separate from the natural persons who may have an involvement in forming it. Like how Amr is a separate person from Hasan, so to is a company a separate person. In example B, Amr is the public company. The only difference is that instead of being a natural person, he is a juristic person. We just have to change his name to AMR (Pty.) Ltd. We think you have difficulty in conceptualising the true nature of the juristic person, hence you are erring. Since you have been schooled in Shari'ah all your life, you are finding it difficult to imagine that a person can exist in the mind. In Shari'ah, there is no such thing as an assumed person. In secular law there is. Since you are thinking in lines with the Shari'ah, you assume that the juristic person is just part of the natural person's estate; with the difference that it is administered separately, like in example A. However, this is not true. The real picture is that the juristic person has a totally separate and independent existence, like a separate natural person. You cannot be totally blamed for not understanding this concept in full. Even people in the secular field find it hard to grasp with. It takes some time for the concept to settle in one's mind. You may be pondering how it is possible that the shareholders are the ones who create the company, and then become slaves of the company. They are its inventors, and yet they work for the company. They act on behalf of the company in choosing the directors. Then the directors act on behalf of this fictitious creation. All this sounds somewhat weird and illogical. Let us try to assist you in understanding this matter through an example. You know fully well that the mushrikeen (idolaters) carve out their idols with their own hands, and thereafter consider these very objects as their masters. They then submit and become servants to these idols, whose powers are mere fictitious creations of the mind. They have no reality. While we obviously do not share their thinking, we have to appreciate that some societies think in this manner and assume such powers for non-existent beings. This then governs their actions and standards. In the same light, the juristic person is a creation of the mind. Legal relationships are not physical. If Ismail owes Yunus a R100, there is nothing on Ismail's or Yunus's body that shows this. It is the norms that the legal system attaches to individuals that give rise to rights and duties. Each legal system has its own set of norms. The present western secular legal system recognises an artificial person. It attaches some capacities to this juristic person, for example ownership, the right to buy and sell, and many other commercial transactions. Some capacities of a very personal human nature are excluded. This imaginary person may not marry, it has no feelings that may be hurt, in cannot occupy fixed property etc., as these are human in nature. Hence, we gauge that you have not fully understood the nature of the juristic person, therefore the conclusions you are drawing are erroneous. We have repeatedly tried to clarify the matter. 10) You state:
The company likes a kully tab y {composite whole}, which exists under its members; there is no separate existence of the kully {whole}.

It is based on statements like this that we assume you understand example A to be an example of the juristic person. We have explained that in reality example B is the appropriate one. The juristic person is not sub-section of the estate of the shareholder, with an independent administration.
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Rather, as a separate person it has its own separate identity, and functions independently of the shareholder. Do read through the entire correspondence once more, and you will notice that many of the references we have provided make it abundantly clear that the juristic person has its own independent existence, thus debunking your statement. 11) You state:
Directors and shareholders have authority to close and wind up the company at any stage by mutual agreement. These peoples manage the activity of the company and set the rules and conditions. The company does not do any thing itself and it cannot do any thing without the directors. They are not strangers from the company. From your quotation 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.

Our quotation supports our contention, and not yours. There is no doubt that since the juristic has no mind of its own, it functions via the directors and shareholders. However, in doing so, the directors are not acting on their own behalf, but are merely administering the interests of the company for the company. Allow me to illustrate by means of an example. The court appoints a curator to administer the affairs of a child or an insane person. The child or insane person has inherited some money from a relative. When the curator purchases an item with this money, he is not buying it for himself. Rather, the item belongs to the child. He merely represents the interests of the child. In the same light, when the director purchases something for the company, it is for the company and not for himself personally. The fact that the child or insane person is dependent on the curator does not make the curator the owner of the child, or the owner of the child's assets. The child is an independent being, who alone is responsible for its liabilities, and who alone owns its assets. In the same light, the fact that the company's administration depends on the director, and to a small degree the shareholder, does not imply that the director or shareholder own the assets of the company. They only have a vested interest in the company. Like how the curator of the child is definitely not a stranger to the child, similarly the director is no stranger to the company. He merely acts for the company. 12) You state:
The partnership is also a juristic person according to Imam Shaf y and he says that zakaat is compulsory on the assets of partnership.

If you had carefully followed the discussion from the very beginning, you would realise the absurdity of your claim. The meaning of juristic person is a separate assumed being that has similar rights to a human. This artificial person can own assets independent of human beings. Since it is a separate person, if the juristic person owns a particular item, then that item cannot be in the ownership of any other person. The converse is also true. If a human has sole ownership of a particular item, then that item cannot be owned by the juristic person.
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No two persons may simultaneously have full ownership of one asset. This applies equally whether these are two juristic persons, two human beings, or one juristic person and one human being. In other words, one cannot say that the whole of this apple belongs to Ahmad, and at the same time the whole of this same apple belongs to Khalid. If the items belong to two partners as mentioned by Hadhrat Imaam Shafi'ee (rahimahullah), then it cannot belong to a juristic person. If it belongs to the juristic person, then it cannot belong to the partners. Therefore, in no way is Hadhrat Imaam Shafi'ee (rahimahullah) ever claiming that there is an independent being who has the ability to own assets of its own. Your error is based on your misunderstanding of what the juristic person is. You are under the impression that it is simply the separate administration of assets belonging to a human. No, this is not the case. Rather, it is ownership of an asset separate from the ownership of a human. That is why in the very beginning of this discussion we had asked you for an example in Shari'ah where a non-human is considered an owner. After some initial dribbling around, you finally conceded that you were unable to provide an example. This honesty is much appreciated. The mas'alah mentioned by Hadhrat Imaam Shafi'ee (rahimahullah) in no way shows that an independent artificial person is an owner of any item. If you still doubt us, we challenge you to prove your claim. For further confirmation, please study the following:
"Hadhrat Mufti Taqi Saheb states: Another example very much close to the concept of juridical person in a joint stock company is found in the Fiqh of Imam Shafi i. According to a settled principle of Shafi i School, if more than one person run their business in partnership, where their assets are mixed with each other, the Zakah will be levied on each of them individually but it will be payable on their jointstock as a whole, so much so that even if one of them does not own the amount of the nisab, but the combined value of the total assets exceeds the prescribed limit of the nisab, Zakah will be payable on the whole joint-stock including the share of the former, and thus the person whose share is less than the nisab shall also contribute to the levy in proportion to his ownership in the total assets, whereas he was not subject to the levy of Zakah had it been levied on each person in his individual capacity. The same principle which is called khultah-alshuyu is more forcefully applied to the levy of Zakah on livestock. Consequently, a person sometimes has to pay more Zakah than he was liable to in his individual capacity, and sometimes he has to pay less than that. This principle of Khultahal- Shuyu has a basic concept of a juridical person underlying it. It is not the individual, according to this principle, who is liable to Zakah. It is the joint-stock which has been made subject to the levy. It means that the joint-stock has been treated a separate entity, and the obligation of Zakah has been diverted towards this entity which is very close to the concept of a juridical person, though it is not exactly the same. According to the reasoning presented in the aforegoing explanation, the obligation of Zakah has been diverted towards this entity , i.e. to the joint stock which has been termed the juridical person. Prior to the admixture of the stocks, the obligation of Zakaat was the responsibility of the individual, i.e. the person who is the owner of the assets. After the stock of two persons has been mixed, the obligation of Zakaat according to Hadhrat Mufti Taqi s reasoning is diverted from insaan (the human being) to the inanimate stock, be it wheat, rice, sugar, money, etc., etc. When the incidence of mixture of two assets takes place, the human beings who are the actual and true owners of the stock are no longer responsible for the Zakaat obligation since a diversion of obligation has been effected. After the admixture, the Zakaat obligation is transferred to the joint inanimate stock. Truly, this reasoning is weird to say the least. SUBHAANALLAH! WHAT IS ZAKAAT? Everyone knows that Zakaat is one of the Arkaan (Fundamentals) of Islam. The obligation of this Fardh injunction devolves on Muslims Muslim human beings, not on kuffaar, least of all on inanimate objects such as wheat and rice. Mufti Taqi Saheb has cited the mas alah of khultah (the admixture of two assets) which is a ruling of the Shaafi Math-hab as well as of some Jurists of the Maaliki and Hambali Math-habs. However, Page 58 of 113

The Debate on Shares Mufti Saheb has omitted to mention that regardless of the incidence of admixture of rice and barley or the money of two human beings, Zakaat on the combined stock will be obligatory only if the human beings are free Muslims. In view of the imperative condition of being a Muslim for the obligation of Zakaat, Zakaat will not be Waajib according to the Shaafi Math-hab on the joint stock owned by a Muslim and a kaafir. If the stock of a kaafir and the stock of a Muslim are combined, khultah has taken place. No one can deny this. Now if the obligation of Zakaat devolves on the joint inanimate rice and barley which were mixed or on any other combined stock, it would logically follow that Zakaat will have to be paid regardless of one partner being a Muslim and one a kaafir. Only the Muslim will pay Zakaat on his share of the mixture. The kaafir will not pay Zakaat on his share of the admixture regardless of the incidence of khultah. If the joint stock was truly a separate entity or a juridical person in the western conception of the term, then Zakaat should have been obligatory on the stock by virtue of the principle of khultah regardless of the faiths of the owners of the joint stock. Faith does not apply to the inanimate juridical person . It is therefore meaningless to portray the joint stock as a juridical person and divert the obligation of Zakaat from the joint stock to only the Muslim. This should make it abundantly clear that it is not the inanimate joint stock which is liable for Zakaat payment and obligation. The obligation is squarely the responsibility of the Muslim human being, not of the inanimate joint stock. Hence, Zakaat is not payable on such joint-stock if both partners are kaafirs or if one partner is a Muslim and the other a kaafir. In this case, the khultah has absolutely no effect. Only the Muslim will pay Zakaat on his share of the stock, and that too, if it amounts to nisaab or more. The crucial determinant for the obligation of Zakaat is the nisaab value owned by Muslim human beings. This is the unanimous verdict of all the Fuqahaa of Islaam. The difference is only in the manner in which the nisaab is attained. While the Shaafi Fuqahaa accept the validity of a nisaab achieved by admixture of assets (khultah), the Hanafi Fuqahaa reject this principle. WHAT IS KHULTAH? To gain a better understanding, it is necessary to explain what exactly is the meaning of Khulta tush Shuyoo . Khultah simply means an admixture of different substances or things. An admixture of heterogeneous things produces a homologeous whole, for example, different metals mixed after melting produce one whole alloy. Shuyoo means permeation or spreading throughout in every particle of the whole combination of things. In the context of Zakaat, Khulta tush Shuyoo means the amalgamation of assets belonging to more than one person, whether two or a hundred, etc. For the obligation of Zakaat, a minimum amount termed the Nisaab is necessary. If a person is the owner of the nisaab value, he has to pay Zakaat. If a man owns several Zakaattaxable assets, each being less than nisaab, the variety of assets will be figuritively amalgamated to see if they collectively amount to nisaab. Thus, a man s little cash, little stock-in-trade and a little silver he owns will all be added up and Zakaat will be paid on the combined value of his stock if it amounts to nisaab or more. When the little assets of a variety of kinds, each less than the nisaab, belonging to a single person have a combined value of Nisaab, then Zakaat becomes Waajib on him. Since the owner of the variety of little assets of different kinds is one person, the khultah (amalgamation) of values suffices for the production of the nisaab. On the other hand, according to the Shaafi Mathhab, if a physical khultah (amalgamation) of assets belonged to several Muslim persons has transpired, then this physical whole will be treated as a homologeous whole of one person only for the purpose of assessing Zakaat, not for any other purpose whatsoever. Confirming this, Imaam Nawawi (rahmatullah alayh) says in Raudhatut Taalibeen, Volume 2, page 170: Thus, the maal (stock/assets) of two or more persons will be regarded as the maal of one person. Then Zakaat will become obligatory. For the purpose of levying Zakaat only, and for no other purpose whatsoever, the Shaafi Math-hab rules that the amalgamated stock be treated as a homologeous whole for the production of nisaab. There is nothing more to this amalgamation. For the obligation of Zakaat in this case, a juridical man is not necessary nor does amalgamation of assets give rise to a juridical person. Only the nisaab value is required. And, this requirement is acquired by treating the combined assets as a whole. If the amount of the amalgamated stock is less than nisaab, the khultah has no effect whatsoever even in the extremely limited scope the Shaafi Math-hab allows it to operate, namely, only for assessing Zakaat. The following example in Raudhatut Taalibeen also confirms that the obligation of Zakaat is the liability and responsibility of the two human Muslim partners of the amalgamated stock. It is NOT the obligation of the inanimate joint stock as has been averred by Hadhrat Mufti Saheb. ...like two men who amalgamate forty (goats) with forty (goats). One goat is Waajib on both of them. (Volume 2, page 170) Page 59 of 113

The Debate on Shares The ruling is clear Zakaat is Waajib on both human beings whose stock has been amalgamated. Zakaat is not Waajib on the inanimate amalgamated stock. It is simple to understand that just as Zakaat is Waajib on one owner when his Zakaat-stock is equal to nisaab or more, so too in exactly the same way is Zakaat compulsory on two owners according to the Shaafi Math-hab when their combined stock equals nisaab or more. There is no intermediary of a juridical person here, nor is there a need for such a fictitious person. The Western kuffaar had a specific need for inventing the paper man they term juridical person . We have no need for such a fiction. Islam has ample systems, devices and apparatus for all exigencies and times. While the condition for the obligation of Zakaat is related to wealth, the obligation of discharge or payment of Zakaat is the liability of the Muslim human being, not of the inanimate stock. Khultatush Shuyu or amalgamation produced by permeation or diffusion of the stocks of more than one person results in a homologeous whole akin to the homologeous whole of one owner. This factor has been taken by the Shawaafe fuqaha to hold the two or more owners of the amalgamated stock responsible for Zakaat payment. There is nothing further to read in this principle. It presents no substantiation for the western concept of juridical person. Khultah itself cannot assume any liability. The liability of Zakaat remains the responsibility of the Muslim owners. Imaam Nawawi states in his Raudhatut Taalibeen, page 171, Vol.2: (Among the conditions) is that both the (human) amalgamators should be of those on whom Zakaat is Waajib. Therefore, if one of the two (owners of the amalgamated stock) is a zimmi (non-Muslim citizen of a Muslim state) or a Mukaatab (a category of slaves), then khultah will have no consequence. If the share (of the amalgamated stock) of the free Muslim is nisaab, he (the Muslim) will pay Zakaat on it, the Zakaat of one person (the Muslim owner). If not (i.e. if his share is less than nisaab), there is nothing (of Zakaat) on him. This ruling clearly negates the suggestion that the amalgamated stock has become a juridical person who has liability and who has become liable for Zakaat. Zakaat remains the obligation of only the Muslim person. It is never diverted from the Muslim owner to anyone or anything else. There are also other examples in the Shaafi books of Fiqh to negate the claim that amalgamated stock called joint stock is a juridical person having rights and obligations like insaan (a human being).10

The juristic person has many features. We would like to isolate the most central feature. If this central feature is found in any concept acknowledged in the Shari'ah, then we would be willing to consider it as a possible example of a juristic person, and investigate it further. If it is absent then the example can never be that of a juristic person. This feature is: INDEPENDENT OWNERSHIP VESTED IN AN ARTIFICIAL PERSON Alhamdulillah, thus far you have admitted that you were unable to find an example that complies with this requirement. 13) You state:
The company is not like a waqf in the state of juristic person. Because waqf has a physical existence while the company is not, waqf cannot be finished by waaqif while the company can be finished by its creators, the rules of waqf can not be amended by waaqif after the completing the waqf while the rules of company can be amended by shareholders.

We agree with your conclusion that waqf is not a juristic person, although for reasons different from yours. However, we are glad that we do agree on some issues. Therefore, there is no issue raised in your statement that requires meaningful debate. However, in passing we would like to comment that the respected Mufti Taqi Uthmani Saheb considers waqf as a juristic person. Since you obviously do not agree with his view, there is no need to debate the matter with you.

10

Limited Liability, Mujlisul Ulama, pp. 21-26 Page 60 of 113

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We also take note that while the respected Mufti Taqi Uthmani Saheb has attempted to provide many examples for the juristic person11, you preferred only one of those many examples. 14) You state:
There is no big difference between the company and the partnership according to shari ah

We found this statement highly confusing. We therefore referred to the urdu in order to assist us in understanding the statement. There it states:

What we understand from your words is that, besides Limited Liability, there is no major difference between partnerships and a company. If that is what you mean, we cannot agree. There is a world of difference between the two. Kindly refer to quote no. 3 on pg. 3. Please read through it carefully. Secondly, partnership is a transaction recognised in the Shari'ah. The Company is not a Shar'ee concept. What then can be the meaning of "There is no big difference between the company and the partnership according to shari ah" ? If both the concepts were Shar'ee concepts, then one could have claimed that the Shari'ah does not consider there being a major difference between the two. However, when one is a secular concept, and the other a concept acknowledged in Shari'ah, how could one conclude that the Shari'ah does not regard it to have any major difference. It would have been different if you said that you do not regard the two to have a major difference. This would have then been your personal conclusion. However, in this statement you are saying that the Shari'ah regards the two to be similar. Where in the books of fiqh does it say the two are similar? Thirdly, even some of the votaries of the permissibility of shares have had to concede that there are fundamental differences between partnerships and incorporated companies. The differences are too glaring to ignore. They are self evident. Only one ignorant of the nature of partnerships and companies will aver that there is no major difference. Fatwas based on ignorance are of no significance. The respected Mufti Taqi Uthmani Saheb has admitted to and enumerated some of these differences12. You obviously disagree with him since you now claim that there is no "big difference". 15) You state:
There is no big difference between the company and the partnership according to shari ah except in limited liability and I am not agreeing with limited liability but it does not effect on the validity of trading the shares abiding its conditions.

Firstly, why do you not agree with the concept of limited liability? What are the actual reasons?

11

An Introduction to Islamic Finance, pp 224-227.


12

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Secondly, the other Ulama who consider trading in shares as permissible regard the concept of limited liability as perfectly permissible and justifiable in terms of Shari'ah. Do you agree? If so, what is the meaning of your words: "I am not agreeing with limited liability" Thirdly, you aver that limited liability does not affect the validity of the transaction. We find it very strange indeed for a Mufti to give such a ruling. You are well aware of the maxim:

Liability is proportionate to benefit This is supported by the Ahadith, Rasulullah had decreed that the income is commensurate to the risk (attached to the source of the income).

Rasulullah

has mentioned that the profit accrued from something over which one is not liable is not Halaal.

