Debate On Shares

The Debate on Shares
Page 1 of 113

Page 2 of 113
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 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
Page 3 of 113
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.
Page 4 of 113
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.
Page 5 of 113
March 10, 2006 From DI to Ml. Joosab
From: Daarul Iftaa Desk One

To: 'Shoayb Joosab'

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

1
{Maulana Shoayb Joosab Saheb is: Shariah Supervisory Officer at ABSA Bank, Former Shariah Supervisory Officer
of AlBarakah Bank; Former Shariah Supervisory Officer of Wesbank Islamic Finance; Member of Shariah Board of
Takafol SA; Member of Shariah Board of Malawi Islamic Bank; Former Chairman of Frater Advisory and Supervisory
Board; Author of "Unit Trusts"}
Page 6 of 113
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 Suliman
2
[Thereafter was attached a few fatawa from the AskImam site]

2
{Ml. Ahmad Suliman Saheb serves on the following Shariah Boards: Takafol South Africa; Fraters Asset
Management ; Old Mutual ; Malawi Islamic Bank, and Academic Advisory Committee of Islamic Finance Institute of
Southern Africa}
Page 7 of 113
April 3, 2006 from MA
3
to DI

3
{Mufti Ashraf Quraishi Saheb is from Pakistan. He is: Head of the Daarul Iftaa of Jameah Mahmoodiyah, Springs;
Chairman of Takafol SA Shariah Board; Chairman of ABSA Bank Shariah Board; Member of Fraters Shariah Board;
Member of Old Mutual Shariah Board; Academic Advisory Committee of Islamic Finance Institute of Southern Africa}
Page 8 of 113
{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
Page 9 of 113
April 19, 2006 from DI to MA

{The Urdu is the same as the English}
Page 10 of 113
April 23, 2006 from MA to DI

Page 11 of 113
{Translation supplied by DI}
Topic: Limited Liabilities
Respected Mufti Ebrahim Desai Sahib Mad Zhilahu al-Aali
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.
Page 12 of 113
The issues of limited liability as well as that of ownership are important in shares. In the Shari 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 ownership 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
Shari ah and there are no absolute limitations in Shari ah in that regard.
Attached is a detailed article on limited liabilities by Mujlisul Ulama. I hope you will go through it
and let me have your response. Jazaakumullah, it is always a pleasure to engage in academics with
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
Page 13 of 113
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.
Page 14 of 113
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
Page 15 of 113
May 5, 2006 from DI to MA

{Translation by DI}
Respected Mufti Ashraf Sahib Mad Zhiluhu
Page 16 of 113
We received Mufti Sahib s fax dated 5/4/1427 in accordance to 4/5/2006. Jazakumullah Khairah
1. My original question was that is it possible for something besides Allah and the owner to
possess ownership? Mufti Sahib is requested again to turn his attention to this question.
If the position of share in the stock exchange is of a partnership, then the loss and gain have
the position of the foundation in a partnership. The partnership cannot exclude itself from
the partnership of gain and loss. If a partner makes a condition of not sharing the loss, is
such a condition valid?
2. The Fuqaha have stated that the rulings of an insolvent person are in accordance to the laws
of a debtor.
Jazakumullah Khairah
Wasallam,
Ebrahim Yusuf Desai
May 5, 2006 from DI to Ml. Joosab
From: Daarul Iftaa Desk One [mailto:alinaam@inMail24.com]
Sent: Friday, May 05, 2006 10:49 AM
To: 'Shoayb Joosab'
Subject: RE: [Spam Bayes=93,44] Fw: Request
Muhtaram Maulana,
Jazakallah for your email.
I think I should inform you that my investigation into the issue of limited liability and the status of public
companies was under the instruction of my honourable Ustaad Mufti Ebrahim Desai Saheb. It is not a solitary
position different from that of Mufti Ebrahim Desai Saheb. After deliberating on the issue, we at the Daarul
Iftaa all saw the need to review our previous position. It is in this light that we have attempted to engage
other Ulama on the issue.
The general response we have had is that the protagonists of the view of permissibility have no sound
answers (in the majority of cases no answers at all), convincing us that we should retract our previous
fatawa. It is sad to note some Ulama find it difficult to accept the truth even after realizing that they have no
basis for their views. May Allah Ta ala save me first, and all of us from such takabbur.
The only exception was the response of Mufti Ashraf Saheb, which is much appreciated. The discussion is
presently ongoing, and we look forward to the outcome.
After our investigation is finalized, should the need arise we will make a public retraction of our previously
issued fatawa.
I would like to once again express our appreciation for you raising such matters.
And Allah Ta ala knows best.
Was Salaam
E. Vawda for Daarul Iftaa
Checked and Approved: Mufti Ebrahim Desai
{Fax of MA to DI, dated 9 September 2006, is missing from file}
Page 17 of 113
September 11, 2006 from DI to MA
17 Sha baan 1427
11 September 2006
Muhtaram Hazrat Mufti Ashraf Saheb, Sallamahullah
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.
Ebrahim Desai
{Email of MA to DI, dated 11 September 2006, is missing from file}
19 Sha baan 1427
13 September 2006
Muhtaram Hazrat Mufti Ashraf Saheb, Sallamahullah
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
Page 18 of 113
then arises as to, in terms of Shariah, how we classify the dealing in shares. We await your
response.
Request for Duas.
Ebrahim Desai
22 Sha baan 1427 / 16 September 2006
Muhtaram Mufti Ashraf Saheb (Sallamahullah Ta ala)
Once again I must express my appreciation that you are at least discussing the issues, unlike others
who do not even attempt to do so.
In the letter of 3 April 2006 a number of simple and basic questions were posed around companies.
Although I did not mention it at that time, I was very surprised that such simple and fundament
questions were being posed. For someone to have approved a complex and intricate product, it
would only be expected that the person be aware of the simple and basic nature of the product. If
the person himself was not aware of the reality of the product, how then can he tell the world that
such a product is acceptable?
Nevertheless, in reply to the letter we clarified some basic misunderstandings regarding companies.
We stated that:

