When business wind-up and are required to pay the creditors at the first instance, the creditors are obviously entitled to interests. What happens in countries that are governed by Sharia Law ?
The process of winding up of a company occurs when a company’s assets are collected and sold in order to pay its debts. Any monies remaining after all debts, expenses and costs have been paid off are distributed amongst the shareholders of the company.
The bankrupt business is that whom its debt exceeds its net worth. So, if the creditor requests the ruler to seize the money of a particular business and divide it between them , the business should comply. This process called freezing assets , to prevent any financial transactions.
To start with classical Islamic law, which particularly encapsulate the fundamentals of finance into “four distinct areas : prohibition on earning interest (riba), the prohibition on speculation (maysir), the prohibition on illegal activities (haram), and the obligation of banks to give back to the community (zakat).” In this context, we are concerned with Riba.
The tension between the debtor’s obligation to repay money and the creditor’s obligation to forgive (or at least allow the debtor more time to repay)” projects as equal treatment for personal and commercial bankruptcy, but when it comes dealing with bankruptcy practically, it varies among schools of jurisprudence, as they deviate on how a creditor may humanely demand repayment.
Nevertheless, a creditor will be permitted to persevere with the borrower and keep a check on him, so that he can repay the debt.
In case where the business is wealthy and has the means to repay the loan, but still do not pay or fails to repay. There are two Hadiths of the Messenger of Allah (PBUH) pertinent to this issue.
Regarding this, the punishment, however, will be based upon the order of the court and therefore, individuals will not be permitted to take the issue of law in their own hands, or else there would be anarchy in the society.
Imam Abdullah ibn al-Mubarak (Allah have mercy on him) said the defaulter, who has means to pay, will have his reputation damaged and will be spoken to in a stern manner. As stated by Sufyan, that “damage to his reputation” signifies that his delay in payment is talked about in the community and people will be made aware of this.
After identifying this tension between the debtor’s obligation to repay and the creditor’s obligation to forgive (or at least allow more time for repayment), we can look closer at how classical Islamic law deals with bankruptcy. When it comes to classical Islamic law, there is no difference between personal bankruptcy and commercial bankruptcy. Therefore, the discussion above applies in the context of business as well.
In conclusion, in accordance with Sharia Law, if the business is winding up, creditor should give respite until it is able to repay the loan, even though it is permitted to persevere with him orally, though superior to even avoid that. If the business is solvent, creditor may take his case to the court if he has the evidence. It is permitted to disgrace and humiliate. Confiscation of items and recovering one’s debt from them can also be an option available to creditors, but without transgression and violating the law of the land.
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