Limited liability creates the effect where the shareholder does not carry the liability. The actual liability is borne by the company itself, which is a separate person. How then is the shareholder entitled to a fraction of the profits when he does not carry the burden of liability? If it is argued that the shareholder carries the risk of loosing the capital contributed, then too this is of no assistance. We are concerned with the risk associated with the ownership of the asset. Here the asset belongs to the company and not the shareholders. We are not concerned with the risk undertaken when giving a loan. If that were the case Riba would be permissible since the loan-giver could be considered as having liability, hence entitling him to gain. It is undisputed that this is not the case and that the loan-giver does not carry any liability. Even if, by some stretch of imagination, we consider the risk of loosing the capital, this possible loss is only a fraction of the total risk. As far as the profits are concerned, the shareholders right to the profits are not limited. However, as far as loss is concerned, their loss is limited to the capital. Hence the liability is not proportionate to the gain. When they do not carry the full liability, the full profits cannot be permissible for them. By way of example, a company gathers R1m as capital contribution of the shareholders. In the process of business, it incurs debts of R9m. The shareholders carry only one-tenth of the liability of the company. Yet, as far as profits are concerned, the shareholders are not restricted to only onetenth of the profits. Hence limited liability creates an incongruent system whereby liability is limited whilst the right of gain is unlimited. This inequitable system is hence impermissible in the Shari'ah. In the Shari'ah, the liability has to be proportionate to the opportunity to gain. Hence the absence of liability, or at least the presence of disproportionate liability, is sufficient to render the returns on shares impermissible. This is the after-effect of limited liability. However, there is another aspect to limited liability that should also be considered. This protection that limited liability offers has often been used by the dishonest trader to arrange his business in a way that he enjoys the benefits of the company, while the innocent creditors bear the brunt of his mismanagement. The creditors are the ones who carry the eventual loss, while the shareholder has already relished the fruits of the risk held by the creditors. The modern company has been used as a sophisticated system of 'legally defrauding' the guiltless creditor.
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The result of this wicked cabal is that the creditors carry the risk, while the shareholders enjoy the advantages of a portion of the profits, or increase in share price. The shareholders are not the ones carrying the risk. As Jacqui Cohen points out in her thesis:
Externalising of Risk A further advantage of limited liability is that it allows companies to externalise the risk involved with modern industrial enterprise and passes the risk to the creditor. 13

As Bryer puts it: If all capital is equal, What is the difference between such cases and a partnership? It is said that in a partnership all the partners are owners of the partnership assets, their goods and debts; but so, in effect, is a lender to the extent of his interest. (p. 28) As he said, the potential risk to creditors was obvious:
A and B are partners. A has nothing to lose; B subscribes 1,000; they risk it in an enterprise where it is an even chance whether they lose 10,000 [the cost of the goods acquired, 9,000 worth on credit] or gain 20,000; an obviously good speculation. If they win, they gain 9,500 each; if they lose, B loses 1,000, A nothing, and the creditors 9,000. Here is obviously a prudent speculation for A and B, though most injurious to creditors. (p. 25) 14

As another author puts it [t]he introduction of general limited liability and the rise to dominance of the fully paid-up share thus paved the way for no-obligation, no-responsibility, no-liability shareholding. 15 Although legal journals are generally formal, academics do sometimes have the humour to drive their point in a picturesque manner, as the following passage illustrates: Some concluding thoughts: property, pensions and sofas Some years ago, newspapers in Britain featured an advertisement depicting a man lying on a sofa. We were told that, contrary to appearances, he was working and, indeed, working highly profitably. The small print explained that this was because he had been wise enough to invest his money in a particular financial institution, with the result that as he lay there, seemingly idle, he was in fact making a great deal of additional money thanks to the prudent investments that had been made on his behalf. His money was, so to speak, working for him, albeit in places and ways of which he almost certainly had no knowledge and little interest. Moreover, it was working incessantly, for money, as another advertisement recently pointed out, never sleeps . In reality, of course, the man lying on the sofa was not working. But someone, somewhere, certainly was. Indeed, it was these unknown others, dotted no doubt around the globe, working in unknown industries, for unknown wages and in unknown conditions, who were generating the wealth to which the sofa bound man was entitled to lay (partial) claim by virtue of his ownership of income rights like the joint stock company share. In its way, therefore, the sofa in the advertisement was curiously revealing of the fetishised nature of financial property and interest-bearing capital (money appears to make more money by itself) and the social relations underlying it (it is only able to do so when certain social relations prevail). It was also revealing of the irresponsibility that is built into the prevailing structure of corporate rights and the regulatory institutions that support them, for it is precisely the no-obligation, no-responsibility, no-liability nature of corporate income rights which enables their owners to relax on sofas, blissfully ignorant of and uninterested in precisely how the dividends and interest accruing to them is generated. As Harry Glasbeek
13

Veil Piercing a necessary evil? A critical study on the doctrines of limited liability and piercing the corporate veil. Jacqui Cohen, September 2006, Pg 13. 14 The Mercantile Laws Commission of 1854 and the political economy of limited liability, R. A. BRYER, Economic History Review, L, 1(1997), pg. 52 15 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 486 Page 63 of 113

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observes, the shareholders in ... corporations have little financial incentive to ensure that the managers involved behave legally, ethically, or decently . . . [because] in law, [they] are 16 personally untouchable It is the liability-free advantage that makes this vehicle of financial gain so appealing. The injustice of the disproportionate scheme is attested to by even western writers. Ambrose Bierce defined a corporation as: "An ingenious device for obtaining individual profit without individual responsibility." We cannot help but agree with the sentiments expressed in an editorial of The Times of London of 25 May 1824. It declared: "Nothing can be so unjust as for a few persons abounding in wealth to offer a portion of their excess for the information of a company, to play with that excess to lend the importance of their whole name and credit to the society and then should the funds prove insufficient to answer all demands, to retire into the security of their unhazard fortune, and leave the bait to be devoured by the poor deceived fish."17 On the other hand you find nothing objectionable in this devilish scheme, despite there being no proportionality between liability and profit. What about the Hadith: (profit without liability is not permissible). We therefore finding it shocking that a Mufti could make a statement like: I am not agreeing with
limited liability but it does not effect on the validity of trading the shares.

16) You said:


If the creators of the company passed away the company will stay remain because their shares is transferred to their heirs, and in case of partnership they can do like this as well, the partnership will be remain after the death of all partners or any one.

Mufti Saheb, what does this prove? In no way does this justify the concept of juristic person. Secondly, a correction. In partnership the death of a partner brings to end the partnership-in-profit (shirkatul uqood), and only the co-ownership in the assets (shirkatul milk) survives. 17) You state:
Like the shareholders of a company, the partners of any partnership cannot do any thing by the assets of partnership with their will and desire against the rules, which they have set for their partnership according to Islamic and secular law. They are abided by the rules of partnership although they have set the rules themselves like the rules of the company.

In terms of the Shari'ah, partners may jointly and unanimously decide to amend the rules they may have set for themselves. They may also jointly agree to dispose of an asset as it belongs to them jointly. In the company, the shareholders have no such say over the assets as the assets belong to another person, i.e. the juristic person the company. 18) You mention:
16 17

Ibid pg. 506 As quoted in An Economic Analysis of Limited Liability in Corporation Law, Paul Halpern; Michael Trebilcock; Stuart Turnbull, The University of Toronto Law Journal, Vol. 30, No. 2. (Spring, 1980), pg. 117. Page 64 of 113

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The share of the partners in partnership is unallocated i.e. sahm musha , any partner in partnership cannot say that this thing from the assets of partnership is only for me and I can sell it or destroy it etc. no another partner belongs to this. The undivided estate of a dead person is like this as well, any heir cannot do any action by this estate with his own desire without the permission of other heirs.

If all the co-owners of an asset jointly agree to use the asset in certain manner, they would be allowed to do so. On the contrary, if all the shareholders of a company jointly and unanimously agree to deal with an asset of the company in a certain manner, they would be prohibited from doing so by virtue of the fact that they are not owners of the asset. The company is the owner. 19) You state:
In muzaarabah the rabbul maal cannot do any thing with maal-e-muzaarabah as his wealth, he can buy from the muzaarib. We know that partners, heirs, and rabbulmaal are the owners and having the risk of the assets of partnership, the estate, and the maal-emuzaaribah respectively. They cannot do any thing by their desire with their wealth so can we say that they are not owners and do not have the risk of this wealth?

There are three separate examples provided and will comment on each separately. a. As we have shown above, while the individual members of a partnership may not act independently, they may act jointly. The shareholders may not even act jointly, as the asset is not theirs. b. In a similar light, while no heir may act individually as doing so will be trespassing the rights of other heirs, the heirs may jointly dispose of an asset belonging to the estate. Once again, the shareholders may not even act collectively, as the assets of the company do not belong to them. c. By virtue of the Aqdul Mudhaarabah, the mudhaarib has acquired an interest or vested right in the capital advanced. Hence the rabbul maal (the one providing the capital) may not interfere with this right although he remains the full owner before any profits are received. The point you wish to aver is based on a false premiss. You wish to imply that prohibition from acting independently necessarily implies non-ownership. Non-ownership is not the only factor that may prohibit a person from dealing in an asset. There are many other causes, such as vested rights. On the other hand, we have shown that non-ownership leads to an absence of control. Since the shareholder in not an owner of the assets of the company, he has no control over such assets. 20) You state:
You wrote, He simply has a right to receive funds from the company. I think this the sign of ownership

Your conclusion is baseless and ridiculous. For example, if Bilal gave Haroon a loan of R100, Bilal has a right to receive R100. Does this then necessarily imply that Bilal owns any tangible asset? The error of your deduction is self-evident. You cannot distinguish between a debt and an asset. 21) You state:
You stated that they often resort to metaphoric (majaazi) language, , I think there is no sign(qareenah) to taking metaphoric language and why we leave the actual(haqiqy) meaning?

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Firstly, we should keep in mind that a word may not be used in both its literal (haqeeqi) and metaphorical (majazi) meanings at the same time.
18

It is impossible for both the literal and metaphoric meanings to be intended instantaneously in one word Secondly, the criterion for determining whether or not a particular meaning is the metaphorical meaning of a word is to ask whether it may be both affirmed and negated. If it can be both affirmed and negated, it is metaphorical, otherwise not. For example, it may be said that Zaid s grandfather is his father, and it may also be said that Zaid s grandfather is not his father. Since it can be both affirmed and negated, metaphorically he is Zaid s father.
19

The literal meaning can never fall away. This is a sign of recognising the literal and metaphoric meanings. Now keeping these two points in mind, consider the following article that appeared in the Financial Times20:

Test of possession
John Kay21 Ownership is not a simple concept. I own my umbrella, and companies are owned by their shareholders. The word means different things in different situations. I own my umbrella. And companies are owned by their shareholders. But what do we mean when we say that? What does, or could, the word own mean when applied, not to the relationship between me and my umbrella, but to that between hundreds of thousands of shareholders and the collection of people, assets, brands and customers that constitutes BT? The classic description of the nature of ownership was provided forty years ago by the distinguished legal theorist, AM Honor.22 Concepts of ownership vary across countries and over time. But, Honor argued, "there is indeed a substantial similarity in the position of one who "owns" an umbrella in England, France, Russia, China. In all these countries, the owner of an umbrella may use it, stop other using it, lend it, sell it, or leave it by will. Nowhere may he use it to poke his neighbour in the ribs or knock over his vase". Honor explained that ownership is neither a single nor a simple concept. Ownership, like friendship, or obligation, has many characteristics. If a relationship has sufficiently many of these, it is one we can describe as ownership: just as if an animal has enough elephant-like features, we say that what we see is an elephant. Honor went on to list eleven badges of ownership. Ownership typically confers the right to possess, the right to use, and the right to manage. Ownership entitles you to any income that is earned, and to claim the capital value of the asset. Ownership imposes an obligation to refrain from harmful use. What you own can be seized to satisfy your unpaid debts. Owners
18 19 20 21

Financial Times 28 February 1997 John Kay is Director of London Economics and director of the School of Management Studies at Oxford University. 22 Honor, AM; Ownership in AG Guest (ed), Oxford Essays, in Jurisprudence - OUP 1961 Page 66 of 113

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may claim security against expropriation. And owners can pass on any or all of their rights to someone else. There is no time limit on the rights of ownership. And owners have an ultimate right of residual control. All rights which you have not explicitly conceded to someone else belong to you. That is what we mean when we say "I own my umbrella". I can put it up, take it down, sell it, rent it, leave it in my will, throw it away. I can appeal to the police or the European Commission on Human Rights if a thief or the government takes my umbrella away. And I must accept responsibility for its misuse and admit the right of my creditors to take a lien on it. When we run through these tests, we see immediately that shareholders own their shares in BT. All the criteria of ownership are met. But not at all obvious that they own BT itself. Their shareholding gives them no right of possession, no right of use. If they go to a telephone exchange, they will be turned away at the door. They have no more right to use BT services than any other customers. They are not responsible for BT's harmful actions, and BT assets cannot be used to satisfy their debts. Shareholders do not have the right to manage, although they do have a - largely theoretical - right to appoint the people who do. They have a right to such part of the income as the directors declare as dividends. They have no right to the proceeds of the sale of BT assets, except in the wholly fanciful event of the liquidation of the entire company, in which case they will get what value is left, but not much. The application of another of Honor's tests - the right of shareholders to contest the appropriation of the company's assets - was the key issue in a leading case in corporate law, Short Vs Treasury Commissioners, and the shareholders cost [sic: lost]. Their Lordships went on to say, in unequivocal terms, 'shareholders are not, in the eyes of the law, part owners of the company'. And the House of Lords was right. Of the eleven tests put forward by Honor, the relationship between BT and its shareholders satisfies only two, and these rather minor: three are satisfied in part: and six are not met at all. We could make a stronger case for asserting that BT is "owned" by its directors. So who does own BT? The answer is that no one does, any more than anyone owns the River Thames, the National Gallery, the streets of London, or the air we breathe. There are many different kinds of claims, contracts and obligations in modern economies, and only occasionally are these well described by the term ownership. The differences between BT and my umbrella are so wide ranging that it is hardly likely that my relationship to them could be described in the same way. We have been made victims of an inappropriate analogy. As Charles Handy puts it, when we look at the modern corporation, 'the myth of ownership gets in the way". It is rather obvious that there are two meanings to ownership . One has to be the literal and the other figurative. Other writers have emphatically negated the ownership of shareholders, as shall be abundantly clear from the references we shall supply. In fact some of these references have already been presented. Now that ownership is both denied and applied by some (rarely), it would mean that the ownership of shareholders is at most metaphoric. Thirdly, if we position the loose and technically inaccurate statements provided by you next to the precise, accurate and legally tuned words

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"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.",23 the result would be that we would have to interpret the loose wording as metaphorical. Fourthly, why is it difficult for you to produce a clear-cut, unambiguous and succinct statement to prove that the directors and shareholders are the real owners of the assets (not company)? The reason is that there is no such reliable statement. 22) You mentioned:
You wrote some of the rights that flow ownership, I say that all these rights you have mentioned, it applies on sole ownership, not on partnership, as I mentioned above.

This is another ludicrous and preposterous assertion. Just as these rights apply to sole-ownership, they also apply to partnership, on condition they are exercised jointly and unanimously. In the examples24 we have provided, the only two partners are acting jointly25. 23) You state:
The thinking of any one is not hujjat in all mujtahad feeh and zanni masaail, if some one against to another aalim in these masaail on base of daleel then we cannot say to this person that he is against the shari ah.

This statement of yours shows that you are on very weak grounds. From the outset of this discussion we were well aware that the issue of shares is Mujtahad fee (one arrived at through deduction). Only now, when your arguments are weak, you wish to raise this angle. Why was it not raised at the beginning. If you recall, we had mentioned this at the start of our discussion that the poor excuse given by many of the supporters of shares is that this is an issue in which there is a difference of opinion. We wrote:
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. 26

These other Ulama, from the outset, hid behind the cloak of "difference of opinion". On the other hand, you first tried to engage on academic arguments, but when you saw that your arguments are weak, you now seek refuge in the fact that this is a matter in which there is "difference of opinion". However, in doing so you inadvertently made a true statement. You confirmed that "thinking" is no proof. We agree. However, our view is not just "thinking" or a personal opinion. Rather, it is based on well constructed arguments. To the contrary, you have not been able to support your views with academic arguments.

23 24

See pg. 3 See pg. 3 25 See pg. 3 26 See pg. 03 Page 68 of 113

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Now that "thinking" is no proof, you cannot take support from the views of the respected Mufti Taqi Uthmani Saheb, for on the very subject he writes: "As a humble student of Shari'ah, this author have been considering the issues since long, and what is going to be presented in this article should not be treated as a final verdict on this subject, nor an absolute opinion on the point. It is the outcome of initial thinking on the subject, and the purpose of this article is to provide a foundation for further research."27 On the other hand, you consider the verdict of permissibility as immutable as wahi, for even if proofs against permissibility are stacked up in a huge pile, you would prefer to ignore them. You have not left any scope for the contrary "further research" suggested by Muhtaram Mufti Saheb. This leads me to the second point which you raised. You said: "The thinking of any one is not hujjat in
all mujtahad feeh and zanni masaail, if some one against to another aalim in these masaail on base of daleel" Where is the daleel from your side? For example, where is the proof that the directors and

shareholders are the owners of the tangible assets of the company? 24) You state:
If one differs to another person in these masanil, so he should say that my opinion is this and I am not agreeing with that person s opinion. He should not say that another person is wrong. This difference is not difference of haq and baatil.

The scope of valid differences is where both sides have some reasonable proof to offer. Then it may be said that each one may hold his opinion, and should respect the others. By way of example, we recently had a discussion with another Aalim. He was of the opinion that reciting the basmalah is waajib in Salaah. We regard it to be sunnah. Since he provided some correct quotations from the works of the fuqaha to substantiate his view, we say that he has some reasonable basis for his view. Although we disagree with his view, he at least produced some proof and basis for it. Hence, while we disagree with him, we cannot say he is outright wrong and on baatil. However, when the one side is totally bereft of any reasonable proof, then it would be acceptable to say that that side is wrong. If they have absolutely no proof or authority to back up what they are saying, then it is an issue of haq and baatil. This will apply even if an Aalim makes an error and supports the wrong. For example, the sheikh of Al Azhar has permitted bank interest28. We consider this to be wrong and baatil. You obviously will have to respect those views, and will have no right to attack those views since this a respected scholar. Similarly, we have in our country a so called sheikh who claims homosexuality is allowed. He even claims to have his so called "proofs". Are you then going to "respect" his opinion? Some modern day Arab scholars permit insurance, again with so called proofs. You have no right to say that they are wrong, while we can do so. In brief, not every difference has to be respected. As to where we should draw the line, we feel that if the other party has some reasonable daleel, then such a difference should be accommodated, otherwise not. 25) You say:
0 ye who believe, avoid suspicion as much: for suspicion in some case is a sin. (Al hujraat:l2)
27 28

An Introduction to Islamic Finance, pg. 223 Fatwa of Dr. Tantawi dated 2 December 2002 Page 69 of 113

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29

Not every suspicion is sin. If you wish to attribute the word sin to us, then you must show that we are involved in the sinful type of suspicion. 26) You mention:
Mufti Sahib; we have discussed on this matter for a long time and now you wish to put this discussion on your website so you may go and I will send my opinion to related ulamaa. You may send my opinion to brother Muhammad Saleem Khan and brother Zeyn Bhayat but I want to add brother MS Omer and mufti Zubair Bayyat as arbitrators as well.