A company is a fictitious and artificial entity termed juristic person . (Mercantile and
Company Law, Gibson, pg. 297)

Directors are mere guardians or administrators of a company. (ibid pg. 408)

If a bank gives a loan to the company, it is to the company and not its directors. (ibid,
pg. 298)

The directors, in their personal capacity, are not normally responsible for the loss of a
company. They only become responsible at the time of misconduct or fraud. (ibid pg.
249)

The company continues to exist after the death of its directors. The heirs of the director
do not inherit the position upon the death of the director. (ibid, pg. 298)
Further to this, in our last email we stated: Under the concept of Juristic Person , the person who
buys shares does not own any portion of the assets of the company, nor is he responsible for any of
the liabilities of the company.

The same misconception is now repeating itself. We therefore have to repeat ourselves and clarify:
Page 19 of 113

The directors, in their personal capacity, do not own any of the assets of the company

The directors, in their personal capacity, are not responsible for any of the liabilities of the
company

The shareholders do not own any of the assets of the company

The shareholders are not responsible for any of the liabilities of the company

The fictitious juristic person owns the assets of the company

The fictitious juristic person is responsible for the liabilities of the company
Therefore, the next important question was: In terms of Shariah, what is the shareholder purchasing
when he buys a share ? How do we classify this deal?
We look forward to your reply on this question.
Request for Duas.
Ebrahim Desai
26 Sha baan 1427 / 20 September 2006
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
partnership
40
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
R. v. Levy, 1929 A.D. 312 at 322.
41
On the foregoing, see Webb & Co., Ltd. v. Northern Rifles, 1908 T.S. 462.
(The South African Legal System and its Background. Hahlo and Khan.1973. Pg. 106)
We now leave it up to you to counter this. You should not just attempt to disprove us, but to
disprove what these experts in the field of law (Gibson, Hahlo and Khan) have to say on the matter.
Page 20 of 113
Request for Duas.
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
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.
Page 21 of 113
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
Page 22 of 113
shareholders do not own the assets of the company, nor are they responsible for the liabilities of the
company. When we have provided proof, how then can you ask for proof in a manner that suggests
that no proof was provided.
Secondly, should you require further proof, we are prepared to consult more reliable works of
secular law, and provide quotations to substantiate our point. But then you must not ignore our
proofs and pretend that it does not exist. You must take up the challenge and state clearly your
response to these authorities. You must come out clear and disagree with these experts if you hold a
contrary view.
Thirdly, in our last letter we left the following challenge to you, to which you have not responded.
"We now leave it up to you to counter this. You should not just attempt to disprove us, but
to disprove what these experts in the field of law (Gibson, Hahlo and Khan) have to say on
the matter."
You have quoted from a book "Dictionary of Bussiness". Kindly provide us with full details of the
book, so that we may look into this quotation. Please provide the author's name, the publisher and
ISBN number.
However, even without consulting the book, we must caution regarding the following:
a) Many books of this nature are written for the layman, and hence are not technically accurate.
They are merely there to bring these concepts within the grasp of the general public.
b) In pursuit of simplifying technical issues, they often resort to metaphoric (majaazi)
language, which is not technically accurate. To use the above example, they would
metaphorically say that Amr owns Zaid because he is the one who benefits most from Zaid,
and Zaid only has his financial existence because of Amr. Metaphorically this statement
may be acceptable, but it is in reality (haqeeqatan) incorrect.
In the quotation provided, it alludes to the fact that shareholders receive the residue upon the
company being wound up. I have heard this argument previously, that since the shareholder
