Law School the Liability of Groups of Companies in Islamic
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Law School The Liability of Groups of Companies in Islamic Law (A Comparative Study with Common Law) Supervisor: Presented by: Prof. Dr. Fraser Davidson Raed El-Saadouni for the Degree of PhD November 2013 Dedication This work is dedicated to the memory of my parents who taught me to walk in the path of truth and righteousness Page 2 of 292 Statutory Declaration I declare that the thesis has been composed by myself and that it embodies the results of my own research or advanced studies. Where appropriate, I have acknowledged the nature and extent of work carried out in collaboration with others included in the thesis. Page 3 of 292 Keywords • Parent and subsidiary companies • Groups of companies • Law on groups of companies • Separate personality • Shareholders’ Limited liability • Piercing the corporate veil • Islamic law Page 4 of 292 Abstract Groups of companies offer considerable economic and practical advantages over other forms of business organizations. However, the phenomenon creates a long list of problems in terms of antitrust law, tax law, labour law, corporate law, and in the case of international companies, conflict of laws. National laws do not provide a complete solution to these problems because groups of companies are still governed by traditional corporate law, which is designed to govern single independent companies. On the other hand, harmonization of the law of corporate groups across Common legal systems is neither feasible not advisable. The most important problem which has not yet been completely solved by Common law systems is the liability of groups of companies for the debts of their subsidiaries. This has been described as "one of the great unsolved problems of modern company law". The present study aims to analyse the solutions provided by Common law systems to this problem and evaluate if they provide a solid settlement or whether further safeguards are needed for those dealing with corporate groups, namely minority shareholders and outsiders including creditors. By using a comparative approach with the Islamic law system, the study evaluates if the Common law solutions are also applicable in such a religious system or whether, due to its unique character Islamic law needs to create its own solution. This comparative approach assesses the possibilities of harmonization between Common law and Islamic law systems and promotes the Islamisation of modern laws in Islamic countries. Page 5 of 292 Table of Contents § Title Page Dedication 2 Statutory Declaration 3 Key Words 4 Abstrac t 5 Table of Contents 6 Introduction to the Study 10 §1 The Emergence of Companies 10 §2 The Emergence of Group of Companies 13 §3 This Study 16 §4 Plan of the Study 18 Chapter One: The Phenomenon of Group of Companies in Common 21 Law §1 Reasons for Corporate Groups 23 §2 How do Groups Come About? 26 §3 The Structure of Corporate Groups 27 §4 Management of Corporate Groups 30 §5 Risk Related to Corporate Groups 31 §5.1 Minority Shareholders’ Risks 32 §5.2 Creditors’ Risk 33 §6 The Terminology of Corporate Group 36 §7 Parent/ Subsidiary Test 42 §7.1 Accounting Standard Test 42 § 7.2 Company Law Test 44 §8 How Do Jurisdictions Govern Corporate Groups? 45 § 8.1 UK Law 45 § 8.2 European Law 49 § 8.International Initiatives 53 §9 How Corporate Groups are Regulating 56 §9.1 The Separate Entity Approach 57 §9.2 Evaluation to the Separate Entity Approach 72 §9.3 The Single Enterprise Approach 73 Page 6 of 292 § Title Page §9.4 Position in Common Law Countries 81 §10 Corporate Group and Corporate Governance 86 § 10.1 The Situation for Group of Companies 89 § 10.2 The Respond to the calls of Proper Corporate Governance 91 §11 Conclusion of Chapter I 92 94 Chapter II: Group of Companies in Islamic Law 94 Part I: Introduction to the Islamic law 100 §1 Sources of Islamic Law 101 §2 How is Islamic Law Made? 114 §3 The Principles of Islamic Law 117 §4 Development of Islamic Law 119 §5 How Islamic Law Now Made? 129 §6 Implementation of Islamic Law in Muslim Countries 131 §7 Conclusion: Islamic Law is a Growing Tree 133 Part II Group of Companies in Islamic Law 136 §1 The Concept of Sharikah (Partnership) in Islamic Law 140 §1.1 Sharikah Classification 142 §1.2 Definition of Sharihah al aqd 144 §1.3 Classification Sharihah al aqd 146 §2 Partnership under the Law of Islamic Countries 152 §3 Concept of Liability in Sharikah 157 §3.1 Liability for Lawful Acts 159 §3.2 Liability for Unauthorized Act of the Managing Partner 160 §4 Does Sharikah regime equate to the Modern Concept of Corporation? 