To refresh your memory, this was your suggestion in the first place.30 We asked you to give an undertaking that you will accept the decision of the arbitrators. We still await such an undertaking. Secondly, while we did invite you to make suggestions of names, no arbitrator may be imposed upon us.31 The very meaning of arbitration is that the parties mutually agree on one or more persons, whose decision shall be binding on them. Hence both parties must have confidence in the arbitrators, and no party may impose an arbitrator upon the other. Thirdly, for any person to serve as an arbitrator, at least two attributes need to be present. a) He should be well versed on the issue, or be an expert in that field, and b) He should have no personal interest in the matter. As we have explained, the issue to be decided is whether or not the shareholders and directors are the owners of the tangible assets of the company. This is an issue of secular law, and requires experts of this field. The reason for the second requirement is that no person may be the judge, and also be the one who is benefiting from the judgement. There is a principle in secular law: nemo iudex in sua causa No one should be judge in his own case The Fuqaha have a similar rule:
32

It is not permissible for a Qaadhi to rule in favour of himself, even if the opposite party consents.
33

The decree of a Qaadhi in his own favour is inadmissible. As far as your first suggested person, namely M. S. Omar, we have no confidence in his expertise in even secular law. Should you require, we could explain in more detail the reasons for our lack of trust. Secondly, he has a personal interest in the matter, hence we find him inappropriate.
(
30 31 29

See point c) on pg. 3 See pg. 3


32 33

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With regards to the respected Mufti Zubair Bhayat Saheb, he is firstly not an expert in secular law. Secondly, he also has a personal interest in the matter as a member of the Board of Futuregrowth AlBarakah Equity Fund. You are welcome to make any other suggestions of persons who at least have the two mentioned qualities. If it could be arranged, we would be glad to have a professor of law or a High Court Judge as part of the arbitration panel. 27) You state: English is not my home language, so please ignore all spelling and grammatical mistakes. Considering your circumstances, your English is good. It would be highly unethical of us to take advantage of your position. 28) We have read through the Urdu portion of your fax, and did not find any additional matter that directly relates to the issue under discussion. Nothing therein directly proves that the directors and shareholders own the assets of the company. If perhaps we missed any pertinent point proving this, please draw our attention to it. As indicated in the outset of this response, we intended to firstly deal with issues raised by you. Circumstances compelled us to do so, and we unfortunately were disappointed by the lack of substance of your reply. We now move on to the next stage. 29) As indicated, we wish to support our view on shares with ample evidence, and explain our position on trading in shares. To do this we will firstly establish the separate nature of the juristic person. Thereafter, the consequences of this separateness will be discussed. This will be followed by an analysis of the company in terms of Shari ah. 30) Separateness of the Juristic Person The fact that the shareholders are separate from the juristic person the company, has been illustrated by many authorities. Let us first consider a few examples from case-law. i) The Salomon Case34 This is probably the most famous and oft cited case on the issue. Mr. Aaron Salomon was a boot and shoe manufacturer trading on his own account. Accordingly he was liable in full for all the debts which he incurred. In order to acquire the advantages which could be obtained from incorporation, and particularly the advantage of limited liability, he registered a limited company under the name Salomon and Co. Ltd. At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors, and Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost 39,000, of which 10,000 was a special loan. This special form of loan is known as debentures, and was considered as a liability of the company. This type of loan made him a secured and priority creditor. He was thus simultaneously the company's principal shareholder and its principal creditor.

34

Salomon v Salomon & Co Ltd (E 1897)


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The company fell upon difficult days. When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The initial judgment was that the company was simply Salomon in another form, who had used the company as an alias. The House of Lords unanimously overturned this decision, rejecting the arguments of agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. Lord Halsbury stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others." Lord Herschell noted the potentially "far reaching" implications of the Court of Appeal's logic and that in recent years many companies had been set up in which one or more of the seven shareholders were "disinterested persons" who did not wield any influence over the management of the company. Anyone dealing with such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders. Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do. It was not the function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing, they were "in a most lamentable state", as Malins V-C had stated in an earlier case in point, In Re Baglan Hall Colliery Co., which had likewise been overturned by the House of Lords. The House held: "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not." The House further noted: "The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act. Any member of a company, acting in good faith, is as much entitled to take and hold the company's debentures as any outside creditor"35

35

Mercantile and Company Law, Gibson, 6th edition, Juta and Company, 1991, pg. 299. See also: One-Man Corporations: Broderip v. Salomon Reversed, Harvard Law Review, Vol. 10, No. 5. (Dec. 26, 1896), pp. 304-305; Limited Liability with One-Man Companies and Subsidiary Corporations, Bernard F. Cataldo, Law and Contemporary Problems, Vol. 18, No. 4, The Close Corporation. (Autumn, 1953), pg.474; Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. Pg. 8; Entrepreneurial law, 3rd Edition, Pg. 59, Benade et al, LexisNexis Butterworths, 2003; Student Case Book on Entities, Third edition, pg. 52, Pretorius et al, Juta 2004; An Economic Analysis of Limited Liability in Corporation Law, Paul Halpern; Michael Trebilcock; Stuart Turnbull, The University of Toronto Law Journal, Vol. 30, No. 2. (Spring, 1980), pp. 119; Introduction to Company Law, Leigh et al, 4th Edition, Butterworths 1987, pg. 19 Page 72 of 113

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This all-important dictum adequately indicates that the shareholder(s) is a separate person, and the company is a separate person. What the company owns is not owned by the shareholder, and vice versa. The company owed the shareholder a loan, showing that they were two separate persons. Furthermore, the loan received preference over the debts owing to other creditors. ii) The Dadoo Case36 This is the leading South African case on the question. In terms of a statute of the South African Republic in 1915, natives of the Asian race were not capable of being owners of fixed property in the Republic. On 12 February 1915 a company called Dadoo Ltd was registered at Pretoria with a share capital of 15 000 divided into 150 shares of 100 each. Of these shares 149 were owned by one Dadoo and one share by one Dindar (who were both Indians). In March of the same year Dadoo Ltd bought and took transfer of a stand in the township of Krugersdorp. This stand was subsequently let to Dadoo, in his individual capacity, who carried on a grocery and general dealer's business on it. The Krugersdorp Municipal Council applied to the Transvaal Provincial Division for an order setting aside the transfer as being a contravention of statute. The judge, on appeal, stated: "I come to inquire whether the transaction complained of is a contravention of the Statute. In other words whether ownership by Dadoo Ltd is in substance ownership by its Asiatic shareholders. Clearly in law it is not. A registered company is a legal persona distinct from the members who compose it. ... That result follows from the separate legal existence with which such corporations are by statute endowed, and the principle has been accepted in our practice. Nor is the position affected by the circumstance that a controlling interest in the concern may be held by a single member. This conception of the existence of a company as a separate entity distinct from its shareholders is no merely artificial and technical thing. It is a matter of substance; property vested in the company is not, and cannot be, regarded as vested in all or any of its members".37 In Commissioner of Customs and Excise v Randies, Brothers and Hudson Ltd( 1941) the court endorsed the Dadoo principles without any qualification. Following Dadoo's case, in Gumede v Bandhla Vukani Bakithi Ltd(1950) the defendant's contention that the magistrates' court had no jurisdiction because both parties to the suit were "natives", was rejected. As the judge said, although the question turned upon the test of "race", it was difficult to see how the plaintiff, a limited liability company, could possibly be susceptible of such a test. The company should not be confused with its members or directors who were "natives", for it possessed a legal persona quite apart from them.38 It is quite clear from these cases that the company is a separate person, and the shareholder is another. The two are distinctly separate. The company, as a person, has no race. The natural persons controlling the company do. The two shareholders were Indian, but the company was not, as it was a separate person. iii) The Walkovsky Case39 This was an extension of the principle enunciated in the Salomon Case.40

36
37

Dadoo Ltd & others v Krugersdorp Municipal Council 1920 AD 530 Mercantile and Company Law, Gibson, 6th edition, Juta and Company, 1991, pg. 299. See also Student Case Book on Entities, Third edition, pg. 52, Pretorius et al, Juta 2004 38 Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. Pg. 10 39 Walkovszky v. Carlton N.Y.2d 414, 223 N.E.2d 6, 276 N.Y.S.2d 585 (1966) 40 An Economic Analysis of Limited Liability in Corporation Law, Paul Halpern; Michael Trebilcock; Stuart Turnbull, The University of Toronto Law Journal, Vol. 30, No. 2. (Spring, 1980), pg. 119. Page 73 of 113

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Mr. Carlton was the sole shareholder of ten companies, each of which owned two taxicabs. As required by law, each cab carried the minimum automobile liability insurance required by law ($10 000). One such company was Seon Cab Corporation. One of the taxicabs owned by this company struck Mr. John Walkovszky. As a result of the accident he suffered a double fracture of the pelvis and a possible skull fracture; and would be partially disabled for life. To pay his claim for half a million dollars compensation, Seon Cab Corporation could put forward as assets only two mortgaged taxi cabs and $10,000 of insurance. The corporation s meagre assets contrasted strikingly with the wealth of its dominant shareholder, Mr. Carlton. The plaintiff sought either to collapse the assets of the ten corporations by treating all the corporations as one or to hold the defendant personally liable for the tort committed by or on behalf of a corporation of which he was the sole or dominant shareholder. Apparently, the defendant s taxicab business had been set up in this form precisely in order to minimize liability in these circumstances. A majority of the court dismissed the plaintiff s claim. In other words, the court held that this company was a separate person, and that Mr. Carlton was a separate person. The claim could only be made from the company, and no one else. The personal assets of Mr. Carlton could not be touched. In a similar light, each of the companies formed by Mr. Carlton was separate, and could not be liquidated to fulfil the claim. In a very similar case, the owner of a company called Colt Co. Inc. owned one hundred such corporations, each owning two taxi cabs each.41 John Mull, who claimed damages of $30 000, was left with just two used taxi cabs and nothing more. The owner of the company was able to avoid liability but structuring his taxi business under a number of separate corporations. In yet another case42, the court commented: "It is fundamental that a corporation has a separate and distinct existence apart from its stockholders . . . and in the absence of fraud, the liability of the corporation is not the liability of the shareholders. . . .".43 This is not confined to taxi cabs. "Taxi owners are not the only entrepreneurs who incorporate to limit their tort liabilities. Shareholders of real estate, entertainment, shipping, and manufacturing enterprises, for example, have successfully used limited liability to escape personal responsibility for the torts of their corporations."44 iv) Clarkson Co. Ltd. v Zhelka The converse of the Salomon principle applied in this case. Zhelka had incurred personal debts. At the same time he was the dominant shareholder in a oneman company. A one-man company is one wherein one person effective controls the company through members of his family or staff members. The applicant sought to impeach assets of the company in respect of the personal debts. Thompson J stated: No doubt his creditors are disappointed at their inability to have access to his corporate assets and particularly where he himself is reaping some financial benefit therefrom. But that must of necessity be, so long as the legislature provides for and encourages the formation of
41 42

Mull v. Colt , Co., 31 F.R.D. 154, 156-57 McMillan Welding & Mach. Works v. General Towing Co., 247 F, Supp. 402, 405 (E,D. La. 1965) 43 Should Shareholders Be Personally Liable for the Torts of Their Corporations? The Yale Law Journal, Vol. 76, No. 6. (May, 1967), pg. 1191 44 ibid Page 74 of 113

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private corporations. Without such, of course, enterprise and business adventure would be stifled. Limited Liability is one of the landmarks of incorporation A similar decision was reached by the Ontario Court of Appeal in Rockwell Developments Ltd. v Newtonbrook Plaza Ltd., were the dominant shareholder in a 'one-man' company was held not liable to pay costs to another party in a legal action which he initiated in his company's name and lost (the company itself lacking the assets to meet the costs award).45 v) Macaura v Northern Assurance Co Ltd46 Simply put, a shareholder does not own the assets of the company, hence may not insure these assets. The appellant, the owner of a timber estate, assigned the whole of the timber to a company known as the Irish Canadian Saw Mills Ltd, the total amount to be paid to him for the timber being 42 000. Payment was effected by the allotment to the appellant or his nominees of 42 000 fully paid 1 shares in the company. No further shares than these were ever issued. The company proceeded with the cutting of the timber. In the course of these operations the appellant became the creditor of the company for 19 000. Beyond this the debts of the company were trifling in amount. The appellant insured the timber against fire by policies effected in his own name. The timber was destroyed by fire. The insurance company refused to pay out on the ground that the plaintiff had no insurable interest in the timber, and was upheld in this contention by the court. Lord Sumner held at 630: My Lords, this appeal relates to an insurance on goods against loss by fire. It is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish Canadian Saw Mills Ltd of Skibbereen, Co Cork. He had no lien or security over it and, though it lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it there under any contract that enabled him to hold it for his debt. He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company's assets. The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company's only creditor, while the timber was its only asset, seems to me to make no difference. He stood in no 'legal or equitable relation to' the timber at all. He had no 'concern in' the subject insured. His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company's assets, not by the fire... .47 From these few examples it is self evident that the courts have regarded the company to have a separate legal existence. 31) Other academic writings will now be presented which confirm the same. (aa) "Once a joint stock company is formed then it becomes a separate legal entity apart from its shareholders, able to enter into contracts with suppliers and customer."48

45

An Economic Analysis of Limited Liability in Corporation Law, Paul Halpern; Michael Trebilcock; Stuart Turnbull, The University of Toronto Law Journal, Vol. 30, No. 2. (Spring, 1980), pg. 120. 46 [1925] AC 619 (HL(Ir)) 47 Student Case Book on Entities, Third edition, pg. 54, Pretorius et al, Juta 2004. See also Corporate Law and Corporate Governance, Tshepo Mongalo, New Africa Books 2003, pg. 88 48 See pg. 3 Page 75 of 113

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(ab) "[T]he 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."49 (ac) "We 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."50 (ad) "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."51 (ae) "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."52 (af) "Our courts have rested-unnecessarily, it is believed, - the concept of limited liability on the legal entity theory. This theory, familiar to every elementary student of corporation law and finance, treats the corporation as a legal persona or juristic person constituting an entity in itself separate and distinct from the members."53 (ag) "The questionable but judicially accepted reasoning which regards limited liability as a result flowing out of the legal entity theory follows a simple route: The corporation is a separate entity; hence the obligations incurred in the operation of the business are those of the corporation itself, and the shareholders are not personally liable on those obligations."54 (ah) "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."55 (ai) "What is limited liability? The basic principle of limited liability is that the company has a legal personality separate and distinct from its members . Each can own their own assets and incur their own liabilities. Flowing from separate legal personality is the more important notion of limited liability. The
49 50

See pg. 3 See pg. 3 51 See pg. 3 52 See pg. 3 53 Limited Liability with One-Man Companies and Subsidiary Corporations, Bernard F. Cataldo, Law and Contemporary Problems, Vol. 18, No. 4, The Close Corporation. (Autumn, 1953), pg.473 54 Ibid, pg. 474. 55 See pg. 3 Page 76 of 113

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company laws in jurisdictions with advanced economies allow for companies to carry on their businesses with limited liability. Accordingly, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment. As such, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal (separate) assets of the members. This has the effect of capping the investors risk whilst, consequently, their potential for gain is unlimited."56 (aj) "Limited liability and the separate personality of the company The concept of separate legal personality goes hand in hand with the doctrine of limited liability and, although separate personality was a consequence of the Joint Stock Companies Act of 1844, as discussed above, it took 53 years until the courts began addressing the implications of this separateness in detail. In Foss v Harbottel, the court confirmed the idea that when a wrong is committed against a company, the company itself would be the plaintiff in the proceedings and not the members. This principle was later reinforced in the Salomon case, where it was held that the company is a separate legal person, this being the first time the court asserted the separate legal existence of the company."57 (ak) "To get from the Roman origins of the corporate form to today s multinational enterprises, the corporation had to undergo several crucial changes. First, the concept of the corporation as a separate legal person from its owners or members had to be developed, and this development was only completed with the work of the civil law Commentators in the fourteenth century. By the end of the Middle Ages, the membership corporation, i.e., a corporation with several members who chose others to succeed them, had legal personality (the capacity to own property, sue and be sued, and even bear criminal responsibility) and unlimited life, was well established in both civil and common law jurisdictions."58 (al) "Unfortunately a considerable degree of misunderstanding has become evident in recent times as to the nature of a company as a separate legal entity. Undoubtedly, as has been seen, for the business, commercial or other purposes for which it exists it is an independent and separate legal entity in every respect."59 (am) "Practically the whole of company law rests on the basis of the separate legal personality of the company, the concept of limited liability and the necessity to which they give rise of protecting those who invest money in the company as well as those who have business dealings with the company"60 (an) "The importance of the separate and independent existence of the proprietary and other rights of companies which is so made possible hardly needed the emphasis of Lord Russell of Killowen in E.B.M. Co. Ltd. v. Dominion Bank: Their Lordships believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company's
56

Veil Piercing A necessary Evil? A Critical Study on the doctrines of Limited Liability and Piercing the corporate veil, Jacqui Cohen, 2006. pg. 5. 57 Ibid, pg. 7 58 The cyclical transformation of the corporate form: A historical perspective on corporate social responsibility, Reuven Avi-Yonah, Paper no. 05-003, University of Michigan 59 The Company as a Separate Legal Entity, Murray A. Pickering, The Modern Law Review, Vol. 31, No. 5. (Sep., 1968), pg. 509. 60 Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. Pg. 5 Page 77 of 113

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legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand."61 (ao) THE LEGAL PERSONALITY OF THE COMPANY

Once a company has been registered by the registrar he will issue a certificate of incorporation (s 64) and from the date of incorporation stated in that certificate those who have signed the memorandum (i.e. the subscribers of the memorandum) together with those persons who, subsequent to the registration, from time to time become members of the company (which in general they will do by becoming the registered holders of shares in the company), will have formed a corporation. A corporation is in the eyes of the law a legal person. It is a legal person which has been created not by birth in the same way as a human being, but by the use of the machinery laid down by the legislature in an Act of Parliament. There are many Acts of this kind (page 23) - called "enabling Acts" - which enable corporations to be formed for certain special stipulated purposes. The Friendly Societies Act 25 of 1956 is one example. In essence the object of such a society is to raise, by subscription, funds which may be used for the relief and maintenance of its members and their relatives in case of ill health, infancy, old age or infirmity. But the most common one, the one with which we are concerned and which enables a corporation to be formed for any lawful purpose, is the Companies Act 61 of 1973. Companies registered under the Companies Act are sometimes accordingly described as "artificial" or "fictious" (sic) persons. The distinguishing mark of legal persons is their ability to acquire rights which can be enforced against others in a court of law, and to incur legal duties which can be enforced against themselves. Although in general an artificial person enjoys such a capacity, it cannot in all respects be equated with a human person, for it has no physical substance and exists only in the contemplation of the law. This difference resulted in a number of problems for company law which required solution. The following are some examples: (a) Being a metaphysical entity, an artificial person could not enter into a valid marriage. As it had no body it could not be said to "occupy" land (Madrassa Anjuman Islamia v Johannesburg Municipal Council (1919)), or be appointed guardian of a minor, for this is something which involves the personal relationship of human beings (Ex parte Donaldson (1947)), or appear in court in person (Yates Investments (Pty) Ltd v Commissioner for Inland Revenue (1956)). 62 (ap)

