Corporate Personality from the eyes of Shari’ah.

Martin Luther King Jr. once said:

“Personality is like a charioteer with two headstrong horses, each wanting to go in different directions.“

Such might be true in a situation of a company whereby upon incorporation, a company acquires a legal personality separate from that of its member a.k.a a separate legal entity (see Section 20 of the Companies Act 2016).

And such corporate personality allows a company to have full rights, powers and privileges to exercise all the functions of a body corporate such as having the full capacity to carry on or undertake any business or activity including, to sue and to be sued, to acquire, own, hold, develop or dispose of any property, and to do any act which it may do or to enter into transactions (as per section 21 of the Companies Act 2016). In other words, a company is an artificial legal person in the eyes of the law.

In Malaysia, Shari’ah compliance businesses are flourishing. More and more Islamic businesses, enterprises, and organizations which are formed under the Companies Act, are being established as body corporate. For example, the Islamic banks, zakat institutions, Pilgrimage Board (Lembaga Tabung Haji) and Islamic insurance (takaful) companies.

Accordingly, those Islamic institutions ought to also acquire their legal personality. However, have you ever wondered whether the principle of corporate personality is actually Islamic? That is to say, does Islam recognize corporate personality? 

Joseph Schacht, a western jurisprudence scholar, contended that Islamic law is only limited to individual personality and is devoid of corporate laws. Hence, contractual agreements between corporations has no basis in Islamic law. Contemporary Islamic jurists have argued against this position. 

The concept of dhimmah

The fundamental contention of Islamic scholars is that person rights must exist as a pre-requisite to legal capacity for a person to claim, amend, transfer, or own right. The term personality in Shari’ah is the eligibility to have dhimmah (the capacity to acquire and exercise rights and obligations). Although all human being possess dhimmah, the debate remains on whether a corporate enterprise can be assumed to be having dhimmah.

There are two schools of thoughts on this.

Islamist jurists who refute the existence of dhimmah in corporate institutions. 

Jurists who refute rely on the opinion of Al-Sarakhsi (a classical jurist), that dhimmah belongs only to human beings, which crowns them with the capacity to hold obligations. 

Al-Sarakhsi said: 

“It is the human being alone [who enjoys this capacity] to the exclusion of all other animals that [all] do not have an appropriate legal personality.”

Reason being, Al-Sarakhsi relied upon the Quranic verse of Surah Al-Ahzab [33:73] whereby Al-Sarakhsi equated dhimmah with“trust” (obligations):

“Indeed, we offered the Trust to the heavens and the earth and the mountains, and they declined to bear it and feared it; but man [undertook to] bear it. Indeed, he was unjust and ignorant.“

As can be seen from Surah Al-Ahzab [33:73], humankind accepted the obligations as a whole and became the seat of obligations or dhimmah. As such, Al-Sarakhsi concluded that only human being is a receptacle fit for dhimmah. 

Thus, in the strict sense, the supporters of Al-Sarakhsi do not accept artificial legal persons in general that lack the ability “to understand the communication creating the obligation”. Such preposition is in line with the Islamic jurisprudence that humankind are Allah’s vice-regency (khalifah).

Islamic jurists who acknowledge the existence of dhimmah in corporate institutions

According to modern jurists like Taqi Usmani, the existence of the principle of separate legal entity under Shari’ah law is based on precedents of other Islamic institutions and practice like waqf, mosque, baitul mal, joint stock, inheritance under debt and Al Abd al-Ma’thoon (the slave who is permitted by his master to trade). 

For instance, waqf is a legal and religious institution wherein a person dedicates some of his properties for a religious or a charitable purpose, creating separate legal entity. After being declared as waqf, the donor is no longer the owner of the property. This means the waqf institution may own a property. Another example is the mosque whereby any donation given to the mosque belongs to the mosque.  

The principle of a joint stock company (Shirkah) which is found in the Fiqh of Imam Shafi ‘i, also formed the basis of Taqi Usmani’s argument on the separate legal entity in Islam. 

