Question Summary:
Mahomed wanted to open a business. He approached his friend Zaid for help. at partnership(50/50). Mahomed invested R60000.00 and Zaid invested R60000.00 plus the equipment..How do Zaid and Mahomed dissolve this partnership?

Question Detail:

Mahomed wanted to open a business. He found a premises and approached his friend Zaid for help. It was agreed that they would go into partnership(50/50). Mahomed invested R60000.00 and Zaid invested R60000.00 plus the initial shelving, computers, signage, initial travelling expenses and other odds and end totalling R100000.00. Therfore Zaid invested a total of R160000.00.

It was agreed that Mahomed would physically be running the business and would draw a salary of R12200.00 as Zaid would be occupied with running his other businesses. It was also suggested by Zaid that they would discuss a drawing for Zaid after six months once the business is up & running. However, two years have passed and the topic was never discussed and due to personal reasons, Mahomed has requested that Zaid buy his share of the partnership. When calculating the value of the business, Zaid requests that R6000.00 a month x 18 months totalling R108000.00 be deducted from the value of the business as his salary.

Basically Zaid has been a silent partner for the better part of the two years whilst Mahomed has relocated to the town where the business is and has been physically running the business 8:00 to 5:00 everyday. Is Zaid’s salary request justified? Zaid makes payments to certain suppliers through internet banking and cheques as the bank a/c is controlled by him as it is still in his wife’s name after two years. He has also used funds from the account to assist his other businesses over the two years mostly without Mahomed’s permission. Zaid currently owe’s the business /-R190000.00 and the figure could be more once all has been reconciled.

How do Zaid and Mahomed dissolve this partnership? How do they calculate the value of the business? If Zaid’s salary request is justified does the business still have to pay Zaid for the shelving, computers and other expenses to the value of R100 000.00?

Answer :

In the name of Allah, Most Gracious, Most Merciful
Assalaamu `alaykum waRahmatullahi Wabarakatuh
The partnership that Mohammad and Zaid commenced comprises of many clauses and conditions in opposition to an Islamic Shirkah (partnership). It would have been advisable to learn the Masa’il pertaining to such a transaction before entering into it. Nevertheless, hereunder is a list of the incorrect practices and the necessary steps that need to be taken to rectify the situation:
The fact that Mohammad and Zaid entered into a partnership by investing R60,000 each is in order and valid. However, it was stated that Zaid further supplied shelving, computers, signage, initial travel expenses and other miscellaneous items. In an Islamic Shirkah, partnership does not take place in items or goods unless such items are sold into the partnership. This is facilitated by selling half of his goods to the partner / partners in an undivided manner. In this manner, both partners will become equal shareholders in the goods, which is a precondition for Shirkah. If Zaid did not purchase these goods after the initiation of the Shirkah and merely invested his pre-owned goods into the partnership, these goods will be excluded from the partnership and will remain in Zaid’s ownership. However, if he purchased the items after the commencement of the partnership then the expenses born by Zaid will be considered as his investment and will comprise part of his total investment. The value spent by him on such items and expenses will be calculated and added to his initial investment of R60,000.
Secondly, Zaid and Muhammad should not have stipulated a fixed return in the Shirkah. They should have stipulated a greater percentage of profit for the working partner. Therefore, it was not correct for Mohammad to stipulate a salary of R12,200. Similarly, it is also incorrect for Zaid to demand 18 months of salary at R6,000 per month. Each partner is only entitled to a proportionate percentage of the profits of the company. This is calculated through the percentage that both partners agreed upon at the inception of the contract. The query states that both Mohammad and Zaid agreed to a 50/50 partnership, therefore, each partner was only supposed to be entitled to half of the profits and not a stipulated fixed salary. If one partner was doing more work for the business, the partners could have agreed to give him a greater percentage of the profits and not a fixed salary. Now that the partnership has become corrupted through such impermissible conditions, each partner will only be entitled to receive profits in proportion to his investment. The total amount of money invested by each partner must be calculated and an exact ratio must be determined. Each partner will deserve a share in the profits of the partnership based upon this ratio. For example, if Mohammad invested R60,000 and Zaid invested R140,000, then the total amount will be R200,000. The ratio of investment between the partners will be 30% for Mohammad and 70% for Zaid. They will be entitled to all the profits earned by the partnership based on this ratio and disregard any amounts stipulated as fixed wages or salaries. If such salaries were already paid, the money can either be returned and redistributed according to this ratio, or any paid amount of the salary can be deducted from the partners rightful share after recalculation. For example, assuming Mohammad received his fixed salary for the previous two years totaling R220,000. If after recalculation according to the above mentioned ratio, it becomes apparent that Mohammad was entitled to R300,000 which comprises 30% of the total profits then Zaid can deduct the R220,000 already paid to Mohammad and pay him the balance of R80,000. If Mohammad was only entitled to receive R200,000, then he will have to return R20,000.
Thirdly, it was not acceptable for Zaid to use the finances of the partnership for his personal use. He will have to refund that amount to the partnership account.
To dissolve this partnership, both partners can mutually agree to terminate the partnership. Similarly, if one partner wants to withdraw from the partnership, he is entitled to do so. He must simply inform the other partner/partners that he is withdrawing from the Shirkah. He will be entitled to receive his share of the profits, if any, and liable for his share of the loss, if any. In the case at hand, each partner’s right to profit as well as liability of loss will be according to the percentage or ratio of his investment.
If Zaid did not purchase the above-mentioned items after the commencement of the partnership, then such items will be excluded from the assets of the company and neither will he be credited with the value of its investment. If he did purchase it after the commencement, the items will make up part of the assets and the amount paid to purchase the items will be credited to his total investment. When dissolving the partnership, all the assets of the company will be calculated; thereafter, all of the liabilities will be calculated. The amount leftover after calculation will be the profit which should be divided between the partners in accordance to their respective ratios as previously mentioned.
And Allah knows best
Wassalam
Ml. Yusuf bin Yaqub,
Student Darul Iftaa
Checked and Approved by:
Mufti Ebrahim Desai
Darul Iftaa, Madrassah In'aamiyyah