COMPANIES

Although a company is in essence a partnership of which the shareholders are partners (Dadoo Ltd & others v Krugersdorp Municipal Council 1920 AD at 573) its juristic nature is very different, for the principles of incorporation are fused with those of partnership (Charlesworth Company Law ). A corporation ('universitas') is not simply an association of individuals, but is itself a person, albeit an artificial one. An universitas personarum in Roman-Dutch law is a legal fiction, an aggregation of individuals forming a persona or entity.... An universitas is distinguished from a mere association of individuals by the fact that it is an entity distinct from the individuals forming it, that its capacity to acquire rights or incur obligations is distinct from that of its members, which are acquired or incurred for the body as a whole, and not for the individual members. . . . The main characteristics of an
61

The Company as a Separate Legal Entity, Murray A. Pickering, The Modern Law Review, Vol. 31, No. 5. (Sep., 1968), pg. 509. 62 Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp 6-7 Page 78 of 113

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universitas, therefore, are the capacity to acquire certain rights as apart from the rights of the individuals forming it, and perpetual succession' (Webb & Co Ltd v Northern Rifles 1908 TS at 464-5). 63 (aq) Legal Personality

In the primary sense the word person means a human (Nathan's Estate v Commissioner for Inland Revenue 1948 (3) SA N 882). But in law any entity which can acquire rights and duties is considered a 'person'. A company, although it is a purely legal conception and has no physical existence, existing only in contemplation of law, is such an entity (Madrassa Anjuman Islamia v Johannesburg Municipal Council 1919 AD 439).2 It is a legal person entirely distinct from the members who compose it (Dadoo Ltd & others v Krugersdorp Municipal. Council 1920 AD at 550). A company has 'neither body parts nor passions', but it can have rights and duties of its own. And such rights and duties do not attach to the members of the company but to the company itself (ibid). A company cannot eat or sleep, but it can keep house and do business (De Beers Consolidated Mines v Howe [1906] AC 455, cited in Estate Kootcher v Commissioner for Inland Revenue 1941 A 256). It seems to me impossible to dispute that once a company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are at absolutely irrelevant in discussing what those rights and liabilities are. . A company [has] a legal existence with . . . rights and liabilities of its own... (Salomon v Salomon & Co [1897] AC 22 (HL)). 64 (ar) III Legal Personality (a) The Concept of Legal Personality A 'person' in the language of everyday life is a human being. A 'person' in the legal sense is any being or object or aggregate of beings or objects which the law endows with the capacity of acquiring rights and incurring duties. Legal personality is 'not a natural phenomenon but a creature of law.' A legal system can personify whatever being or objects it pleases. It can withhold legal personality from human beings, thus demoting them from 'persons' to 'things'; and it can extend legal personality to beings or objects other than human beings, thus promoting them from 'things' to 'persons'. Today it is axiomatic that every human being has the capacity for rights and duties and is, therefore, a person in the legal as well as in the natural sense. But this was not always so. As long as the institution of slavery existed the law withheld legal personality from large numbers of human beings. The slave in ancient Greece and Rome or at the Cape in the seventeenth and eighteenth centuries was incapable of rights, was owned by his master in the same way as the latter owned his furniture and his cattle, and could be bought and sold; he was legally a thing, not a person. Again, in early Germanic law a man by being outlawed could be deprived of legal personality. Conversely, the law may extend legal personality to entities and objects other than human beings. In medieval Continental law long-deceased saints were conceived to be capable of owning property and of entering upon an inheritance, and criminal trials were conducted against animals. In all countries of the Western World today companies enjoy legal personality.
63 64

Mercantile and Company Law, Gibson, 6th edition, Juta and Company, 1991, pg. 297 Ibid pg. 298 Page 79 of 113

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Thus there are two classes of person in law: (i) 'natural persons', i.e. individual human beings who in modern law enjoy legal personality as a matter of course; and (ii) juristic' or 'artificial' persons, i.e. associations and bodies other than individual human beings upon which the law has seen fit to bestow the capacity for rights and duties. 65 (as) The company does not represent the shareholders, as in agency. Rather, being a separate entity and over and above being independent, it is not totally subservient to the shareholders. The following tract highlights this. Agency , according to its leading definition, is a fiduciary relation which results from the manifestation of consent by one person (the principal) to another (the agent) that the other shall act on his (or her) behalf and subject to his (or her) control, and consent by the other so to act . The control need not be total and continuous, but there must be some sense that the principal is in charge . Needless to say, the relation between owners and managers in a classical firm is a paradigmatic agency relation, with the owners acting as the principals and the managers as their agents, as is illustrated in Figure 10. It is the owners who unilaterally define the objective of the relation and maintain the power to control and direct the managers who have consented to act solely on their behalf. In fact, it is important to note that the owners need not hire any managers at all: at any time, they can terminate the agency relation and manage their own assets by themselves . However, once we turn to the problem of corporate governance, or of governing the corporate form of business firm with its characteristic two-tier ownership structure, we find ourselves on a totally different plane. The relation between shareholders and managers (i.e. directors and officers) can no longer be identified with an agency relation. To be sure, shareholders can dismiss individual directors, or even replace the entire team of incumbent directors at shareholder meetings; but they cannot dismiss the very legal institution of the board of directors, if the corporation is to remain a corporation. To be sure, shareholders can approve or veto major policy decisions of directors at shareholder meetings; but they cannot deny the very legal power of the directors to act in the name of corporation, if the corporation is to remain a corporation. As Clark (1985) remarks, [s]tockholders cannot withdraw the authority they delegated to the board of directors, because they never delegated any authority to the directors (p. 57). Shareholders are not in charge of their corporation s managers. Corporate managers are not shareholders agents. So who are they? What is the legal status of the corporate managers? They are the corporation s fiduciaries . A fiduciary is a person who is entrusted to act as a substitute for another person for the sole purpose of serving that person. 66 (at) The modern corporation is more that just a contractual arrangement. It takes on a different form due to it having the capacity to own assets of its own. One author writes: It should be noted that the corporation is described here not as a nexus of contracts but as a full-fledged subject of property ownership. In order for a corporation to serve as one of the parties of a contractual relation, it has to be recognized by others as the holder of the ultimate rights over some real assets and as the bearer of the ultimate duties associated with their use, independently of its constituent members. 67

65 66

The South African Legal System and its background, Hahlo and Khan, Juta and Company, 1973, pp 103-104 The nature of the business corporation: Its legal structure and economic functions, Katusuhito Iwai, University of Tokyo, The Japanese Economic Review Vol. 53, No. 3, September 2002, Pg. 258 67 Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, Katsuhito Iwai, The American Journal of Comparative Law, Vol. 47, No. 4. (Autumn, 1999), pg. 591. Page 80 of 113

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(au) The heart of the contractarian description of the corporation is the emphasis it places upon the contractual relationships between those actors involved in the company's affairs. In its extreme version, the firm (and the corporation as a species of firm) is reduced to no more than a 'nexus of contracts' between employees, managers, shareholders, consumers, creditors and so forth. As Fama puts it, '[t]he firm is just the set of contracts covering the way inputs are joined to create outputs and the way receipts from outputs are shared among input.' Thus, it no longer makes sense to think of the firm or company as a thing, capable of being owned or controlled. One simply has a web of contractual relationships between human actors. Similarly, the company disappears as an actor; understanding 'its' behaviour involves understanding the behaviour of a variety of human actors and the relevance to that behaviour of the contracts into which such actors have entered. 68 (av) Some writers have attempted to explain the company as a nexus of contracts . However, this has been amply rebutted, and it has been shown that it is more than just that. Rather, it is a separate person. The basis of the law of partnership, explained Edward Cox, editor of The Law Times, in 1856, was that there is a moral obligation, which it is the duty of the laws of a civilised nation to enforce, to pay debts, perform contracts, and make reparation for wrongs . Limited liability was founded on the opposite principle ... permit[ting] a man to avail himself of his agent s acts if advantageous to him, and not to be responsible for them if they should be disadvantageous; to speculate for profits without being liable for losses; to make contracts, incur debts, and commit wrongs, the law depriving the creditor, the contractor, and the injured, of remedy against the property or the person of the wrongdoer, beyond the limit, however small, at which it may please him to determine his own liability. Like nexus-of-contracts theorists today, Cox failed to appreciate that as a result of the changes to the nature of the joint stock company and shareholding, directors were coming to be conceptualised as the agents not of shareholders but of the company as a separate, property-owning legal person. Indeed, for many of Cox s contemporaries it was precisely the autonomous existence of companies and the externality from them of their shareholders (now owners of a quite separate piece of property, the share) that made limited liability defensible. 69 (aw) Of all these attributes it is the legal personality that holds the key to the problem. For it is the legal personality that enables a business corporation to own real assets under its own name, separate and distinct from those of the constituting shareholders. This allows outside parties to enter into contracts directly with a business corporation itself in exactly the same way as they enter into contracts with the owner of a single-proprietorship firm. Hence, the complex network of contractual relations is greatly simplified, leading to a large reduction of transaction costs for all participants. Moreover, the independence of the legal personality enables a business corporation to outlast the lives of individual shareholders as long as the shares are handed from individuals to individuals without interruption. 70 (ax) [L]imited liability and the corporation's legal personality are merely the different sides of the same coin. If the assets owned by a corporation as a legal person are separate and distinct from the assets owned by its shareholders, then the assets owned by shareholders must also be separate and distinct from the assets owned by their corporation. It would indeed be illogical to reject the legal personality of corporation and at the same time embrace the limited liability of corporate shareholders. A corporation and its shareholder are two distinct subjects of property

68

Review: Understanding and Regulating the Corporation, Christopher A. Riley, The Modern Law Review, Vol. 58, No. 4. (Jul., 1995), pg. 597 69 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg.464 70 Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, Katsuhito Iwai, The American Journal of Comparative Law, Vol. 47, No. 4. (Autumn, 1999), pg. 589. Page 81 of 113

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right, and each owes no legal obligation to any contract the other has independently formed with a third party. 71

32) It should be abundantly clear now that the company is an independent person, totally separate from the shareholders and the directors. This has significant consequences, of which the major two are (a) Limited Liability and (b) Separate ownership of assets and responsibility of liabilities. While these outcomes have been demonstrated above, we nevertheless wish to accentuate them with further references. (ba) So how good is the stockholder ownership theory as a theory? Not very. It does not describe the law very well, nor does it do a very good job as a normative matter. Indeed, it does not even address many of the most important question that arise these days. 72 (bb) "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."73 (bc) "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."74 (bd) Historically, the company moved from a partnership to a new person, and the shareholder s role moved from a partner to a capital rentier. In recognition of these changes, from around the mid- 1830 s the legislature and courts began to reconceptualise the legal nature of joint stock company membership, reconstituting shares as autonomous and freely transferable forms of property, relieved of any direct link to the assets of companies. Henceforth, the assets were deemed to be owned, in both law and equity, by the company itself, either in the form of a corporation or through trustees, while shareholders were deemed to be the owners of shares, quite separate pieces of property in the form of transferable rights to profit. In this process, all joint stock companies, incorporated and unincorporated, were, in effect, (re)constituted as autonomous, property-owning legal persons in the changing language of the statutes of the time, people no longer formed themselves into companies but formed companies, objects external to them. At the same time, shareholders gradually ceased being conceptualised as partners in the traditional sense and were reconstituted as rentiers external to the company and production, a process which continued (and was perfected) as the century progressed with the rise to dominance of the fully paid-up share, the elimination of residual liability, and the spread of diversified, risk-spreading, portfolio shareholding. 75 (be) "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
71

Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, Katsuhito Iwai, The American Journal of Comparative Law, Vol. 47, No. 4. (Autumn, 1999), pp. 591-592. 72 Who owns the corporation and who cares?, Richard A Booth, Chicago-Kent Law Review, Vol. 77 No. 147, 2001, Pg. 150 73 See pg. 3 74 See pg. 3 75 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 463 Page 82 of 113

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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."76 (bf)"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)."77 (bg) "Because a partnership is not a juristic person there is no separate legal subject which can be the bearer of rights and obligations.78 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."79
(bh) "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. 80

(bi) "THE JURISTIC PERSON


76 77

See pg. 3 See pg. 3 78 The partners as principals own the assets directly; each partner as principal and as agent for his fellow-principals has implied authority to act for all within the scope of the partnership business; and, in the absence of an agreement to the contrary, each partner has a right to take part in the management of the business. By definition, the partnership does not survive the death or withdrawal of a partner In the classic partnership these characteristics were reasonable in view of the ensuing legal consequences. Direct ownership results in personal liability; not only the individual s investment but also his personal fortune can be called upon to make good any liabilities incurred within the scope of the partnership business. Since any partner has such unlimited power over the resources of his fellows, there must be complete confidence in all fellow-partners, and new partners cannot be substituted. Also incidental to such extensive power vested in each partner during the life of the partnership is the safeguarding rule that any partner may at any time dissolve the partnership. (Judicial Tolerance of the Incorporated Partnership, George D. Hornstein, Law and Contemporary Problems, Vol. 18, No. 4, The Close Corporation. (Autumn, 1953), pg. 437. 79 See pg. 3 80 See pg. 3 Page 83 of 113

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Collective property is not to be confounded with co-ownership of individual property in an undivided state. While it remains undivided, there is nevertheless, autonomy of the portion of each individual, every part, although actually confused with the others, has its own proprietor, and he is independent of the others. He alone can deal with his portion. Co-ownership of undivided property therefore, is always individual property, with actual confusion of the parts. Furthermore, this confusion is necessarily transitory and accidental. The mingling or confusion is not the object- is not a permanent characteristic of this kind of property; its characteristics on the contrary are isolation and independence, and for this reason, the very state of being undivided tends naturally toward partition and provokes it . These classifications may become clearer if we consider an example of each. A is the owner of a house. He owns it individually-it is individual property. A and B own the same house, jointly or in common. A may sell his half, B may sell his half. The share of each, though unsevered, is his individual property, and may by appropriate proceedings be set out to him. The house is still individual property. A, B, C, D and E form a corporation which purchases the same house. A nor B nor C has any distinguishable share in the house. There is no way in which his share can be severed. In other words there is complete affectation of the house to the general utility of A, B, C, D, and E."81 (bj) "When individuals transfer assets to or invest money in a company they lose, as has been seen, all proprietary and other interests in that property."82 (bk) "The importance of the separate and independent existence of the proprietary and other rights of companies which is so made possible hardly needed the emphasis of Lord Russell of Killowen in E.B.M. Co. Ltd. v. Dominion Bank : Their Lordships believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand."83 (bl) "Some consequences of a company's legal personality The company's business and property A number of consequences flow logically from the fact that a company enjoys a separate legal personality. The business of the company will be its own business and not the business of its members. A shareholder has a proprietary interest in the company, not in its business (Stellenbosch Fanners' Winery Ltd v Distillers Corp (SA) Ltd (1962)). Property which is owned by the company cannot be treated as if it were owned by the members or any one of them (Dadoo Ltd, above), and so not even the sole beneficial shareholder who manages the company's business and can exercise complete control, may appropriate the company's assets for himself or confuse his own banking account with that of the company. For example, even a sole director who is beneficially entitled to all the shares, is not entitled to pay into his own private bank account cheques which are made payable to the company (AL Underwood Ltd v Bank of Liverpool & Martins Ltd (E 1924)).

81

The Juristic Person. II, George F. Deiser, University of Pennsylvania Law Review and American Law Register, Vol. 57, No. 4, Volume 48, New Series. (Jan., 1909), pp. 230-231 82 The Company as a Separate Legal Entity, Murray A. Pickering, The Modern Law Review, Vol. 31, No. 5. (Sep., 1968), pg. 499. 83 ibid pg. 509. Page 84 of 113

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NOTE: In S v Dejager (1965) the accused was found guilty of stealing the company's funds despite the fact that the beneficial shareholders, namely he himself and his co-conspirator, had been agreeable to the abstraction of the funds in question. It was the company which owned the funds, not the shareholders. The fact that the accused was a director did not help him either, for as we shall see, everything that a director does, including dealing with the company's assets, must be done in good faith and for the benefit of the company as a whole. A shareholder will only enjoy a general right to participate in the company's assets when the company is wound up and although it is commonly that a member is entitled to a share in the profits of the company, it is clear that he normally becomes so entitled only if and when a dividend is properly declared in terms of the company's constitution. NOTE: 1. As a member has no legal interest in the company's property, he is unable to insure it. He lacks an insurable interest therein. This may sometimes lead to the most unfortunate consequences. For example, if a businessman forms a company and sells his business to it, as Salomon did, he should be careful to make over to the company any insurance policies which he may previously have taken out to cover the loss or damage of the assets, and obtain the consent of the insurance company, for if he does not, and the assets are subsequently destroyed or damaged, the insurance company will be entitled to refuse to pay out, despite the fact that he may have continued to exercise complete control over the assets and business (Macaura v Northern Assurance Co Ltd (E 1925)). Company s debts The debts of a company can in no way be regarded as the debts of any of its members (Estate Salzmann v Van Rooyen (1944)) who, once their shares have been fully paid up, will normally be free of any further liability."84 (bm) "Adhering to the formula that the corporation is an entity apart from its shareholders, in such cases the courts have frequently refused to impose liability for corporate obligation. Upon the bankruptcy of the corporation the sole shareholder has even been allowed to assert a claim and in one instance, a preferred claim."85 (bn) There are two sides to be considered in the case of companies and corporations. There is the business side directed towards a material purpose, which is created, not by the law, but by the respective interests involved. On the other hand, there are the legal consequences attached to the association, which may amount to the appearance on the scene of a new "juridical person." The liabilities of the individual members do not go further than their shares in the capital of the company, an important legal consequence of which is that such shares are negotiable, so that in this respect the element of personal association, so prominent in the case of a partnership, disappears. 86 (bo) Consequences of separateness 1.20 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
84 85

Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp. 10-11 Judicial Supervision of the One Man Corporation, Harvard Law Review, Vol. 45, No. 6. (Apr., 1932), pg. 1085 86 Juridical Persons, Paul Vinogradoff, Columbia Law Review, Vol. 24, No. 6. (Jun., 1924), pg. 597 Page 85 of 113

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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. Consequently it is not necessary to transfer a company's assets when there is a change of membership. In a partnership, however, the partners are the joint owners of the partnership assets and are jointly and severally liable for the partnership debts. On a change of its membership its assets must be transferred to the new partners. (d) No one is qualified by virtue of his membership, to act on behalf of the company. Only those who, in accordance with the articles, are appointed as representatives of the company, can bind the company. A partner, however, can normally bind the partnership in regard to everything within the scope of the partnership business. 87 (bp) The prevailing theory of Anglo-American law was expressed emphatically by Chief Justice Marshall in Trustees of Dartmouth College v. Woodward, where he said : A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual. 88 (bq) Relegated by the early twentieth century to the status of rentiers, the legitimacy of their [shareholders ] rights began in some quarters to be questioned. With the rise of the company as a radically separate, property-owning legal person, and the transformation of the share into an obligation-free, autonomous property form external to the company, it could no longer be claimed that shareholders were the owners of the corporate assets, and although the alternative view emerged that shareholders were owners of the company itself, this claim too lacked legal grounding. It was further undermined by the empirical work of Berle and Means and others which suggested that shareholders had lost control of the companies in which they held shares (not that this was something which seemed greatly to concern them). As a result, shareholders found themselves being unfavourably described in some quarters as absentee owners , owners of claims to unearned or free income , and likened to corporate bondholders. With this, their status as corporate owners was called into question, as was their exclusive claim to corporate surpluses. 89 (br) The judgment of the then Lord Chancellor in the case of Taff Vale Railway Company v. Amalgamated Society of Railway Servants, (1901) A.C. 426, is as follows : If the Legislature has created a thing which can own property, which can employ servants and which can inflict injury, it must be taken, I think, to have implicitly given the power to