Under the Shafi ‘i School, when more than one person run their business in partnership and the assets are mixed with each other, the zakat (the obligatory donation)  will be levied on each of them individually. However, the zakat will be payable on their jointstock as a whole and even if one of them does not own the amount of the nisab (the minimum threshold for somoene to be eligible to pay zakat), but the combined value of the total assets exceeds the prescribed limit of the nisab, zakat will be payable on the whole joint-stock including the share of the former. Hence according to Taqi Usmani, if the ‘joint-stock’ is subjected to the levy, it indicates that the ‘jointstock’ is treated as an entity distinct from the partners.

Also, whether the concept of ‘corporate personality’ is permissible may also be argued from another principle of Islamic jurisprudence (specifically the Ḥanafi School), namely that everything is prohibited unless permitted by the Shari‛ah. A company being an artificial and legal person can do any business so long as it does not go against Islamic laws.

Not only that, based on the Islamic doctrine of maslahah mursala (public interest), the State may consider it essential for the benefit of the society to accept the concept of ‘corporate personality’ and accordingly allow the establishment of corporations as business organisations.

Having said that, now let us now look into the application of corporate personality on Islamic institutions in Malaysia. 

Corporate personality of Islamic institutions in Malaysia. 

The recognition of corporate personality in Islamic institutions can be seen in the case of Bank Islam Malaysia Berhad (BIMB) v. Adnan Bin Omar (Civil Suit No. S3-22-101-91) whereby in this case, a preliminary objection was raised by Adnan (the defendant) challenging the jurisdiction of civil court in hearing this Islamic finance case.

The legal personality of the first Islamic bank of Malaysia has been brought to question. Because BIMB is an Islamic bank, at the face of it, the matter should belong to the Shari’ah court. Nonetheless, the matter was brought to the High Court of Malaya which held that BIMB being registered under the Companies Act 1965, was a body corporate separate from its member. It did not have a religion and therefore was not subject to the jurisdiction of the Shari’ah court. The said judge in the case (NH Chan J) also ruled that Islamic banking matters fall under the List 1 of the Ninth Schedule of the Federal Constitution. Here, the corporate personality of BIMB was recognized.

Another interesting case which attracted the application of doctrine of separate legal entity in Islamic institution is the case of Dato’ Nik Mahmud bin Daud v. Bank Islam Malaysia Bhd [1996] 1 CLJ 576 whereby a financing agreement was entered into by plaintiff and BIMB to develop his piece of land in Kelantan.

The land is held under the Kelantan Malay Reservation Enactment 1930; whereby section 7(i) prohibits any transfer or transmission or vesting of any right or interest of a Malay in reservation land to or in any person not being a Malay. The issue here is whether there is a transfer or a vesting of right or interest involving a non-Malay (that is to say BIMB). This is due to the fact that BIMB is a bank with neither a Malay nor a native of Kelantan. However, to reconcile this matter and to enable the bank to register the charge, Schedule D of the 1930 Enactment allows Rulers in Council to grant Malay status to a bank for the purpose of registering a charge document. As such, in this case, BIMB was given the recognition and was included in the said Schedule D. 

Based on these two cases, we can see that Islamic institutions are recognized as a body corporate. 

Conclusion

In short, dhimmah or legal personality is the central issue of Islamic jurisprudence in determining the rights and obligations of a competent person. Since there is no clear prohibition in the Qur’ān or Sunnah, it may be granted to artificial entities like business corporations. Rather its permissibility may be inferred from Qur’ānic verses and the Sunnah of the Prophet as well as precedents of other Islamic institutions and practices (like waqf and the mosque). The permissibility of corporate personality may still be argued from the perspective of maslahah (public interest). As such, the overwhelming majority of jurists, both past and present, recognize corporate personality as Shari’ah friendly.

However, this concept should not be accepted without limitation. The limitation is no other than; such business corporations must comply with Shari’ah and cannot do things which are prohibited under Shari’ah. For instance, a company, while the liability of the shareholders is limited, cannot be exploited as a vehicle of fraud.