In the last article, I had promised to explain the two aspects related to Musharakah in this week’s article.
First, all partners are equally eligible to share the responsibility to run the Musharakah affairs and the other aspect is that all of them are exposed to the unlimited liability arising from the Musharakah operation.
Assume that Ali, Anderson, Akmal and Andrew are partners in a wholesale foodstuff trading company which operates between the UAE and Europe. Ali has 10 years of experience of successfully delivering in the capacity of general manager of a Dubai-based company which is one of the major suppliers of Halal foodstuff items to the Gulf market.
Anderson specializes in European territory where he worked as the export manager at a multinational manufacturer of Halal food items with large consumption in Arabian Gulf countries. Ali’s firm was one of the lead importers of the products produced by Anderson’s firm and they had been dealing with each other over a period of time.
Akmal and Andrew were fairly successful as investment bankers in the UAE, working in different institutions and became good friends a few years ago. They earned handsome bonuses over the years, and would like to be self-employed before the midlife crisis gets them.
As prudent bankers, both have been contemplating on what to do in their desire to become their own bosses. During the last two years, they have attended various exhibitions that took place at the Dubai World Trade Centre which included building material, information technology (Gitex), electronics and healthcare with a view to finding an opportunity to start their own business and gradually phase out from the current investment banking role.
Both could not make up their minds until they bumped into Ali and Anderson who were representing their respective companies through a joint stall at Gulfood 2019 — the world’s largest annual food and beverage trade exhibition. Akmal and Andrew frequented the stall a few times during the week-long exhibition and obtained detailed information from Ali and Anderson on their products since somehow they believed they have found the forte they were looking for.
However, the biggest question was how to get the knowhow to start the Halal foodstuff business on a wholesale basis and to make it a successful venture. They enjoyed gourmet food but never thought of going beyond being served at the fine dining restaurants.
So, they took a chance and it worked. They made an offer to Ali and Anderson to leave their current employment and join them to establish a new company in Jabel Ali Free Zone where all four shall be partners. Anderson extended his stay in Dubai after the exhibition, citing personal reasons, and all four held a few rounds of closed-door discussions to thrash out and firm up the modalities of the new business. A few months down the line, the Four A’s was formed as a partnership entity and commenced operations.
As per the partnership agreement, 70% capital was invested by Akmal and Andrew and the remaining by Ali and Anderson. Since Akmal and Andrew wanted to continue with their respective employment until such time that the company starts producing the desired results which is when they will call it quits, they requested Ali and Anderson to run the business on their behalf as well.
In addition to the partnership agreement, a ‘management agreement’ was signed between the four partners, whereby Akmal and Andrew appointed Ali and Anderson as the ‘managing partners’ for and on their behalf to run the overall business affairs.
In other words, although Akmal and Andrew were equally authorized to actively take part in the running of the business together with Ali and Anderson, they chose not to use this eligibility owing to their own current occupations besides the lack of expertise in the chosen trading line. The validity of the management agreement was kept at three years during which time Akmal and Andrew will be in a position to resign from their jobs and attend to the company affairs on a full-time basis.
A question should come to readers’ minds at this stage which is: what happens if the company suffers losses during the validity of the management agreement? Will Akmal and Andrew be spared from any liability since they had surrendered the right to take part in the day-to-day running of the Musharakah affairs to Ali and Anderson?
The Shariah position is clear on this point which is that, together with Ali and Anderson, Akmal and Andrew shall also be responsible to bear the losses in proportion to their equity contribution irrespective of the fact that they had relinquished the right to actively take part in the running of the Musharakah affairs by entering into the management agreement. This is because by entering into the management agreement, Akmal and Andrew had appointed Ali and Anderson as their agents and in Shariah, the principal is fully responsible for the acts of its agent, save when the agent has breached any of the agency agreement terms.
So, therefore, if the Musharakah suffers losses due to no breach of the management agreement and the partnership agreement by Ali and Anderson, the passive partners, ie Akmal and Anderson will not be able to wriggle out of their respective liability to bear the Musharakah losses.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next week: Explanation of the unlimited liability on partners in a Musharakah entity.