In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
The partnership agreement between Ahmed and Zaid is one of Mudarabah.
A Mudarabah is where one partner referred to as the rabb-ul-mal contributes the capital. The other partner is referred to as the mudarib and is exclusively responsible for the management and work of the capital invested.
In your query you stated that Ahmed acquired share holdings of 25% during the first three years. This acquisition will alter the partnership agreement. The partnership will now change from a Mudarabah and will now become a combination of Musharakah and Mudarabah agreement.
In this type of partnership the mudarib may claim the full profit from his investment in the partnership and will share in the profit from the investment of the rabb-ul-mal. However, the only binding profit sharing ratio is that the rabb-ul-mal being a sleeping partner should not be paid a percentage of the profit that is greater than his percentage investment in the partnership. (Islamic Finance By Mufti Taqi Usmani, Edition 1999; Pg. 37)
Therefore, if Ahmed, who is currently enjoying a 50% ownership, is successful in purchasing an additional 25% of the partnership, Zaid’s share will be reduced to 25%. Hence, subsequent to this sale Zaid would be entitled to a maximum of 25% of the profit.
It should also be noted that in a straight Mudarabah partnership loss will only be suffered by the Rabb-ul-Mal. In a Combination of Musharakah and Mudarabah partnership loss will be borne by the partners according to their capital investment ratio.
Regarding Question One
At the point of purchasing the additional 25% a Realisation Account should be constructed. This account should highlight the current market value of the assets of the partnership inclusive of stock in trade. The 25% will then be calculated on this current market value. The same rule will be applied to acquire the final 25%.
Dissolution of Partnership
According to Shariah it is not permissible to account for Goodwill or loss of any anticipated profit. Consequently, Zaid will not be entitled to any anticipated potential loss of earnings.
Both partners should agree on a value for the dissolution of the partnership. In this case Zaid will be entitled to the current market value of his share of the partnership (25%) in addition to his %age of any profits that might be accrued to the partnership up to the point of his withdrawal from the partnership.
If Ahmed experiences difficulties in compensating Zaid for his share of the partnership, then the partnership may be divided into shares. Ahmed will then compensate Zaid for his (Zaid’s) remaining share in the partnership on a phased basis until the value of his shares is totally exhausted. Throughout, this period Zaid will continue to reap profits and suffer loss if any according to his remaining capital shareholdings.
However, if the partnership is to remain as a going concern where it will not close, but will continue in the ownership of either of the two partners and they dispute regarding the value upon dissolution, then the partnership should be liquidated or the actual assets of the partnership should be distributed according to the capital investment ratio and profits if any distributed in the profit sharing ration. (Islamic Finance By Mufti Taqi Usmani, Edition 1999; Pg. 44)
However, liquidation should be a last resort as it can cause long lasting or irreparable damages to the partnership and should be avoided.
And Allah Ta’āla Knows Best
Mufti Saeed Ahmed Golaub
Islamic Solutions
Jamaica