receives the residue, it may be inferred that the shareholder is the owner of the assets. This line of
argument is unsound.
In secular law, the company owes its existence to the shareholders. Had the shareholders not
"invested" in the company, the company would not have existed. All the financial benefits are for
the benefit of the shareholders. Therefore, in law, the shareholders should benefit if the company is
wound up. This in no way indicates that that the shareholders own the assets.
The example of this would be that of a person who bequeaths his entire estate to his son. During the
lifetime of the father, the father is the owner of the assets. Only after death, when the father is no
longer there, does the ownership of the assets pass from the father to the son. During the lifetime of
the father, it can never be said that the son owns the assets.
The winding up of the company is like the death of the juristic person. It is at this time that it is
possible that some assets may be transferred from the company to the shareholders. This does not
indicate that during the existence of the company the shareholders own those assets. They only have
a right to, so to say, inherit those assets from the company upon it being dissolved.
If the right to inherit had to indicate immediate ownership, then one would have to conclude that the
son owns the father's assets during the lifetime of the father. This is absurd.
Page 23 of 113
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.
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
Sent: Thursday, December 07, 2006 8:13 AM
To: 'mohammadashraf759'
Subject: RE: shares, contd
15 Thul Qada 1427 / 06 December 2006
Jazakallah for your email of 5 December 2006.
Unfortunately, many issues are being avoided and are not being addressed.
You wrote:
Page 24 of 113
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
partnership
40
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
R. v. Levy, 1929 A.D. 312 at 322.
41
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.
Ebrahim Desai
February 3, 2007 from MA to DI
From: mohammad Ashraf [mailto:mohammadashraf759@hotmail.com]
Sent: Saturday, February 03, 2007 10:12 PM
Subject: RE: reminder
Page 25 of 113
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
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 Collins
internet- linked dictionary of Business (ISB-N-0-00-720583-X)
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 26 of 113
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.
Page 27 of 113
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 28 of 113
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
Sent: Wednesday, February 21, 2007 9:03 AM
To: Mufti Ashraff Quraishi; (mohammadashraf759@hotmail.com)
Subject: shares continued
30 Muharram 1428
19 February 2007
Page 29 of 113
Jazakallah for your emails of 3
rd
and 4
th
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 3
rd
February 2007 that you are not prepared to
discuss the substantive issues. However, this was followed by your email of 4
th
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,
As indicated above, I have been requested to respond to your email.
In the quotation provided by you, it states: "ownership of shares". We have no doubt that the
shareholders are owners of the shares. However, as to what this implies we differ. If a person holds
a share in a company, it does not imply he owns the assets of the company. He simply has a right to
receive funds from the company. The term used to refer to this is a "share", which is a word that can
be confusing, looking from a Shar'ee perspective.
You state:
N.B. All know that the Share s mean the some unallocated part (sahmun musha n)
in the assets of the company, not the paper of certificate. The paper is the
recite of the share.
This is your interpretation, with which we respectfully disagree. As explained above, the word
"share" can be misleading. You are applying the Shar'ee meaning of sahmun musha'un {undivided
portion}to the term "share", which is not the intended meaning in the context of a public company.
You state:
If the shareholders are not the owner of the assets of the company in ratio of
their capital then what is the meaning of the words ownership, legal owners
We have dealt with this issue in our previous correspondence. We had stated:
Page 30 of 113
