Question:

السلام علىكم ورحمة الله وبركاته

Hope the ulama are well

A brother asked me the ff question

About 5 yrs ago he entered into a partnership with a fellow practitioner

Let’s call him Ahmed – his partner Zaid invested about 250000 as a startup- equipment etc- Zaid is the sleeping partner n Ahmed the working partner-

For the first 3 yrs Ahmed was a 25% shareholder n Zaid was 75% shareholder although monthly profits were 50-50

Then about the 5th yr they became 50-50 shareholders

Now in their 7th year Ahmed has in the clause of their agreement that he can purchase a further 25% at the end of this yr n at the end of the 10th year Ahmed can purchase the last 25%  from Zaid

If Ahmed wants to purchase the 25% end of this year does he pay 25% of the initial 250k investment plus current stock as the agreement is vague with regards to exact amount-

So question one is according to shariah how do we work out this 25% and by extension the last 25% how will that be worked out ?

Question two- how can the partnership be dissolved now?

Ahmed says initial investment was 250k and current stock is about 50k so approximately 300k so he offered Zaid 150k to dissolve th partnership but Zaid says he needs like 600k because of potential loss of earnings over the next 3-4 years-

Is this valid according to the shariah?

To charge for a potential loss of earnings-

Please give us advise according to the shariah how we can go ahead and to answer my few queries

JazakAllah khairan

ADDITION INFORMATION

(1)     As agreed when they started 

He will run the practice and he will be a 25% share holder and Zaid will be a 75% share holder 

He was the active partner n Zaid the sleeping partner who invested the 250k initial start up costs – equipment- tiling – machines- stock etc

Over a 10 year period it was agreed that Ahmed will start off with a 25%  share till he gets 100% as explained in previous email 

(2)   The first and the 2nd 25% was agreed upon a part of their agreement

No passing of cash

Answer:

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