87 88

Corporate Law, Celliers et al, Butterworths 1988, 4th edition, pg. 11 ibid, pg. 602 89 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 481 Page 86 of 113

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make it suable in a court of law for injuries purposely done by its authority and procurement. 90 (bs) The development and spread of capitalist relations in the eighteenth and nineteenth centuries saw the emergence of an increasingly sophisticated system of credit and a dazzling variety of intangible forms of wealth, many of them titles to revenue like the joint stock company share. 91 (bt) Much of the learning that has been built up about the terms "legal fictions," "fictitious persons," "entities," "artificial being" has become cant92. A vague connotation belongs to each of these terms which enables the casual user of it to apply it to the correct problem; of the consequences of the application he is ignorant, and there is little or no relation between theory and practice. The most uninformed mind has an idea of capacities, and can even follow the ramifications by which a man by marrying his first cousin, loses some of his second cousins, or becomes second cousin to his own children, but the separation of individual wills from collective wills is a task which even the academic mind has but unsatisfactorily accomplished. Let us see what is here involved. Dobson, Hobson, Jopson and others form a corporation. Each receives stock, Dobson is president, and Hobson secretary. They have a board of directors and own property. Now who owns the property? Dobson, Jopson, et al, or the vague personality connotated by the term corporation. Is it, in fact, a personality? Dobson and the rest own stock, ergo, no property. The directors do not own it; all the stockholders together cannot alienate it, the corporation can. And the corporation is the sum of the volitions of all the stockholders expressed in unity of action. It is this individual, this aggregate of wills that has aroused all the controversy. What name shall we give it? Person, collective property - persona ficta - the name is very nearly a matter of indifference so long as we understand by it an existence distinct from the members that compose it; for, be it understood, one may be a member of this corporate body and yet deal with it - may sell to it - buy from it, -in fact, maintain business relations with it, precisely as he does with any other natural person. 93 (bu) THE LEGAL NATURE OF A SHARE

There is no comprehensive legal definition of a share but in Borland's Trustee v Steel Farwell J described a share in the following terms: A share is the measure of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se. The contract contained in the articles is one of the original incidents of the share. A share is not a sum of money... but is an interest measured by a sum of money and made up of the various rights contained in the contract. This description makes it clear that a shareholder is an investor: he pays a sum of money in the hope of earning of return. The shareholder's financial interest is in the company itself and it does not amount to a direct interest in the company's assets. These assets belong to the company which is a separate legal person. Thus in Macaura v Northern Assurance Co Ltd it was held that a shareholder did not have an insurable interest in the company's property. The financial rights attaching to shares are discussed in detail in this chapter. In outline, a shareholder expects to earn a return on the investment in the form of dividends and capital
90

Entities and Real and Artificial Persons, W. E. Singleton, Journal of the Society of Comparative Legislation, New Ser., Vol. 12, No. 2. (1912), pg. 295 91 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 486 92 Cant: A Stock phrase that has become nonsense through endless repetition. Ed. 93 The Juristic Person. I, George F. Deiser, University of Pennsylvania Law Review and American Law Register, Vol. 57, No. 3, Volume 48, New Series. (Dec., 1908), pp. 133 Page 87 of 113

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growth. An investment in shares is infinite and continues until the company is liquidated or effects a reduction of capital or share buy back affecting those shares. Where shares have a nominal or par value, this is the minimum amount that a shareholder would hope to receive back from the company in the event of liquidation. However, unless displaced by the terms of issue, there is a presumption that all shareholders are also entitled to share equally in any surplus assets of the company which remain after all of its debts and liabilities have been discharged and the nominal amount of the share capital has been repaid to shareholders. 94 (bv) The shareholders in any company cannot exercise any rights in respect of property owned by their company simply because they have no estate or interest in that property. Conversely, as established by Salomon's case, the company has no estate or interest in the property of its members. This fundamental principle has often been restated. In I.R.C. v. Sansom it was alleged that a company was the agent of its controlling shareholder for the purpose of avoiding liability to super-tax. The Court of Appeal rejected this contention, for, in Lord Sterndale M.R.'s words ''An agent cannot make a loan to a principal out of the principal's assets; it is not conceivable; it cannot be done." In the Court of Appeal's decision in Firestone Tyre and Rubber Co. v. Llewellin Jenkins L.J. stated that a subsidiary company could not sell its property as the agent of its parent company, for it is a legal impossibility for a person to sell his own goods as agent for another." And in Bank voor Handel en Scheepvaart N.V. V. Slatford Devlin J. described the proposition that property owned by a company belongs to its shareholders, or alternatively is held or managed by the company on behalf of its shareholders "as being beyond the reach of sustained argument. It seems to me to be contrary to all authority and principle." In Walton J's simple truism The property of the company is not the property of the shareholders; it is the property of the company. 95 (bw) Company as Owner of Property [401] The fact that the company has an existence in law independently of its membership provides convenience in the holding of property for a group. A company has power to acquire, hold and dispose of property: CA s 16(4). A group could own property as co-owners but every time an old member left the group or a new member joined it there would be necessary for the title to the property to be vested in a new group of co-owners. This unwieldy arrangement can, it is true, be avoided by an unincorporated group vesting title to the group property in a small number of trustees to hold on trust for the members for the time being. In that event conveyancing transactions to adjust the holding of title would be necessary only on a change of trustees. In a company changes in membership do not necessitate any change in ownership of assets devoted to the group's purpose: the company continues to be the owner of the property. It will be seen later that when members of a company pay in money as capital of the company, the company becomes in general both legal and beneficial owner of that money and of any other assets which it acquires with that money. In other words, the legal entity which is the company is not a trustee for the members. This is not to say that a company may never be a trustee. The point is that the property which the group devotes to group purposes belongs to the separate legal entity and the members have no legal or beneficial interest in it merely because they are members. 96 (bx) In misdescribing the joint stock company and the joint stock company shareholder, contractual theory also elides the distinction between the assets owned by the company and the shares (rights to revenue) owned by the shareholder. They are conflated under the rubric capital , a process which discretely reunites shareholders with the corporate assets and eliminates the corporate entity as an owner of property other than in a purely formal sense. With corporate shareholders recharacterised as providers of capital and with assets and shares
94 95

Company Law and Corporate Finance, Ellis Ferran, OUP 1999, pg. 315 The Company as a Separate Legal Entity, Murray A. Pickering, The Modern Law Review, Vol. 31, No. 5. (Sep., 1968), pg. 497 96 Principles of Company Law, H. A. J. Ford, 3rd edition, Butterworths 1982, pg. 85 Page 88 of 113

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conflated, the corporation itself is stripped of substance and more or less conceptualised out of existence, reduced to a mere cipher through which the owners of different factors of production are brought contractually together. Thus the corporation, Jensen and Meckling inform us, is merely a legal fiction [which] serves as a focus for the complex process in which the conflicting objectives of individuals ... are brought in equilibrium within a framework of contractual relationships . Crucially, this conceptual elimination of the corporation not only reconnects shareholders with the corporate assets (the capital ), it also reconnects them, in theory at least, with corporate managers, for with no corporate entity of substance to come between them the relationship between shareholders and managers can once again be characterised, partnership-style, as fit[ting] the definition of a pure agency relationship . In short, then, nexus-of-contracts theory tries to spirit us back to the early nineteenth century, to the days before general limited liability, fully paid-up (no-liability, no-obligation) shares, developed share markets, and coupon-clipping rentiers; to the days when joint stock corporations were conceptualised as essentially artificial, fictional entities (shareholders merged into one body), when shareholders really did give money to companies and were conceptualised as partners (with its implication of managerial and monitoring function), and when directors were conceptualised, partnershipstyle, as their agents. Unfortunately, while the companies it portrays bear some resemblance to the joint stock companies of this earlier era, they bear little resemblance to their contemporary counterparts. This becomes apparent when nexus-ofcontracts theorists attempt to elaborate the contracts which allegedly constitute the corporation. In this respect, even the corporation s relationships with third parties, many of which are clearly contractual in nature, are not entirely problem-free because the rights possessed by third parties are, of course, held against the corporation, not its shareholders, and necessarily so for rentiers wanting the benefits of freely transferable, no-liability, no-obligation shares. As a result, in this context at least, contractualists require the fictional corporate entity to spring briefly to life. 97 (by) An essential corollary

When individuals transfer assets to or invest money in a company they lose, as has been seen, all proprietary and other interests in that property. The rights and powers so relinquished are reformulated and reconstituted in another form of property created for this purpose. In return for their tangible or intangible assets shareholders receive the rights conferred upon them by their shares, and their proprietary rights are limited to their property in those shares. The shareholder, in Cohen L.J.'s description, has no property in, nor right to, any particular asset. He has only the right to have all the assets administered by the directors in accordance with the constitution of the company . In Lord Porter's words: " . . . in the case of land the owner possesses a tangible asset, whereas a shareholder has no direct share in the assets of the company. He has such rights as the memorandum and articles give him and nothing more." This is an essential integral part of the concept of corporate legal entity because it makes possible the complete separation of the property and rights of the company from the property and rights of its members. It achieves this by a duplication of assets through the creation of shares as a new form of personal property. Through this duplication of interests in respect of the same assets " The corporation is not a mere aggregate of shareholders," and " The undertaking is something different from the totality of the share-holdings "The importance of the separate and independent existence of the proprietary and other rights of companies which is so made possible hardly needed the emphasis of Lord Russell of Killowen in E.B.M. Co. Ltd. v. Dominion Bank: "Their Lordships . . . believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company's legal

97

Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 475 Page 89 of 113

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entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand."98 (bz) The third basic problem to be resolved in establishing the concept of separate legal entity was that of the procedural capacity of the company. As stated earlier the company is more than an entity capable of the ownership of property. It is also an association of persons, all of whom individually possess their own standing at law. In consequence it became necessary to decide whether the company's capacity to act at law was to be dependent upon, or related to, that of the individuals who comprise it, as is the case, for example, with the trust, or whether it was to have separate and independent procedural powers. The development of two rules in the nineteenth century decided this issue in favour of the latter alternative. First, it was decided that the company's members have no capacity to act themselves, or in the company's name, on its behalf or for its benefit. Secondly, outsiders dealing with the company may rely on its capacity to act itself as a party to any transaction within its powers and need not inquire as to either the legal capacity of its members or the regularity of its internal affairs. These rules were confirmed by the well-known decisions in Foss v. Harbottle and Royal British Bank V. Turquand respectively. They have been considered very fully elsewhere and only their relationship to and importance for the concept of separate legal entity need be noted here. 99 (baa) It is often claimed that Salomon v. Salomon opened the path for the recognition of the incorporated company as a separate legal entity. In fact the real shift occurred in the wording of the 1856 and 1862 Acts. The 1856 Act regarded persons as forming themselves into an incorporated company. The 1862 Act saw persons as forming a company by them but not of them. The earlier Act identified the company with the members, the later Act identified the company as something separate from and external to them from then on companies have been referred to as it rather than they . On the other hand there was the constitution of a new form of property, the share, the legal nature of which had simultaneously been reconceptualized. In the eighteenth and early nineteenth centuries ownership of a share was taken to mean ownership of a share of the companies (sic) assets. By the time private companies had been placed on a statutory basis (in 1907) the share had been fully constituted as property in its own right, and in a host of cases the courts found that shareholders in incorporated companies had interests only in the profits and not the assets. The essential link between the corporation as a separate legal subject and the share as a form of property is that the shareholder has no property in or right to any particular asset of a company other than the share; ownership of a share of stock in British Telecom gives the holder no right to go off with a telephone box. All the shareholder can claim as a right is to have the assets of the company administered in accordance with the constitution of the company to attend Annual Meetings, receive the Annual Report, to vote on certain matters and, crucially, a right to a share in the surplus value produced through the company s consumption of labour power. Thus the link between shares and assets had been broken, a process which helped define the company as a new legal subject: the property of the company is precisely the property of the company, not the shareholders. In effect, the development of company law had produced a new form of legal subject, the private corporation, and a new form of property, the share. A dual separation was effected between companies and their shareholders and shareholders and their shares.

98

The Company as a Separate Legal Entity, Murray A. Pickering, The Modern Law Review, Vol. 31, No. 5. (Sep., 1968), pg. 499 99 Ibid pg. 509 Page 90 of 113

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That the property of the company is the property of the company and not the shareholders is a necessary corollary of the company form. 100 (bbb) It is important to bear in mind that the term Limited Liability is a misnomer, and was inherited from the days when the company was a partnership. By now the reader would have gathered that the modern company is a child of the old partnership. Gradually101 over time certain key elements of the partnership were modified to create the new concept. In partnership, the shareholders or members were personally liable for the debts of the company. When the company acquired its independent personality, the fact that the shareholders were no longer liable was referred to as limited liability, as the claim was limited to this new person. It is a misnomer for the reason that there is no limitation at all. The creditors have a right over the full assets of this new person, the company. In this respect, they are not limited to any portion of the assets. Hence, the term limited is misplaced. If A were indebted to B, upon A s liquidation B would have a right over all of A s assets. It would not be limited to any portion of the assets. A s liability is unlimited. The fact that B could not claim from C does not imply that A s liability is limited in any respect. 102 The company is a separate person, whose indebtedness is not limited to any portion of its assets. The fact that the creditors may not claim from the third party the shareholders does not make the claim limited. This crucial point indicates very well the meaning of separate personality, and is supported by the following text.
THE MEANING OF LIMITED LIABILITY

100

Staging Power: Marx, Hobbes and the personification of capital, Mark Neocleous, Department of Politics American Studies and History, Brunel University, Law and Critique 14: 147 165, 2003. pg. 157 101 Historical Developments Blumberg has recently offered an extensive and thoughtful survey of the historical experience with unlimited liability. As he points out, in England prior to 1844, manufacturing firms had difficulty obtaining corporate charters. Consequently, large manufacturing firms were commonly formed as unincorporated joint stock companies with transferable shares. Indeed, an active public market in the shares of such companies developed as early as the seventeenth century. These firms had roughly the legal characteristics of a large partnership, including unlimited joint and several liability for all corporate obligations. Then, between 1844 and 1855, joint stock companies were permitted to incorporate but had to retain unlimited liability. Only after 1855 was incorporation with limited liability generally available. Prior to 1855, joint stock companies commonly sought to limit their shareholders' liability to voluntary creditors by contractual means, thus providing evidence that limited liability is the appropriate default rule for contractual obligations. Such devices presumably did not succeed, however, in limiting liability in tort. Nevertheless, by 1844 there were almost 1,000 joint stock companies in England, some with thousands of shareholders. Similarly, although American states freely granted corporate charters by the beginning of the nineteenth century, for the first several decades of that century a number of states imposed unlimited liability on manufacturing corporations. Nevertheless, many manufacturing firms incorporated in this period. Moreover, states that were slow in adopting limited liability, such as Massachusetts (1830) and Rhode Island (1849), did not appear to suffer a conspicuous disadvantage in industrial development in comparison to neighbouring states, such as Connecticut and New Hampshire, that adopted limited liability And, although most American states had adopted limited liability for corporations in general by the 1850 s, California imposed unlimited pro rata liability by statute on the shareholders of both domestic and foreign corporations from statehood in 1849 until 1931, evidently without crippling industrial and commercial development. Even after discarding unlimited liability, many states provided for double or triple shareholder liability for corporate debts throughout the nineteenth century liability that, at least originally, extended to tort creditors as well. Similarly, most states, as well as federal banking legislation, imposed double liability on the shareholders of banks until the 1930's. An efficient mechanism, in the form of a procedure in equity termed the creditors bill, ultimately evolved to provide a means for obtaining a collective judgment, good. (Toward Unlimited Shareholder Liability for Corporate Torts, Henry Hansmann; Reinier Kraakman, The Yale Law Journal, Vol. 100, No. 7. (May, 1991), pg. 1924.)) 102 It is interesting to note that Muhtaram Mufti Taqi Uthmani Saheb, in a self contradictory statement, supports the issue of limited liability using the same circular argument. Refer to Page 91 of 113

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At this point it may be stressed that although one may hear expressions such as "company limited by shares" or "company with limited liability", they tend to convey a wrong impression. The principal form of company registered under the Companies Act of 1973 does not enjoy any limited liability at all. In the same way as a human being, it is liable for the full amount of its debts to all its creditors, and if it has insufficient assets to pay them in full, it may find itself placed in liquidation. A better description of such a company is accordingly a "company having a share capital". The expression "limited liability" refers to the liability of the company's members for the debts of the company. Until 1973 the liability of each member in a company limited by shares was to contribute, when required by the company to do so, the full balance unpaid on the shares which he was holding to the extent that this had not already been done by either himself or any person who had previously held those shares. Once those shares had been fully paid up, that liability was at an end. The Companies Act of 1973 no longer permits the allotment or issue of shares unless they are in fact fully paid up (s 92(1)), so that in general, once shares have been issued, the members are free from any further pecuniary obligation in respect thereof. (If a company had issued shares which at the commencement of the Act were not fully paid up, it remains subject to the Companies Act of 1926 in respect of such shares (s 4(2)).) NOTE: 1 Although the company registered under the English Joint Stock Companies Act of 1844 possessed a corporate personality (see below) it was still, because of its historical background, clearly regarded as a partnership, and was called one. In consequence, every partner was liable for all the debts and liabilities of the partnership. However, it was only if the creditors after due diligence had failed to obtain satisfaction of a company debt after executing against the property of the company that execution could proceed against a shareholder, who then enjoyed a right of recourse against the company, and ultimately also those against whom execution could also have been levied. The shareholder's liability was accordingly unlimited. In the face of some opposition, however, the principle of limited liability was finally accepted for these joint stock companies (as they were known) and this was achieved by the simple expedient of limiting the liability of the shareholder on eventual execution against him to the portion of his shares not paid up. 103 (bcc) As Manning puts it: It is clear beyond question that shareholders as a lot have little or no real concern with . . . the "fundamental" transactions. . . . It is commonplace to observe that the modern shareholder is a kind of investor and does not think of himself as or act like an "owner." He hires his capital out to the managers and they run it for him: how they do it is their business, not his, and he always votes "yes" on the proxy 104 (bdd) (a) The Shareholder as Owner/Principal The vision of shareholders as the "owners" of the corporate enterprise has an old and influential pedigree. The aggregate or partnership model of the corporation, which was prevalent in the 19th century, assumed such a role for shareholders, just as it assumed a principal/ agent relationship between the shareholders as owners and their agent directors. Although the contemporary nexus of contracts theory of the corporation again speaks of a principal agent relationship between shareholders and directors, this modern reconstruction
103 104

Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp 5-6 The Shareholder's Appraisal Remedy, An Essay for Frank Coker. Manning 77 YALE L.J. 223, 239 (1962). Page 92 of 113