"In pursuit of simplifying technical issues, they often resort to metaphoric (majaazi)
language, which is not technically accurate. To use the above example, they would
metaphorically say that Amr owns Zaid because he is the one who benefits most from Zaid,
and Zaid only has his financial existence because of Amr. Metaphorically this statement
may be acceptable, but it is in reality (haqeeqatan) incorrect."
"Ownership" refers to the right to receive a return, and is used metonymically. It does not refer to
factual ownership of something tangible.
We have no doubt that the shareholders are the "legal owners" of the shares. The question is: What
does it entail. Does it imply ownership of the tangible assets? This is our point of contention.
Instead of getting broiled in semantics, we feel that we should be concentrating on realities. You
claim that the shareholders and directors are owners of the tangible assets of the company, and we
differ. Let us approach the matter from a different angle. Let us examine whether shareholders have
the very same rights that flow from ownership. If they have the same rights as owners should have,
then we are prepared to accept that they own the tangible assets, otherwise not.
Some of the rights that flow from ownership are:
a) The right to use at free will. An owner of an asset does not require any person's permission
to use his own asset.
Let us apply this to the case of a public company. Zaid and Amr, for example, each own 50% of the
shares of a public company, called xyz holdings. The company owns a car. Zaid and Amr cannot
walk onto the premises of the company and use the car at free will. The car belongs to the company,
and they require the permission of the administrators of xyz holdings, i.e. the board of directors, to
use the car. Although, they can vote for or appoint a board of directors at the AGM, they cannot
override the authority of the board of directors.
b) The right to destroy. An owner of an asset does not require any person's permission to
destroy his own asset. The owner is not liable to anyone for having destroyed his own asset.
Following from the example above, if Zaid and Amr jointly destroy the car, the company will have
a legal claim of damages against them. They cannot overrule the authority of the board of directors.
If it were their own property, they would not be liable to the company for destroying the car.
c) The right to alienate. An owner may alienate his asset at free will, without requiring any
other person's permission.
Zaid and Amr may not jointly sell the car, and such a supposed sale would be void ab inito.
Similarly, they may not give the car as a gift, or transfer ownership thereof by any other means.
d) The right of preventing others from using.
Zaid and Amr may not prevent the company from using any of the assets. Rather, to the contrary,
the company has the right to prevent Zaid and Amr from using any of the assets.
These are just a few examples of the contents of the right of ownership. These substantive issues
show very clearly that the company is the owner of the assets, and not the shareholders.
These entitlements are confirmed by the legal authorities, of which the following is an example.
Page 31 of 113
"ENTITLEMENTS OF THE OWNER
The following entitlements are usually distinguished:
(a) Entitlement to control is the entitlement to physically control and keep a thing.
(b) Entitlement to use is the entitlement to use and benefit from a thing.
(c) Entitlement to encumber is the entitlement to grant limited real rights in respect of the thing.
(d) Entitlement to alienate is the entitlement to transfer the thing to someone else."
[1]
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]
Introduction to the law of property, Pg. 46, third edition, Van der Walt and Pienaar, Juta and Co. 1999.
[2]
The South African Law of Persons, Second Edition, Pg. 5, Cronje and Heaton, LexisNexis Butterworths,
2003
Page 32 of 113
law is, go back to study unit 4 of Module 1 (ILW101-4) where you will find the information
you require.
For example, a company will come into existence in terms of the statutory provisions of the
Companies Act 61 of 1973, and a university in terms of the statutory provisions of the relevant
University Act. However, an association like a church comes into existence in terms of common
law. Our courts have determined that such an association (e.g. a church) which is a juristic
person should