161 §4.1 Are Corporations Based on Contracts? 163 §5 Formation of Group of Companies in Islamic Law 165 §6 Proposal for a Modern Islamic Corporation 170 Conclusion 174 Chapter III Allocating Liability in Corporate Group 177 Part I: Group of Companies Liability in Common Law 180 §1 Lifting the Corporate Veil 181 §1.1 General Principle 181 §1.2 Parent/Subsidiary 184 § 1.3 Evaluation of Court Position 193 Page 7 of 292 § Title Page §2 Imposing Liability on the Directors of Subsidiary 194 §2.1 Fraudulent Trading 195 §2.1.1 Parent/Subsidiary Case 197 § 2.2 Wrongful Trading 198 § 2.2.1 Parent/Subsidiary Case 199 § 2.3 Evaluation to the Wrongful Trading 202 §3 Trading While Insolvent 204 §3.1 Evaluation to the Trading While Insolvent 206 §4 Pooling of Assets 206 §4.1 Evaluation to the Pooling of Assets 210 §5 Substantive Consolidation 211 §6 Directors Duties to Creditors 213 §7 The Single Economic Unit 218 §8 Conclusion to Part I 220 Part II: The Liability of Group of Companies in Islamic Law 223 §1 The Concept of Debts in Islam 224 §1.1 Creditors’ Rights and Duties 226 §1.2 Debtor Obligations 228 §1.3 Conclusion 223 §2 Juridical Persons in Islamic Law 230 §2.1 Natural Persons in Islamic Law 233 §2.1.1 First Opinion: the Concept of Juridical Persons Exists in 234 Islamic law. §2.1.2 Second Opinion: Islamic Law does not Recognize Juridical 239 Persons §2.2 Assessment to the Juridical Persons in Islamic Law 241 §3 Limited Liability in Islamic Law 244 §3.1 Support the Existence of Limited Liability in Islamic Law 245 §3.2 Against the Existence of Limited Liability in Islamic Law 248 §4 My Assessment to the Existence of Limited Liability in Islamic Law 251 §5 The Group of Companies Liability in Islamic Law. 252 Page 8 of 292 § Title Page Chapter IV: Findings and Proposal 266 Final Conclusion 271 Bibliography 274 Arabic Terms’ Glossary 287 Page 9 of 292 Introduction to the Study From time immemorial man has endeavored to increase his wealth through various means, some of which require him to jointly participate with others to achieve his objective. More often than not, the personal capacity of an individual is not enough for him to pursue his dream of amassing assets. He may need to invite others to his side so that they can work together in a partnership where everyone understands his rights and obligations. Partnerships are thus formed in a number of ways with the common objective of pursuing certain activities jointly to generate profits, which will be shared according to an agreement reached beforehand. 1 1. The Emergence of Companies However, the partnership form came to prove inadequate for large scale undertakings. As long-distance trade continued to grow, corporations began to emerge. They have been around for some centuries. Originally a corporation was a social invention of the state which granted a corporate charter, permitting private financial resources to be used for public purposes. This initial creation of private finance and merchants aided the colonial expansion of states such as Britain and served to expand colonial and imperial interests, sometimes supporting military adventures. Corporations had therefore the potential, from the outset, to become very powerful. Abraham Lincoln recognized this: “I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. ... corporations 1 Zainal Azam B. Abd Rahman, Islam in the Corporate World , published at www.thestar.com dated 31 st August 2004. Page 10 of 292 have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed” .2 According to Donaldson, 3 the evolution of the corporation occurred in four stages. The first stage encompassed the medieval period and gave the Church, guilds and boroughs corporate status, but failed to do so for purely profit making associations. The second stage witnessed the rise of corporations whose members shared nothing besides the desire to make money. This occurred in the early sixteenth century, when European entrepreneurs organized to launch trading voyages to the East. Such corporations, however, were a far cry from modern ones. Instead of pooling their capital, members financed their voyages individually and used the corporation only to act as a bearer for special trading rights. The third stage of corporate evolution ushered in the prototypes of modern corporations. Beginning in 1612 with the reconstitution of the East India trading company, this saw capital being pooled, power placed in the hands of a governor and his committees, and liability being distributed amount the stockholders. These changes produced the great trading companies. The final stage is characterized by the gradual shedding of government restrictions upon corporate chartering procedures.