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lacks the traditional hallmarks of agency that were implicit in the 19th century shareholdercentered view of the corporation. Thus, traditional corporate theory assumed that the role of directors was to carry out the will and implement the interests of shareholder and that within standard principles of agency law, shareholders had a formal right to control their agents. The "shareholder as owner" vision under the aggregate theory was of great significance in the development of corporate law. In the US it was used to counter the view of the corporation as a creation of the state under the restrictive concession theory; rather, the aggregate model represented the corporation as a natural and, most importantly, private organization, in which shareholders were akin to partners. Early rules, such as vested rights, under which unanimous consent of shareholders was required for any fundamental corporate change, reflected this role for shareholders within the corporate structure. Also, traditional tolerance by the courts of a low standard of skill and care in directors was based upon the assumption that the shareholders as principals should be more careful in selecting their agents. If shareholder assertion of ownership rights were the ideal, it was an ideal which bore an ever-decreasing resemblance to reality, with the growth of large public corporations at the turn of the 20th century. Indeed, some commentators doubt whether, outside the context of the close corporation, shareholders ever occupied a position where they both owned and controlled the corporation, and view this "ideal" as itself another myth of corporate law. In the early 1960s, a leading corporate law commentator105 stated that the days of viewing shareholders in public companies as owners with proprietary rights were "gone forever"; no longer could anyone take this image of the shareholder seriously. 106 (bee) Unlike a company, a partnership is not a separate person in law, with rights and duties apart from its members. The assets and liabilities of a partnership are the assets and liabilities of its members: [19]. While a company acts through its directors, a partnership acts through its partners, each partner being an agent of the partnership, see Baird's case (1870) 5 Ch App 725. Partners owe each other a duty of the utmost good faith, shareholders in a company do not, except, possibly, where the company is, in substance, an incorporated partnership. While a company has perpetual existence, a partnership comes to an end with a change in its composition. A partner cannot transfer his share in the partnership without the consent of the other partners, while shares in a company are freely transferable unless the articles otherwise provide. 107 (bff) The vulnerability of intangible property in the form of income rights such as shares and bonds extends beyond the risks associated with fraud and speculation, however, and as a result so too do the regulatory demands that they make. As their value is derived from anticipated future revenues, they are potentially affected, individually and collectively, by any changes in the productive (and other) processes responsible for generating the income streams concerned. They are unusually vulnerable, in other words, to everything from changes in trade and labour regimes, to changes in financial and taxation policies, to changes in the balance of political and class power, to changes in particular markets as well as in general economic conditions - shares especially so, in that they provide no right to an income, merely a privilege to receive one in certain circumstances. As Robert Hale noted, the owners of these property forms are reliant upon large numbers of people conduct[ing] themselves in a manner advantageous to [them] and continuing to do so indefinitely into the future. Their financial integrity therefore requires
105 106

Mason, "Introduction," in Edward Sagendorph Mason (ed.), The Corporation in Modern Society 5 (1960) Visions and Revisions of the Shareholder, Jennifer Hill, The American Journal of Comparative Law, Vol. 48, No. 1. (Winter, 2000), pp. 42-43 107 Hahlo's South African Company Law through the Cases, Pretorius et al. Juta and co.1995 pp 42-43 Page 93 of 113

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an extraordinarily wide range of legal and other interventions aimed at preserving the general social and productive relations responsible for ensuring a continuing flow of returns. In short, these are high-maintenance property forms which demand remarkable levels of general economic and social regulation; they are, perhaps, even more magical than Black appreciates. 108 (bgg) Ownership of a corporation is different, of course, from the ownership of personal assets. Most notably, shareholders do not have a right to possess and use corporate assets as they would their own; instead, they create a fictitious person to conduct business, with the shareholders as the beneficiaries. To the extent that shareholders do not manage a corporation but leave control to others, there is a problem of ensuring that the hired managers run the corporation in the interest of the shareholders. 109 (bhh) Now, as Paddy Ireland has shown, the doctrine of separate personality evolved against the background of legal changes that reconceptualised the share as an autonomous form of property, a separate and distinctive form of money capital . This process was more or less complete in Britain by the third quarter of the 19th century. If shareholders had no direct interest, legal or equitable, in the property owned by the company, only a right to dividends and the right to assign their shares for value , the company, by contrast, was now seen as the owner of its own assets. Separate personality severed the link between the assets of joint stock companies and their shares, externalising shareholders and depersonifying the company. In other words, before these changes and throughout the seventeenth, eighteenth and early nineteenth centuries, shares in joint stock companies, incorporated and unincorporated, were consistently conceptualised as equitable interests in the assets of the company. Shareholders were regarded as owners in equity of the company s property and shares as an equitable right to an undivided part of the company s assets . What this means is that there was no distinction in law between companies and partnerships. 110 It is a given that this was the position in the past, and no longer holds. (bii) With the establishment of the incorporated company as an asset-owning separate legal person, joint stock company membership came to take the form of ownership of an unencumbered, free-standing right to revenue external to the process of production, to which was attached no particular obligations, contractual or otherwise, either to the company itself or to outsiders. Shares had become instruments for the private appropriation of surplus value divorced from responsibility or function. They were circumscribed bundles of rights, certainly, but this mattered little to rentier corporate shareholders for most of whom they were nothing more than an income streams, who were now benefiting from the development of modem financial reporting (the publication of independently audited, cost-based accrual accounts) and the emergence of an increasingly sophisticated accounting profession, and who in any case retained residual control rights. 111 (bjj) An ordinary shareholder has rights: (i) to such dividends as the directors from time to time declare (whilst the company is a going concern), and (ii) should the company be wound up, to a pro rata share of capital and surplus, insofar as these exceed the company s liabilities. It is therefore possible to think of capital as an indefinitely deferred claim against the company, which is payable only in winding-up, and subordinate to claims of the company s creditors. 112
108 109

Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 499 Fiduciary Duties and the Shareholder-Management Relation: Or, What's so Special about Shareholders? John R. Boatright, Business Ethics Quarterly, Vol. 4, No. 4. (Oct., 1994), pg. 394 110 Islam, the Mediterranean and the Rise of Capitalism, Jairus Banaji, Paper presented to the Conference on 'Theory as history: Ernest Mandel's Historical Analysis of World Capitalism', Amsterdam, 10-11th November, 2003 111 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg.469 112 Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law, John Armour, The Modern Law Review, May 2000, pg. 365. Page 94 of 113

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(bkk) Another legal academic tries to simplify the issue in terms comprehensible by the layman, and writes: Suppose you are an owner of a mom and pop grocery shop around the corner. Whenever you feel hungry, you can pick up an apple on the shelf and eat it right away. That apple is your property, and the only thing you have to worry about is the wrath of your spouse your co-owner. Now suppose you are a shareholder of a big supermarket chain. If you feel hungry, can you go into one of its stores and grab an apple from the shelf, claiming that that apple is your property? The answer is no. There is a real possibility that you will be arrested as a thief! To be sure, if you are prudent enough to carry a share- certificate with you, the supermarket manager may let you off so as not to tarnish the public image of the chain as a shareholder-friendly corporation. But if you are known to be an activist shareholder, fighting against the chain s inhuman treatment of animals in its slaughterhouse, the chance is high that you will be put into jail. Why? Because corporate shareholders are not owners of corporate assets. Who, then, owns corporate assets? The answer, of course, is the corporation as a legal person . The law treats a corporation as a subject of property rights capable of owning real property, entering into contracts, suing and being sued, all in its own name, separate and distinct from its overlooking shareholders. After all, the corporate assets are literally the corporation s assets. It is the corporation as a legal person that is the owner of the corporate assets. . 113 (bll) In a footnote to the above text, the author draws our attention to the evidence for this, and states: See. Prudential (No 2) [1982] I All ER 357, 'shares are merely a right of participation in the company on terms of articles of association and Short v Treasury Comrs [1947] 2 All ER 298 (CA). Evershed I J Shareholders are not, in the eye of the law, part owners of the undertaking. The undertaking is something different from the totality of the shareholdings in general 114 (bmm) Shareholder rights and company law It is surprisingly difficult to find support within company law for the notion of shareholder primacy. We cannot do it by referring to the claim that shareholders own the company . In law, shareholders do not own the company ; if we take the company to be the fictive legal entity which is brought into being through the act of incorporation, it is not clear in what sense such a thing could be owned by anyone. Nor does the ownership of a share entitle its holder to a particular segment or portion of the company s assets, at least while it is a going concern (see Parkinson, 2003). 115 (bnn) Because of their essential nature as intangible income rights, corporate shares are unusually vulnerable forms of property, so much so that Bernard Black was recently prompted to describe the existence of securities markets as magical , for investors pay enormous amounts of money to strangers for completely intangible rights, whose value depends entirely on the quality of the information that the investors receive and on the sellers honesty . This vulnerability stems in part from the so-called agency problems associated with absentee ownership: the rentier owners of corporate shares are not generally well-equipped to protect themselves, contractually or otherwise, from errant managers. It stems also, however, from the very nature of shares as a property form; from the source and nature of their value. The value of corporate shares is derived not from their concrete properties as physical objects or from the value of the tangible assets owned by the companies concerned, but from their anticipated future earning power, from
113

The nature of the business corporation: Its legal structure and economic functions, Katusuhito Iwai, University of Tokyo, The Japanese Economic Review Vol. 53, No. 3, September 2002, Pg. 243 114 What Is Equity? New Financial Instruments in the Interstices between the Law, Accounting and Economics, Peter F. Pope; Anthony G. Puxty, The Modern Law Review, Vol. 54, No. 6, Law and Accountancy. (Nov., 1991), pg. 904. 115 The Coming Transformation of Shareholder Value, Simon Deakin, CORPORATE GOVERNANCE, Volume 13 Number 1 January 2005, pg. 12 Page 95 of 113

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a capitalisation of the dividends which are expected to accrue to them in the future. Thus, while the value of the tangible assets of companies tends to remain relatively stable, at least in the short term, share values often fluctuate alarmingly. Indeed, there are frequently huge gulfs between the market and book values of companies, between the value of their tangible assets and their value in the stock market. One consequence of this, as history has repeatedly shown and as we have seen only too clearly recently, is that shares are a form of property unusually vulnerable not only to oscillations in value, but to manipulation, fraud and speculation. The result is that the security and integrity of financial property, like shares, requires a wide range of legal and other interventions aimed at trying to eliminate deceit and swindling, and to ensure that their market values reflect with reasonable accuracy their income-generating potential. 116 (boo) If a company owns real property, is a share in the company real or personal property? The members of the company are not the joint owners of its property because the company is a separate person in law and property held in the name of the company belongs to the company and no one else (Bligh v Brent (1837) 2 Y & C Ex 268). So, whether a company share is real or personal property does not depend on the nature of the company's property. The matter is settled by CA 1948, s.73, which declares that the shares or other interest of any member in a company shall be personal estate and shall not be of the nature of real estate. Regarded as an item of property in itself, a company share comes into the class of personal property known as choses in action (or things in action) (The Colonial Bank v Whinney (1886) 11 App Cas 426, HL). This is because holding a company share confers an entitlement to certain benefits and privileges (which may be enforced by action in the courts if they are denied to a shareholder) but does not give possession of any tangible physical object. (A shareholder is entitled to a share certificate but that is merely a memorandum: he is still a member whether he has a share certificate or not.) It is perhaps better not to regard shares as items of property in themselves but to regard membership of a company as an item of property of which the size is determined by the number of shares held. One can, perhaps, discern this view in the much quoted remark of Farwell J in Borland's trustee v Steel Brothers & Co. Ltd [1901] 1 Ch 279: 'A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second ... A share is not a sum of money... but is an interest measured by a sum of money and made up of various rights...' It is also worth noting the (dissenting) judgment of Lord Russell of Killowen in Commissioners of Inland Revenue v Crossman [1937] AC 26 at 66: 'A share in a limited company is a property the nature of which has been accurately expounded by Farwell J in Borland's trustee v Steel Brothers & Co. Ltd... It is the interest of a person in the company, that interest being composed of rights and obligations which are defined by the Companies Act and by the memorandum and articles of association of the company. A sale of a share is a sale of the interest so defined, and the subject-matter of the sale is effectively vested in the purchaser by the entry of his name in the register of members.' 117 (bpp) A registered company is a corporation, i.e. a separate legal person distinct from the members, whereas an English partnership is merely the aggregate of the partners Consequently:
116 117

Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 493 A Practical Approach to Company Law, Mayson and French, Financial Training Publications (London) 1982, pp 77Page 96 of 113

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(a) The debts and contracts of a registered company are those of the company and not those of the members, whereas in the case of an English firm every partner is jointly and severally liable with the other partners for all the firm's debts and obligations incurred while he is a partner. (c) The property of a registered company belongs to and is vested in the company, so that there is no change in the ownership of, or in the formal title to, the property on a change in the ownership of shares in the company. In an English partnership, the property belongs to the partners and is vested in them. Consequently there are changes in the ownership of, and in the formal title to, the firm's property from time to time on the death or retirement of a partner or trustee. (e) Each partner is normally an agent for the firm for the purpose of the business of the partnership and, subject to any agreement to the contrary between the parties, may take part in the management of the partnership business. The members of a registered company as such are not its agents and have no power to manage its affairs -the directors are agents and managers, i.e. they have the powers given to them by the articles. 118 (bqq) One further consequence of corporate personality is that the property of the business is owned by the company, and that one does not have proprietary interest in the company's assets merely because one is a major shareholder in that company. Thus shareholders do not have a proprietary or equitable claim against the company's assets. See Macaura v Northern Assurance Co Ltd. The concept of corporate personality extends to companies in a group. The result is that each company in a group of companies is a separate legal entity possessed of separate rights and liabilities. If the shareholders or directors misappropriate the company's property they may be guilty of theft. Further, as a legal person, a company can incur delictual liability and can be prosecuted for committing crimes. The separate legal personality of a company distinguishes it from other business structures. Unincorporated undertakings, like partnerships, do not have distinct legal personality. Transactions effected in the name of an unincorporated firm benefit, and impose obligations on, the individuals whose business it is, and they are liable to be sued accordingly. Separate legal personality is one of the fundamental concepts in existence in company law but, as it is self-evident, a corporate person cannot act by itself. 119 (brr) 1. The nature of a share. S.73 provides that shares are personal property and that they are transferable in the manner laid down by the articles. S.74, as was explained in XV, 17, requires each share to be numbered, except where all the shares in a company, or all those of a particular class, are fully paid up and rank pari passu for all purposes. The remainder of the sections on shares deal with transfer, share certificates and share warrants, and will be discussed later in this chapter. None of these provisions is very helpful in telling us what a share is. It follows from S.73, of course, that a share is a chose in action, since personal property consists of chattels real (leaseholds) and chattels personal, and chattels personal in their turn consist of choses in possession (tangible things such as goods) and choses in action (intangible things such as debts, contractual rights and patents). Clearly a share is intangible, its ownership being evidenced by a document called a share certificate. But if we were to try to describe it in these terms, no-one would have much conception of what we were discussing.

118 119

Charlesworth s Company Law, G Morse, 17th Edition, Sweet and Maxwell 2005, pp 33-34 Corporate Law and Corporate Governance, Tshepo Mongalo, New Africa Books 2003, pg. 88 Page 97 of 113

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Probably the best description of a share is not given in the Act at all, but in Borland's Trustees v. Steel, (1901), by Farwell J.: "A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second." This definition indicates the true position of the member: he is under a liability to the company, namely to pay for his shares either on application, allotment, or when called upon to do so; but also he has an interest in the company which confers upon him certain rights, such as voting and dividend rights, and attendance at meetings. His interest is something he owns, so that he owns in reality a non-identified part of the company's undertaking. This is sometimes expressed by saying that the shareholders own the company, but of course no legal person can own another legal person. What the shareholders really own, collectively, is the entire undertaking of the company which, for convenience, is vested in the person of the company as soon as it is incorporated. 120 (bss) An obvious consequence of the fact that a company is a separate legal entity is that a company may own property distinct from the property of its shareholders or members. This means that shareholders do not have a proprietary interest in the property of the company. This is illustrated by Macaura v Northern Assurance Co Ltd [1925] AC 619, discussed below. Shareholders only own shares in the company. The legal nature of shares is discussed in Chapter 8 below. A change in shareholder of a company will have no effect on its ownership of assets. 121 (btt) On incorporation, the company becomes a body corporate, a legal person enjoying the historic attributes of corporate status. These include the power to sue and be sued in its own name, the right to hold and alienate its own property, and perpetual succession. It may or may not enjoy limited liability. Whether it does so will, as we have explained, depend upon the form of incorporation chosen by its promoters. As a general rule, a company is governed by directors who are chosen by the members. The directors are vested with the executive government of the company while the shareholders enjoy a residual power. But, although the shareholders are members of the company, having an ultimate power of control, and although the directors manage it, the company is a legal entity separate and distinct from its members and directors. The company holds property and enters into contractual relations with outsiders. In relation to such activities it is the company which will primarily be liable and not the members or directors. This fundamental principle was firmly established by [the famous Saloman case]. 122 (buu) The property rights view of the firm provides a powerful insight and may be a reasonable description of the way many proprietorships, partnerships, and closely held firms are organized. But it is not a theory of corporations: Corporate law is clearly not needed to achieve common ownership of assets. More importantly, the property rights view seriously misstates the nature of shareholders' interest in public corporations. If "control" is the economically important feature of "ownership," then to build a theory of corporations on the premise that ownership (and, hence, control) lies with shareholders grossly mischaracterizes the legal realities of most public corporations. 123 (bvv) In other words, corporate assets belong not to shareholders but to the corporation itself. Within the corporation, control over those assets is exercised by an internal hierarchy whose job is to coordinate the activities of the team members, allocate the resulting production, and mediate disputes among team members over that allocation. At the peak of this hierarchy sits a board of directors whose authority over the use of corporate assets is virtually absolute and

120 121

Company Law, Mary C Olivier, 2nd edition, McDonalds and Evans (London) 1967, pp 175-176 Understanding Company Law, Lipton and Herzberg, 12th edition, Lawbook Co. (Sydney) 2004, pg. 25 122 Introduction to Company Law, Leigh et al, 4th Edition, Butterworths 1987, pg. 18 123 A Team Production Theory of Corporate Law, Margaret M. Blair; Lynn A. Stout, Virginia Law Review, Vol. 85, No. 2. (Mar., 1999), pp. 260-261 Page 98 of 113

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whose independence from individual team members-as we demonstrate later in this Article-is protected by law. 124 (bww) As Berle and Means pointed out more than six decades ago, doing this and selling the pieces to a large and diverse group of individuals alters beyond recognition the basic character of the shareholders' role in a fashion that invalidates the principal agent relationship underlying the grand-design model. Berle & Means, supra note 11, at 3, 355 ("The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital.. . . [Such owners] have surrendered the right that the corporation should be operated in their sole interest. . . ."). 125 (bxx) (a) The Shareholder as Owner/Principal