continue to exist even though there is a change in membership

possess or be able to possess property that belongs to the association as such and over which
individual members have no rights of ownership

not be a profit-making association
A juristic person may cease to exist in a number of ways. (Usually, however, it continues to
exist for an unlimited period.) Juristic personality normally comes to an end with a court
application.
You may find it difficult to understand the concept of the juristic person. We shall try to make it
a little easier for you to understand by looking at another scenario.
Karel and a friend, Amos, establish a company called AK Investments (Pty) Ltd. Karel and
Amos are the only shareholders and they are the only directors of the company. Here we have
two human beings, namely Karel and Amos, who are legal subjects (natural persons). The
company, an entity which exists independently from its members, is also a legal subject (juristic
person). All of them have legal capacity, that is the capacity to be the bearer of rights and duties.
ii) If the company has two motor cars, this does not mean that Karel has one and Amos has one.
The company owns the two cars. If Tom now wishes to buy one of the cars, he cannot buy it
from Karel or Amos. He must buy it from the company and this means that he must conclude a
contract with the company to do this. The car is the property of the company, an entity that
exists independently, and therefore it is the company (juristic person) that must enter into the
contract for the sale of the car to Tom. As a juristic person, the company has legal personality
which means that it has legal capacity and can decide whether to sell the car or not, what the
price be, et cetera. Once the car has been sold, it is the company that will have a right to the
purchase price and it is the company that will have a duty to deliver the car to Tom. Of course,
Karel and Amos will enter into the contract in the name of the company. The role they play in
this case is that of the organs of the company, that is the instruments through which the
functions of the company are carried out. Just as the arms, legs and brains of the natural person
are its organs and carry out some of the necessary functions of the body, Karel and Amos play
the role of the organs of AK Investments. Therefore, they perform the functions of the company.
They themselves, however, are not the company. If Karel and Amos die, company will continue
to exist. Even if Karel sells his share to Tom, company will continue to exist as AK Investments
(Pty) Ltd."
[3]
3. "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
Page 33 of 113
Do you remember that you learned in study unit 5B that entities other than human beings can
have legal personality? In everyday business the company registered in terms of the Companies
Act 61 of 1973 is by far the most important form of juristic person in use today.
The most important characteristic of a company is its legal personality. Because the company is
a person in the eyes of the law, it acquires rights and incurs duties. Although it does not have a
mind of its own like a human being, it functions with the assistance of human beings (natural
persons). Thus, its business transactions (both internal and external) have to be carried out by
its organs and by the employees or agents who act on its behalf. The organs of the company are
the directors and the general meeting of its members or shareholders.
Companies with share capital are by far the most common and important type of company. If
such a company is wound up because it is "bankrupt", that is if it is liquidated, the members
can lose only the amounts they have paid to the company for their shares, and no more than
that.
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.
Page 34 of 113
(6) 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.
(7) 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.
(8) 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.
(9) A partnership cannot consist of more than 20 persons. There is, on the other hand, no
limit on the number of members which a limited liability company may have, except
that a private company's membership may not exceed 50."
[4]
4. "Consequences of separateness
Important consequences of the fact that a company is a separate entity existing apart from its
members are the following:
(a) The company estate is assessed apart from the estates of individual members;
consequently the debts of the company are the company s debts and not those of its
members. The sequestration of the estates of members will not lead to liquidation of the
company and, conversely, the liquidation of the company will not necessarily entail the
sequestration of estates of the members. The position is different with a partnership which
does not exist as a separate person: the estates of the partners and that of the partnership
are sequestrated simultaneously.
(b) The profits of the company belong not to the members, but to itself. Only after the company
has declared a dividend, may the members, in accordance with their rights, as defined in
the articles of the company, claim that dividend.
(c) The assets of the company are its exclusive property and the members have no
proportionate proprietary rights therein. Only on liquidation of the company are members
entitled to share in a division of the assets of the company.
(d) No one is qualified by virtue of his membership to act on behalf of the company. Only those
who are appointed as representatives of the company in accordance with the articles can
bind the company. A partner, however, can normally bind the partnership towards third
parties in regard to everything within the scope of the partnership business. "
[5]
Coming back to your original suggestion of appointing an arbitrator between us, we had agreed to
this suggestion, and requested you to suggest a name. Your response was that we in turn should
suggest a name. Accordingly, we got into contact with two experts. One is a senior advocate,
Brother Muhammad Saleem Khan of Durban. The other is an attorney, Brother Zeyn Bhayat of
Johannesburg. We informed both of them that we have an academic debate with another Mufti, and
we now wish to appoint them as arbitrators purely to settle a point of secular law. We said that this
will be by means of writing only, where they would not have to appear in person. Both have agreed
to offer their expertise for this purpose.

[4]
Pg. 178-180, Introduction to the Theory of Law, Unisa study guideILW102-5, Unisa 2001
[5] Entepreneurial law, 3rd Edition, Pg. 60, Benade et al, LexisNexis Butterworths, 2003.
Page 35 of 113
None of the two are aware of the issue under discussion. We deliberately did not inform them
thereof so that they may remain impartial, and offer their objective and fair academic opinion. We
are prepared to present our full correspondence to them, following which they will offer their
decision based on their expertise on the subject. We are willing to abide by their decision as to the
question of secular law which is being debated. Please let us know if this is acceptable to you.
Should you wish to suggest the name of any other expert in secular law, we are willing to consider
your suggestion.
We look forward to your reply.
E. Vawda, for Daarul Iftaa
From: mohammadashraf759 [mailto:mohammadashraf759@hotmail.com]
Sent: Saturday, February 24, 2007 10:43 AM
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 maal-
e-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
Sent: Monday, February 26, 2007 4:51 PM
To: 'mohammadashraf759'; Mufti Ashraff Quraishi
8 Safar 1428
26 February 2007
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.
Page 36 of 113
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
Page 37 of 113
jointly own all the shares of the company. Yet, despite the fact that they are acting jointly, they are
not allowed to transact regarding the assets of the company.
Therefore your comment of
"You know that partner cann't use maal-e-mushtarak without the permition of other partners and
he is zamin {liable} for any damage specially in mushaa' {joint but undivided} case."
is totally out of line. It has no relevance to the issues raised.
Jointly means together. When two people are acting together, it means that they are in agreement
with each another. The permission of one to the other, and vice versa is an obvious given.
We look forward to you allaying our various doubts on the issues.
Request for Duas.
Was salaam
Mufti Ebrahim Desai
Sent: Tuesday, February 27, 2007 10:59 PM
Assalamualaikum.please wait,i will give the answer in detail.wassalaam.ashraf
March 20, 2007 from DI to MA
Sent: Tuesday, March 20, 2007 10:57 AM
To: 'mohammadashraf759@hotmail.com'; 'Mufti Ashraff Quraishi'
Subject: FW: shares continued
Muhtaram Mufti Saheb,
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
Page 38 of 113
{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
Page 39 of 113
March 25, 2007 from MA to DI

Page 40 of 113
Page 41 of 113
Page 42 of 113
Page 43 of 113
Page 44 of 113
Page 45 of 113
Page 46 of 113

{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 47 of 113

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.
Page 48 of 113
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
Sent: Monday, May 07, 2007 2:51 PM
To: 'Mufti E.M.H. Salejee'
Subject: RE: shares
Muhtaram Mufti Salejee Saheb,
Page 49 of 113
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) In the past he has slipped up on matters of secular law.
b) He made a mess of the MPL bill, and has admitted that "mistakes were made".
c) We do not have confidence in him.
d) 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.
Page 50 of 113
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
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 Sasfin
4
. 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: Technically
correct
Technically
incorrect
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
See pg. 3
Page 51 of 113
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 you
5
, and thereafter present further
substantiation for our point of view
6
. Lastly, we wish to comment on the status of this debate
7
.
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
From pg. 3 to 3
6
From pg. 3 to 3
7
From pg. 3 to 3
Page 52 of 113

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

8
See pg. 3
Page 53 of 113
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

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 54 of 113
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 55 of 113
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
Page 56 of 113
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.
Page 57 of 113
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.
Page 58 of 113
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 59 of 113
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 Zakaat-
taxable 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 60 of 113
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 61 of 113
We also take note that while the respected Mufti Taqi Uthmani Saheb has attempted to provide
many examples for the juristic person
11
, 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
differences
12
. 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
Page 62 of 113
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 one-
tenth 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.
Page 63 of 113
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 64 of 113
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
personally untouchable
16
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
Ibid pg. 506
17
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 65 of 113
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?
Page 66 of 113
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
Times
20
:
Test of possession
John Kay
21
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
Financial Times 28 February 1997
21
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 67 of 113
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
Page 68 of 113
"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
examples
24
we have provided, the only two partners are acting jointly
25
.
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
See pg. 3
24
See pg. 3
25
See pg. 3
26
See pg. 03
Page 69 of 113
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 interest
28
. 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
An Introduction to Islamic Finance, pg. 223
28
Fatwa of Dr. Tantawi dated 2 December 2002
Page 70 of 113
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.