The vision of shareholders as the "owners" of the corporate enterprise has an old and influential pedigree. The aggregate or partnership model of the corporation which was prevalent in the 19th century, assumed such a role for shareholders, just as it assumed a principal/ agent relationship between the shareholders as owners and their agent directors. Although the contemporary nexus of contracts theory of the corporation again speaks of a principal agent relationship between shareholders and directors, this modern reconstruction lacks the traditional hallmarks of agency that were implicit in the 19th century shareholder-centered view of the corporation. Thus, traditional corporate theory assumed that the role of directors was to carry out the will and implement the interests of shareholder, and that within standard principles of agency law, shareholders had a formal right to control their agents. The "shareholder as owner" vision under the aggregate theory was of great significance in the development of corporate law. In the US., it was used to counter the view of the corporation as a creation of the state under the restrictive concession theory; rather, the aggregate model represented the corporation as a natural and, most importantly, private organization, in which shareholders were akin to partner. Early rules, such as vested rights, under which unanimous consent of shareholders was required for any fundamental corporate change, reflected this role for shareholders within the corporate structure. Also, traditional tolerance by the courts of a low standard of skill and care in directors was based upon the assumption that the shareholders as principals should be more careful in selecting their agents. 126 The same writer goes on to comment that Increasing recognition of the separation between ownership and control in public companies - the fact that ownership of shares no longer carried the traditional incidents of property ownership -together with the triumph of the entity theory of the corporation, led to a revision of the image of shareholders in the early 20th century. 127 (byy) Shareholders, who may or may not be directors of the company as well, usually provide a particular type of finance to the company ('risk' capital) and, in return, their shares are usually thought of as giving their holders two types of right. One is to exercise ultimate control over the company, notably by selecting or removing the directors and setting the terms of the company's constitution; and the other is to receive a financial return on their investment in the shares, either in the form of a dividend when the company is a going concern or by way of a share in the assets of the company if it is wound up. In fact, the nature and extent of these entitlements can vary enormously from one company to another. The shareholders' rights are essentially a matter of contract with the company and so different companies may wish to issue shares on differing
124

A Team Production Theory of Corporate Law, Margaret M. Blair; Lynn A. Stout, Virginia Law Review, Vol. 85, No. 2. (Mar., 1999), pg. 251. 125 A Team Production Theory of Corporate Law, Margaret M. Blair; Lynn A. Stout, Virginia Law Review, Vol. 85, No. 2. (Mar., 1999), pg. 265, fn 32 126 Visions and Revisions of the Shareholder, Jennifer Hill, The American Journal of Comparative Law, Vol. 48, No. 1. (Winter, 2000), pg. 42. 127 Ibid, pg. 44 Page 99 of 113

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terms. Even within a single company, there may be more than one class of shareholder, with the different classes having different entitlements. Some shares carry voting rights at meetings of the shareholders, others not; some have an entitlement to a dividend, others do not have a claim to more than the directors choose to pay them; some shareholders may have priority over others in a winding-up, useful if there are not in fact enough assets to go around. In fact, the only substantial limit on the ingenuity of companies in formulating the rights of shareholders is the willingness or otherwise of investors to buy the shares at an acceptable price. 128 (bzz) If I take away a gadget from the factory of the corporation I am a shareholder of, I will be immediately subject to arrest as a thief. Why? Because a corporate shareholder is not the legal owner of the corporate assets. Who, then, owns those corporate assets? The corporation does, of course. It is the corporation itself as a "person" that legally owns the corporate assets. Then, what does a corporate shareholder own? The corporation, of course. It is the corporation itself as a "thing" that a corporate shareholder legally owns. A corporate shareholder is literally a holder of a corporate share, a bundle of participatory and pecuniary rights in the corporation. And to hold a share of the corporation is, unlike a partnership share, to own a fraction of the corporation as a "thing" independent of the remaining fraction and separate and distinct from the underlying assets. 129 (baaa) Property As the previous discussion will have suggested, one of the most obvious advantages of corporate personality is that it enables the property of the association to be clearly distinguished from that of its members. The corporate property is clearly distinguished from the members' property and members have no direct proprietary rights to the company's property but merely to their "shares." 130 (bbbb) Shareholders do not own the company, nor do they literally own its assets.
131

(bccc) In short, then, during the course of the nineteenth century, as joint stock company shareholders were legally reconstituted as owners of freely transferable revenue rights, they became the possessors of a peculiar bundle of rights and privileges acquired by contract but in crucial respects constituted, conferred and defined by law. 132 (bddd) It should be noted that the position in law is that the property or asset owned by the shareholder is the share itself and the residual rights and duties which it convey. Shares are a bundle of such rights and duties .133 (beee) SHAREHOLDER OWNERSHIP The first source is the popular but misleading metaphor that describes shareholders as owners of corporations. As a legal matter, the claim that shareholders own the corporation is obviously incorrect. Corporations are independent legal entities that own themselves; shareholders own only a security, called stock, with very limited legal rights. Nevertheless, the ownership metaphor exerts a powerful, if often subconscious, influence on the way many

128 129

Introduction to Company Law, Paul Davies, Oxford University Press, 2002, pg. 6 Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, Katsuhito Iwai, The American Journal of Comparative Law, Vol. 47, No. 4. (Autumn, 1999), pg. 592. 130 Gower s Principles of Modern Company Law, Stevens (London) 1985, pg. 103 131 Partnership, Ownership and Control: The impact of Corporate Governance on Employment Relations, S. Deakin, R. Hobbs, S. Konzelmann and F. Wilkinson, ESRC Centre for Business Research, University of Cambridge, Working Paper No. 200, June 2001 132 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 471 133 What Is Equity? New Financial Instruments in the Interstices between the Law, Accounting and Economics, Peter F. Pope; Anthony G. Puxty, The Modern Law Review, Vol. 54, No. 6, Law and Accountancy. (Nov., 1991), pg. 904. Page 100 of 113

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people think about corporate governance. After all, if shareholders own corporations, should they not also control them? Sophisticated observers generally avoid the trap of ownership talk. Instead, they fall prey to two other mistaken ideas. The first is the casual assumption, prevalent in the economic literature on agency costs, that shareholders are the principals in public corporations and that directors are shareholders agents. But as corporate law experts have pointed out, the agency metaphor misstates the real legal status of shareholders and directors. At law, a principal has a right to control her agent. Directors are not agents but fiduciaries largely insulated from shareholders control, and they owe duties not just to shareholders but also to the firm as a whole. The other mistaken idea that often influences experts is the claim that shareholders are the sole residual claimants in corporations. Again, as a factual matter, this is patently incorrect. In a public company, the board of directors controls both dividend payouts and corporate expenses (meaning the board controls whether the corporation s books show any earnings ). This means that shareholders are unlikely to receive, and certainly are not legally entitled to receive, every penny of revenue received by the corporation that is not obligated to be paid out on some formal contract. Rather, while shareholders may share in the wealth when the corporation does well and suffer when the firm does poorly, so may employees, creditors, and other stakeholders. Director discretion means that many different groups are potential residual claimants and residual riskbearers in public firms. Thus, none of the three phrases commonly used to describe shareholders relationship to the public corporation whether as owners, principals, or sole residual claimants is factually correct. Nevertheless, all three give the idea of greater shareholder control an emotional appeal that ignores the realities of business law and practice. 134 (bfff) If I take away a gadget from the factory of the corporation I am a shareholder of, I will be immediately subject to arrest as a thief. Why? Because a corporate shareholder is not the legal owner of the corporate assets. Who, then, owns those corporate assets? The corporation does, of course. It is the corporation itself as a "person" that legally owns the corporate assets. Then, what does a corporate shareholder own? The corporation, of course. It is the corporation itself as a "thing" that a corporate shareholder legally owns. A corporate shareholder is literally a holder of a corporate share, a bundle of participatory and pecuniary rights in the corporation. And to hold a share of the corporation is, unlike a partnership share, to own a fraction of the corporation as a "thing" independent of the remaining fraction and separate and distinct from the underlying assets. 135

33) For those who have managed to correctly conceptualise the company as a separate person, having the capacity to own its own assets, it follows as a logical step to conclude that there is no precedent for such a concept in the Shari ah. We were pleasantly surprised to find western writers confirming this. A few examples follow. (ca) "The notion of a "legal entity" (also a juristic person or an artificial person ) is one without a uniform meaning. This is an abstraction of convenience regarded by the law as a distinct being, having an existence independent of those who create or own it." 1 What bodies other than a natural person have legal personality or existence is for each legal system to
134

The Mythical Benefits of Shareholder Control, Lynn A. Stout , UCLA Law School. Lynn A. Stout is the Paul Hastings Professor of Corporate and Securities Law and principal investigator for the UCLA-Sloan Research Program on Business Organizations, UCLA Law School. 135 Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, Katsuhito Iwai, The American Journal of Comparative Law, Vol. 47, No. 4. (Autumn, 1999), pg. 592. Page 101 of 113

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determine 2 In English law, ships, building societies or companies are persons, in Indian Law, Hindu temples may have legal personality, in American legal usage legal entity or "person apply to a wide variety of organizations. These legal terms, and, more importantly, the concept they denote, are absent from Islamic legal theory. Joseph Schacht summarized the phenomenon succinctly The concept of corporation does not exist in Islamic law (neither does of a juristic person). "136 ------------------1

David Mellinkoff, Mellinkoff's Dictionary of American Legal Usage (St Paul, Minnesota: West Publishing Company, 1992) p 479 2 David Walmer, The Oxford Companion to Law (The Clarendon Press, Oxford. 1980), p 949 See also Henry Black, Black s Law Dictionary (St Paul, Minnesota: West Publishing Company, 1979), p 804 3 Mellinkoff, Mellinkoffs Dictionary, p 480

(cb) "The Shari a did not acknowledge the existence of a juristic entity distinct from the persons of partners in a partnership or from the members of an organisation or institution. The idea that a partnership (as conceivable in civil law and the modern laws of the Arab countries) and the idea that a company may be considered as a juristic person did not develop among Muslim scholars until recently under the influence of Western laws."137 (cc) "But where the Shari a differs with secular law is in the fact that the Shari a never envisaged the dhimma bestowed on a non-human being as a device intended to provide a shield against liability or as a corporate veil meant to protect members from liability. Thus a Muslim ruler remains, in an ideal world, fully and personally accountable for the State s finances, despite the fact that a dhimma is acknowledged to the beit al-mal (Public Treasury). In the case of a waqf it was resolved in Shari a that if a waqf is condemned to the payment of damages owing to the commission of a tort involving that waqf, the beneficiaries, and not the waqf, have to bear responsibility for the payment of such damages." 138 (cd) The nature of the liability in the various forms of Islamic partnership is distinguishable on the basis of jointness and severalty and not on its limitation or non-limitation . The capital of a partnership governed by the Shari a and the respective shares of the partners in that capital, are intended to delineate the ambit and scope of the powers of attorney granted by each partner to the other(s). That capital is not the borderline of the liability of the partners vis--vis third parties. 139
(ce) Classical Islamic law recognizes only natural persons; it does not grant standing to

corporations.

140

(cf) While discussing a topic unrelated to ours, i.e. a comparison between the Madrasah and the university, the author mentions: "There is another fundamental reason why the university, as it developed in Europe, did not develop in the Muslim East. This reason is to be found in the very nature of the corporation. Corporations, as a form of social organization, had already developed in Europe. Their legal basis was to be found in Roman Law which recognized juristic persons. Islamic law, on the other hand, does not recognize juristic persons. It recognized the physical, natural person as the only juristic person; and therefore, a corporation, as a fictitious legal person, as an entity with interests recognized and secured by the law, as a group which, in the

136

Communal Legal Entities in a Muslim Setting Theory and Practice the Jewish Community in Sixteenth-Century Jerusalem, Amnon Cohen, Islamic Law and Society, Vol. 3, No. 1. (1996), pg 75. 137 Arab International Corporations: The Impact of the Shari a, Nabil Saleh, Arab Law Quarterly, Vol. 8, No. 3. (1993), pg. 180. 138 Ibid pg. 181 139 Ibid pg. 182 140 The Absence of the Corporation in Islamic Law: Origins and Persistence, Timur Kuran, Department of Economics, University of Southern California. Pg. 1 Page 102 of 113

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contemplation of the law, has an existence independent of its individual members, such an entity is totally foreign to Islamic law and to the Islamic experience in the middle ages. "141 34) The fact that the Shari ah does not recognise a juristic person has not evaded some prudent western scholars. On the other hand, some Ulama claim that the concept is to be found in the Shari ah, although not by the same name. The error of their claim is founded on a misunderstanding of what a juristic person is. To assist them, we would provide a few more authoritative references which amply describe this person to us. We are confident that once this abstraction is correctly recognised, the claims of these Ulama would disappear into thin air. Hereunder follow some references. (da) "When the personality is described as a fiction of the law, the novice might suppose that no more was meant than that the corporation was not a man. Were this the case there would be no need for controversy. What is meant, however, appears to be that the corporate personality has no existence beyond that which the State chooses to give it."142 (db) "A corporation aggregate is an abstract being or a metaphysical body, and something altogether distinct from the aggregate of the individual members, a much as they are from the rest of her Majesty s subjects."143 (dc) "Savigny in Germany, in the first half of the nineteenth century, began the scientific or metaphysical consideration of the subject. He observed the fact that property belongs in law to a corporation and not to any individual, and the question which he put to himself was: Who or what is the real owner of this property? With this question theoretical writers in Germany and elsewhere have ever since busied themselves. Savigny's answer was that the corporate property belonged to a fictitious being and not to any real person or entity. He took as his starting-point the proposition that ownership involves the possession of a will by the owner; and he concluded that inasmuch as a corporation does not really possess a will, it must as a property-owner be a fictitious person. At the same time, as an acute French writer has demonstrated Savigny and his followers, paradoxical as it may seem, impute a certain reality to this fictitious person. For instance, they speak of it as created by the state."144 (dd) Technically speaking, in a simple partnership every time there is a change of a partner a new partnership is created. This is so since the partnership is an aggregation of the partners that make up the partnership. However, this is not the position of a company. The company exists impendent of its shareholders, and does not change when the shares change hands. In the words of Machen "[t]his may he demonstrated mathematically. Suppose a corporation composed of two members, a and b. Let c = the corporate entity. Now, if the corporate entity is merely the equivalent of the sum of the members, then c = a + b. Now, suppose b to assign his shares to d, then c = a + d. But this cannot be unless b is the same as d, which is absurd. Therefore, c, the corporate entity, is not equivalent to the sum of the members."145 35) From the aforementioned it would be evident that the Shari ah does not recognise the artificial person. Thus, trading in shares fails on its first leg. The very concept it rests upon is a fiction that has no accommodation in the Shari ah. The votaries of permissibility were themselves compelled to concede this, albeit unwittingly.

141 142

Madrasa and University in the Middle Ages, George Makdisi, Studia Islamica, No. 32. (1970), pg. 264. Entities and Real and Artificial Persons, W. E. Singleton, Journal of the Society of Comparative Legislation, New Ser., Vol. 12, No. 2. (1912), pg. 293. 143 Ibid pg. 294 144 Corporate Personality, Arthur W. Machen, Jr., Harvard LawReview, Vol. 24,No. 4. (Feb., 1911), pg. 255. 145 Ibid pg. 259 Page 103 of 113

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However, the matter does not end there. Even if we had to, for the sake of argument, postulate its validity, then too this would be of no help. The permissibility theory would fail on its second leg. It is this leg that we wish to now examine. With the correct picture of the company before us, we may now proceed to analyse the trading in shares in the light of the substantive law of Shari ah. To do this, let us firstly consider possible pathways by which cash could yield cash. If A were to give B cash and expect cash in return, this could follow one of four avenues.

Actual notes/coins returned Ownership maintained Cash Return on investment

Equal value replaced Ownership lost Unequal value paid

I. If A gives B cash and expects the return of the actual notes/coins, this is termed as amaanah (holding in trust). A retains ownership of the form and value.

146

II. If B acts as an agent of A and undertakes any one of the Sharee accepted forms of investment, the return of the cash together with the profit would be acceptable. The important requirements are (a) A should maintain ownership of the cash once handed over to B, (b) A should have ownership (in part or in full) in any asset acquired with the cash, and accordingly bears the risk of the asset (c) B should act as an agent of A, (d) A shares in both the profit and loss of the entire venture, and (e) A receives a pro rata share of the profits.

146

Known in Roman Law as depositum irregulare. Page 104 of 113

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Common examples of these forms of investments are Mudhaarabah and Mushaarakah. III. If B becomes owner of the cash received and is required to replace its equal value, it would be known as a loan147. Money is a replaceable thing148. If upon handing over the cash A looses ownership thereof, it cannot be any of the former two. This is what distinguishes a loan from the former two. The importance of the ever decisive factor of ownership cannot be overemphasised. IV. If B acquires ownership over the cash and is required to replace a value unequal to that received, this would be a usurious149 loan Riba. With the above introduction in mind, let us apply these principles to the case of shares. The cash given to acquire the share does not remain in the ownership of the shareholder; rather it becomes an asset of the company. If that cash in converted into tangible assets, the assets belong to the company and not the shareholder. The company is not an agent of the shareholder. The shareholder does not carry the burden of risk of the company. As will be shown further on, Insha-Allah, the shareholder does not share in the actual profits of the company. Since the company acquires ownership of the cash, it becomes a loan. Since the amount repaid is unequal to the amount given, it would be Riba. It should be evident to the astute reader that the issue of ownership is fundamental in this analysis. An Islamic investment is asset based and not equity based. It is precisely for this reason that we had been harping on the issue of whether or not the shareholder owns the assets of the company. It is also for this reason that the proponents of permissibility conveniently did not see the truth even if it was bare before their eyes. Earlier on we gave an example150 of Bakr, and demonstrated the concept of a company through this example. Instead of providing a clear cut ruling on the example, the issue was confounded by asking why the system is set up in this manner151. Applying the principles to the example would have produced the result that such an arrangement is Riba. The Mufti Saheb knew this, hence the issue was surreptitiously avoided. In the final analysis, dealing in shares is Riba and Haraam. The Hadith is emphatic:
152

Every loan that draws a gain is Riba To this we may add another dimension. Riba applies when the transaction is designed to provide a fixed and definite unequal payment in lieu of the loan. However, here the return is not certain, but rather uncertain and dependent on an uncertain future event. You would recall we had quoted the following text:
147 148

In Roman Law this is referred to as mutuum. The Latin term is res fungible. Even in secular law, money is a res fungible (Commissioner of Customs and Excise v Bank of Lisbon International Ltd. 1994(N)) 149 This word is not used in the meaning of exorbitant gain, rather in the meaning of any tangible gain, whatsoever be its nature. 150 See pg. 3 151 See pg. 3
152

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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.153

The shareholder does not have a right to the profits of the company, but it belongs to the company itself. If thereafter the company wishes to declare dividends, then only do the shareholders have a right to such dividends. This is dependent on the Board of Directors. It often happens that no dividends are declared despite the fact that the company made a profit. Hence the shareholders right to receive something is dependent upon the uncertain future event of the Board of Directors decision. Before such a decision there is no right. Couple this with the Shar ee concept of Qimaar (gambling). Qimaar could be described as: a) A person making a contribution, with a b) legally enforceable right to a return, such right being c) suspended on an uncertain future event. Hence applying this leads us to the conclusion that investing in shares is a form of Qimaar (gambling). The prohibition is hence twofold -- Riba and Qimaar. While the evidence appears in black and white, the votaries are expediently blind to it.