29
(
30
See point c) on pg. 3
31
See pg. 3
32
33
Page 71 of 113
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 Case
34
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)
Page 72 of 113
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, 6
th
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 73 of 113
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 Case
36
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 Case
39
This was an extension of the principle enunciated in the Salomon Case.
40

36
Dadoo Ltd & others v Krugersdorp Municipal Council 1920 AD 530
37
Mercantile and Company Law, Gibson, 6
th
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 74 of 113
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 case
42
, 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 one-
man 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
Mull v. Colt , Co., 31 F.R.D. 154, 156-57
42
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 75 of 113
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 Ltd
46
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 76 of 113
(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
See pg. 3
50
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 77 of 113
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 78 of 113
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
1968), pg. 509.
62
Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp 6-7
Page 79 of 113
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
Mercantile and Company Law, Gibson, 6th edition, Juta and Company, 1991, pg. 297
64
Ibid pg. 298
Page 80 of 113
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
The South African Legal System and its background, Hahlo and Khan, Juta and Company, 1973, pp 103-104
66
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 81 of 113
(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
Page 82 of 113
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
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
Page 83 of 113
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
See pg. 3
77
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 84 of 113
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
1968), pg. 499.
83
ibid pg. 509.
Page 85 of 113
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
Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp. 10-11
85
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 86 of 113
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
Corporate Law, Celliers et al, Butterworths 1988, 4
th
edition, pg. 11
88
ibid, pg. 602
89
Page 87 of 113
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 cant
92
. 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
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 88 of 113
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
Company Law and Corporate Finance, Ellis Ferran, OUP 1999, pg. 315
95
1968), pg. 497
96
Principles of Company Law, H. A. J. Ford, 3rd edition, Butterworths 1982, pg. 85
Page 89 of 113
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-of-
contracts 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
Page 90 of 113
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
1968), pg. 499
99
Ibid pg. 509
Page 91 of 113
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. Gradually
101
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 92 of 113
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
Beuthin s Basic Company Law, Second Edition, Beuthin and Luiz, Butterworths, 1992. pp 5-6
104
The Shareholder's Appraisal Remedy, An Essay for Frank Coker. Manning 77 YALE L.J. 223, 239 (1962).
Page 93 of 113
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 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 commentator
105
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
Mason, "Introduction," in Edward Sagendorph Mason (ed.), The Corporation in Modern Society 5 (1960)
106
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 94 of 113
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
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 95 of 113
(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 96 of 113
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
A Practical Approach to Company Law, Mayson and French, Financial Training Publications (London) 1982, pp 77-
78
Page 97 of 113
(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
Charlesworth s Company Law, G Morse, 17th Edition, Sweet and Maxwell 2005, pp 33-34
119
Corporate Law and Corporate Governance, Tshepo Mongalo, New Africa Books 2003, pg. 88
Page 98 of 113
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
Company Law, Mary C Olivier, 2nd edition, McDonalds and Evans (London) 1967, pp 175-176
121
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 99 of 113
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
No. 2. (Mar., 1999), pg. 251.
125
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 100 of 113
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
Introduction to Company Law, Paul Davies, Oxford University Press, 2002, pg. 6
129
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
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 101 of 113
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 risk-
bearers 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
Page 102 of 113
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 103 of 113
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
Madrasa and University in the Middle Ages, George Makdisi, Studia Islamica, No. 32. (1970), pg. 264.
142
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 104 of 113
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.
I. If A gives B cash and expects the return of the actual notes/coins, this is termed as amaanah
146
(holding in trust). A retains ownership of the form and value.
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.
Ownership
maintained
Ownership
lost
Cash
Actual notes/coins returned
Return on investment

Equal value replaced

Unequal value paid

B A
Page 105 of 113
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 loan
147
. Money is a replaceable thing
148
.
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 usurious
149
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 example
150
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 manner
151
. 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
In Roman Law this is referred to as mutuum.
148
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

Page 106 of 113
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 three
154
:
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 myth
155
.
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
See pg. 3
154
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 107 of 113
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
Introduction to the law of property, Pg. 13, third edition, Van der Walt and Pienaar, Juta and Co. 1999
159
Ibid pg. 26
Page 108 of 113
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
Ibid pg. 15
161
162
Casebook on the law of succession, pg. 215, Cronje and Roos, 4
th
edition, Unisa press, 2002.
Page 109 of 113
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 Shareholders
163

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 Ownership
164

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
The Cambridge Law Journal (1998), 57: 554-588 Cambridge University Press
164
The Modern Law Review, Vol. 62, No. 1. (Jan., 1999), pp. 32-57
165
(
166
(
Page 110 of 113
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 34-
38) 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 Law
168

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.

167
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 1993-
1996 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 111 of 113
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
Page 112 of 113
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:
169
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

169
Page 113 of 113
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

Debate On Shares

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Debate On Shares

Uploaded by

Copyright:

Available Formats

The Debate on Shares

You might also like