Or as darkness on a vast abysmal sea. A wave covers him, above which is another wave, above which is a cloud. Layer upon layer of darkness. When he holds out his hand he can barely see it. And for whom Allah has not appointed light, there is no light for him. (Al Qur aan) 36) A question that is surely lingering in the mind of the reader is: What is a share ? What does a person purchase when he buys a share ? The term share is a word used to refer to the rights that a shareholder acquires upon purchasing it. These rights are in essence three154: A) The right to declared dividends. As explained above, this should not be confused with a right to a fraction of the profits of the company. The two entities are quite apart. It is also significant that other creditors have a right over all the assets of the company, including undeclared profits. The shareholder, however, has no such right. B) The right of control over the company by way of voting rights at shareholder meetings. The efficacy of this measure of control is a matter of debate. Some writers consider it a myth155. This is a discourse beyond the scope of our present discussion. C) The right to whatever is left over after liquidation. The shareholder is called the residual owner. Once again, it is an issue of debate whether the shareholder has any meaningful right, a debate also beyond our scope. And once again, some writers consider it a myth.156

153 154

See pg. 3 See appendix A, pg. 582 155 See The Mythical Benefits of Shareholder Control, Lynn A. Stout , UCLA Law School. 156 See The Myth of the Residual Owner: An Empirical Study, Lynn M. LoPucki, Security Pacific Bank Professor of Law at the UCLA School of Law. Page 106 of 113

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Package these three rights together and you have what is called a share . Contrary to the common misconception, the term share in the context of the modern company does not mean a fraction or portion . It has a technical connotation in respect to company law. It is this bundle of rights that is traded, and which secular law calls property. It is this bundle that is, in the words of some, owned. This may sound strange to the Ulama, as the Shari ah does not recognise creditor rights as property. Hence this needs to be put in perspective. Initially, secular law associated ownership with tangible items. Thereafter, the scope broadened, and even intangible items became things . Until the nineteenth century, property tended to be conceptualised as concrete, tangible objects: the prevailing conception was, in the words of one writer, physicalist . However, with the growth in these new, intangible forms of wealth and of markets for them, there was a consistent tendency toward generalisation and abstraction of the idea of property , as a result of which the old physicalist conceptions derived from land were displaced. Property was increasingly defined much more broadly to embrace not only tangible objects, but anything with exchange value: it was, so to speak, dephysicalised, though this was masked by the tendency to reify every thing to which the label property was attached. 157 In terms of secular law, when one person owes another a sum of money, this incorporeal right to receive the money is called property , as is also referred to as creditor s right . In ordinary language usage the term property includes a wide variety of assets that make up a person's estate or belongings and which serve as objects of the rights that such a person exercises in respect thereof and which are constitutionally protected (see chapter 1 above). An important part of a person's assets is tangible and perceptible, for instance a car or a house. There are, however, also assets that are not tangible or perceptible but which are, nevertheless, part of a person's assets, for instance an amount of money owed in terms of a contract (creditor's right) 158 Being property, it is also tradable, i.e. one may buy and sell this right. Hence we have the concept of securitisation. A debt receivable is sold in the secondary market. For example, one gets a retail market for bonds, and a wholesale market. A person finances his house through a retail bank, or retail bond provider. This person now owes the bank a certain sum, payable over a certain period. Furthermore, the debt is securitised, i.e. there are back-up measures to ensure that the bank will receive its dues, e.g. by repossessing and selling the house. Once this debt is secured , the retail bank may sell it to a wholesale market. In simple terms, the money that is going to be paid in the future to the bank is sold by the bank to another financial institution, in most cases for a lesser amount by immediate. Hence, a debt receivable is a tradable commodity in secular law. A share in a company falls into the same category, i.e. it is a debt receivable. In the widest sense, a person s property may include the following assets: (e) Shares in a mining company (shares are creditor s rights against the company).
159

157 158

Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 487 Introduction to the law of property, Pg. 13, third edition, Van der Walt and Pienaar, Juta and Co. 1999 159 Ibid pg. 26 Page 107 of 113

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In Cooper v Boyes NO 1994 (C) it was decided that shares in a company, which provide the shareholder with a claim against the company, are incorporeal things. For the purposes of the law of property it therefore forms part of the shareholder's estate (or property) although it is neither tangible nor perceptible. The shareholder can utilize the shares (as incorporeal things) as objects in various ways. She can, for instance, grant a usufruct in respect of the shares, that is, the shares (creditor's rights against the company as incorporeal things) can be the objects of a limited real right (usufruct) 160 Nowhere is the legally constructed nature of property and property rights more apparent than in the case of the intangible forms of wealth, like the joint stock company share, which began to proliferate in the eighteenth and nineteenth centuries, for these forms of property do not involve rights over concrete things whose existence as objects is independent of law. On the contrary, there is no tangible thing to act as an object of property in these cases, for these forms of wealth consist primarily of income rights, hence their original classification as choses in action. In these instances the objects of property themselves are legal constructs. Moreover, as we have seen, for the bundle of rights comprising the joint stock company share to become fully autonomous objects of property, they had to be socially and legally constructed in very particular ways. This entailed more than just a permissive legal endorsement of commercial practice and the private , contractual arrangements that it spawned: IS3 it required processes of asset partitioning and decontractualisation. Before they could become property in their own right - things capable of freely circulating in the marketplace - the rights making up the share had to be transformed by courts and legislature into unencumbered, personality-poor, freely assignable bundles. This demanded their severance from obligation and responsibility, and the erosion of their original contractual, personam nature. This was a fundamentally public process and a controversial and overtly political one too, involving the promotion of very particular interests and important derogations from traditional notions of contractual obligation and individual responsibility: while obligations and responsibilities were shed, income and residual control rights were retained. In the words of the Edinburgh Review, the acts of parliament which offered corporate (and other) privileges to companies and shareholders qualif[ied] and dispense[d] with the general law . 161 It is also significant that the one buying the shares is called a shareholder . In the technical language of the law, one is a holder of a right, and an owner of a thing.162 This further emphasises that in buying a share one is purchasing a right. In terms of Shari ah, the trading in a debt receivable is nothing other than Riba. This then is the reality of this entity called a share . 37) Thus far we have concentrated on just two legs of the topic, firstly the juristic person and secondly the Riba and Qimaar aspect of the transaction. There are many other problematic issues around trading in shares, for example the so called screening process, etc. We do not see the need to go into these discussions at present since the trading in shares has already been proven to be Haraam. 38) Annexures We are attaching three valuable articles that have significant bearing on the topic under discussion. Annexure A: The Doctrinal Basis of the Rights of Company Shareholders
160 161

Ibid pg. 15 Property and contract in contemporary corporate theory, P. Ireland (2003) 23 LEGAL STUDIES pg. 492 162 Casebook on the law of succession, pg. 215, Cronje and Roos, 4th edition, Unisa press, 2002. Page 108 of 113

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Annexure B: Company Law and the Myth of Shareholder Ownership Appendix C: The Conceptual Foundations of Modern Company Law A brief outline of each follows. Annexure A: The Doctrinal Basis of the Rights of Company Shareholders163 This article is by Ross Grantham, who at the time was a senior lecturer at Auckland University. He investigates the basis upon which the shareholders have the rights and duties which they do in law. In other words, why do they deserve these rights, and what is the purpose for imposing upon them the duties that they do possess? He analysis the historical development of the company, and points out that initially it was ownership that gave the shareholder his rights. However, since the shareholder is no longer the owner of the company, this basis falls away. (pp 554-564) He traces how the powers of the shareholder were step by step diminished. (pp 573-575) He tries to find a new doctrinal basis for shareholder rights. (pp 578-582). In this light he considers the proposition of ownership of the share (not assets) as a possible basis. Significant to our discussion, he explains what ownership of the share entails. It affords the shareholder three rights: a) Income by way of dividend, b) Residue capital upon winding up, and c) The right to vote at shareholder meetings. (pp 582-583) It comes out clear that the shareholder has no right to the assets of the company. Annexure B: Company Law and the Myth of Shareholder Ownership164 After having prepared most of this reply, by the grace of Allah Ta ala we came across this article, which brought two Ahadith to mind.
165

A wise word is the lost property of a believer, and he is more rightful to it wherever he may find it.
166

Surely Allah Ta ala (at times) assists this Deen through a sinful person.

163 164

The Cambridge Law Journal (1998), 57: 554-588 Cambridge University Press The Modern Law Review, Vol. 62, No. 1. (Jan., 1999), pp. 32-57 ( (
165 166

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The article is by Paddy Ireland.167 As the title suggests, he demonstrates that the notion of the shareholder having ownership is a myth. However, more significantly he discusses usury. (pp 3438) Interestingly, he identifies usury to be a money-money cycle, very much in line with the definition of Riba. He then articulately exhibits that the shareholder is very similar position to the money lender. This is contrasted with the cycle in which the investor owns the assets, and shares in the proportionate risk. What is striking is that although he makes no reference to the Shari ah, he is indirectly enunciating Shar ee concepts in terms of legal language. He refers to the shareholders as money capitalists . The article goes on to explain that a share is simply a term used to refer to a bundle of rights. These rights are threefold: a) A very limited say in the running of the company in the form of voting rights. b) Right to declare dividends c) Residual rights He aptly describes the shareholders as racegoers placing their money on financial runners . (pg. 52) On the whole the article is a must read on the topic, and the writer, not by coincidence, managers to knock the nail on the head. While emphasizing the value of this work, in the same breath caution has to be drawn to the fact that our conclusions do not rest solely on this work, hence our adversaries should not discount our evidences as one man s theory . It should be read in conjunction with the numerous other sources cited. Appendix C: The Conceptual Foundations of Modern Company Law168 By: Paddy Ireland; Ian Grigg-Spall; Dave Kelly The determinant and oft-confusing term share is discussed, and its application traced. It is shown that in the past the share did represent a direct ownership in the assets of the company. (pg. 152) Its evolution is then followed, and it is demonstrated that it no longer represents ownership in the assets. (pg. 153) It is exhibited that the share is just one form of fictitious capital, or in simpler terms, debt receivable. A shareholder, by selling his share, is selling his title to revenue (pg. 158) 39) We have now completed our explanation for our ruling of impermissibility of trading in shares. As previously indicated, we wish to round off with some comments on this debate.

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Paddy Ireland is Professor of Law and Director of Research at Kent Law School. Prior to joining KLS in 1980 he taught at Osgoode Hall Law School, Toronto and the University of Hull. He was Head of Department at KLS in 19931996 and 1999-2002. In Canterbury, he teaches the undergraduate module on Company Law and the postgraduate module on Corporate Governance. Ireland has written extensively on the historical development of company law, corporate theory and contemporary corporate governance. His work seeks to challenge prevailing orthodoxies and to prompt company lawyers into greater critical self-reflection about the generally unstated and unexamined purposes and assumptions underlying their discipline. His recent publications include 'Company Law and the Myth of Shareholder Ownership,' (1999) 62 Modern Law Review 32, 'From Amelioration to Transformation: Capitalism, the Market and Corporate Reform', in J Conaghan, M Fischl & K Klare (eds), Labour Law in an Era of Globalization (Oxford: OUP, 2001), 197, 'History, Critical Legal Studies and the Mysterious Disappearance of Capitalism', (2002) 65 Modern Law Review 120, 'Property, Private Government and the Myth of Deregulation', in S Worthington (ed), Commercial Law and Commercial Practice (Oxford: Hart, 2003), 85, and 'Property and Contract in Contemporary Corporate Theory', (2003) 23 Legal Studies 453. 168 Journal of Law and Society, Vol. 14, No. 1, Critical Legal Studies. (Spring, 1987), pp. 149-165. Page 110 of 113

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40) Mufti Saheb, please understand that there is nothing personal in this debate. We regard you as a colleague and friend. However, we are in enmity with Riba. It is our hope and desire to save our Muslim community from Riba. It was in this light that we revisited the issues of shares, and in all honesty and sincerity we found it to be Riba. However, as a matter of fairness we tried to approach some of the Ulama who support the permissibility of shares. As you are aware they did not respond. We are pleased that you at least took up the issue and attempted to try and persuade us, albeit unconvincingly. Had it been a personal matter, we would not have gone around knocking at the door of different Ulama. It just so happened that you were the only one to open the door. You may be aware that for a number of years we have been running the "Shari'ah Compliant Business Campaign". At these gatherings, and through our website, we have been emphasising that our business community in particular, and our larger community on the whole need to focus on their source of income. This is the seed from which good actions emanate, and this we feel is an aspect which, if corrected, would be a means of the ummah turning a new leaf and reforming. It is with this spirit and intention that we had raised the issues. 41) Mufti Saheb, life is too short and we are getting closer to the Qabr every moment. If in this temporary life of ours we can convert just one person from Haraam income to Halaal, we feel it is a lifetime of effort well spent. In this short lifespan we have no time to create ill feelings and produce enemies. Our vision is our najaat (salvation) in the Aakirah. However, if in the process of telling the truth some people are offended, we cannot hold back for them. We sincerely make Dua for their Hidayah, and hold no personal grudge against them. 42) Mufti Saheb, please forgive us if any strong words were used. Understand that they were not directed to you in person. We are just one small voice fighting a war against this massive tide of Haraam undertaken in the name of Islam. With our limited resources we are facing a gigantic international industry who can afford to spend millions on spin-doctors to give an Islamic hue to their schemes. When one is facing such a large enemy and is outnumbered, one has to remain strong and firm. It was in this spirit that firm language needed to be used. Please forgive us for any shortcomings from our side. 43) Mufti Saheb, this debate has been going on for long, and we had hoped it would have been settled by now. We feel it is now time to inform the public of our position, and leave it up to them to practice thereupon. Our conscience does not allow us to hold on for so long in the hope that we could possibly be convinced otherwise. We have said this repeatedly, and we continue to say so: We are grateful to you for at least trying to interact and debate the issues. May Allah Ta'ala reward you in both the worlds, and may he save you and us from the trials of this world and the next. Please also remember us in your kind Duas. 44) We would like to conclude with some advice to the reader of this correspondence. As you have observed, we have made numerous attempts to engage the Ulama on this issue, but sadly they did not want to discuss the matter. May Allah Ta'ala guide them all. 45) While Mufti Ashraf Saheb did correspond with us, we were not the least convinced by his arguments. This has been laid bare before you to judge for yourself. We have been involved in the field on Islamic commercial issues for some time now. It is our observation that it is impossible for these Ulama to retract from their positions. May Allah Ta'ala forgive and guide them. How does one remove the foundation from a hundred-storey skyscraper? Without producing mass scale tumult and a war it would be impossible. Billions of dollars has already been invested in this avenue, all in the name of Islam. The "Islamic Unit Trust" industry is simply too big, and the momentum it has gathered is too great that it may be stopped by these Ulama. It would be simply too embarrassing for these Ulama to go back to their bosses and say: 'Sorry we made a mistake. Please forgive us.' This is something too difficult, and we don t think
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you will ever see it happening. What we foresee is some fanciful engineered and contrived interpretation to suit the verdict of permissibility. While this is our conviction, we would be happier to be proven wrong than to be proved right. 46) We have no doubt that you will be pounded with this line of argument: So and so has approved shares. How can you say he is wrong? In reality this is no argument. A chain is only as strong as its weakest link. While the one link may be as solid as a rock, this would be of no avail if another is frail. The chain must fail. The conclusion we have drawn is not dependent on the Mufti who is making the ruling, rather it is constructed on a logical train of thought. One link follows the other. Furthermore, we are ever willing to consider any counter arguments. On the other hand, the contention presented to us is based on a misunderstanding of the reality of the company. This is the weak link. Now while the Ulama who follow this view may be famous and pious, and their fame and piety could be viewed as a strong link, it is not sufficient to complete the argument. This is no substitute for the weak link the misunderstanding that exists. Let us illustrate this from another angle. In worldly issues, even a Nabi can make an error in judgement. The fact that he is a Nabi of Allah does not make the error correct. If a Nabi of Allah has to sit as a judge in a case, he is bound by the evidence presented to him. He has to rule in accordance with the facts before him. If perhaps one party presents a false witness and the Nabi is not aware of this, he will rule accordingly to the testimony of this false witness. This however does not justify the falsehood. The wrong does not become right. The one who presented the false witness cannot sit back snug and say that a Nabi has ruled in my favour. If he knows he is wrong, he is deceiving no one but himself. In a hadith Rasulullah has said:

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I am only a human being. You sometimes bring your disputes before me. Perhaps some of you are more articulate in presenting their case than others. I may rule in his favour in accordance with the evidence I have heard. However, (whoever knows he is wrong and) I rule that he is entitled to the wealth of his brother, he should not take anything from it. I am only apportioning a piece of hell for him. Who can deny the position of Rasulullah . Yet his error in judgement does not justify the wrong. His high position is no substitute for the error. In the same light, no matter how senior the Mufti may be his seniority is not a substitute for a weak argument. His misunderstanding does not make the wrong right. 47) The argument that the shareholder is the owner of the assets of the company is so crass that it cannot be entertained. Your average lawyer or accountant will be able to tell you that it is trite law that the assets belong to the company. This debate has exposed this vital flaw. As the saying goes: You cannot fool all the people all the time. While the respected Mufti Saheb was the unofficial spokesman for the advocates of permissibility, he actual did them a disservice. The general front adopted by these Shari'ah Boards is to pretend all is fine. If one is able to put up a
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straight face and act that all is fine, the gullible Muslim public will fall for the faade and false image. They just see the words "Halaal" or "Shari'ah Compliant" and fall headlong to accept the label. The general masses are not circumspect; hence full advantage is taken of their naivety. This debate has ripped aside this veil, and it is for this reason that these Boards are not happy with the respected Mufti Saheb. Their lament is that previous to this debate the public was not aware of the shallowness of their position. The emptiness has now come to the fore, and is open for all and sundry to see. They were better off adopting silence, for then the public could assume that they could possibly have had some good arguments. 48) This issue cannot be settled on possibilities. The call they make to the public is that since there are Ulama who say it is permissible, one must just assume they have their reasons. While we cannot deny that it is possible that have goods reasons, until and unless those are not presented and tested we cannot simply rely on assumptions. An assumption is a like a vacuum, it has no substance. Do not be fooled into thinking that since so and so Maulana or Mufti may be pious, it is disrespectful to differ with him. Respect is a separate issue and sound arguments are a separate issue. The two should not be confounded. One is not the replacement of the other. 49) With a very painful and sore heart, we would like to address you the reader. The arguments of both sides are before you. Most of you are well-read and learned. Some of you are professionals, or have easy access to lawyers and accountants. You could verify the strength of our proofs. Now with what conscience are you going to invest in these schemes? Does your moral sense permit you to devour Riba, and that too in the name of Islam? Do your scruples allow you to fill your belly with fire? Do you feel comfortable in feeding your children Haraam? Do you feel at ease investing in Oasis / AlBaraka / Fraters equity funds? Can you with confidence say that the returns are Halaal? Now that you have been educated, will you be able to answer in the Court of Allah Ta'ala for your actions? It is with a deep pain in the heart that we beg of you these questions. And our duty is only to convey. 50) Lastly, I wish to express my appreciation to the members of the Daarul Iftaa who provided all the references. May Allah Ta ala reward them. Request for Duas. Was salaam Mufti Ebrahim Desai

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