Towards a Corporate Model of Islamic Law of Insolvency: A Note on “Voluntary Insolvency”

Abstract

The emergence and development of Islamic finance has opened the gate for new, unforeseen questions. One of these new issues is the insolvency and bankruptcy of corporate entities. Classical Islamic law only deals with the insolvency of individuals because there were no corporations in the form of a “legal personality” having the unique attribute of “limited liability” at that time. Thus, it should not come as a surprise that there is no concept of “corporate bankruptcy” under Islamic law. This situation leads us to two conclusions: first, the issue of corporate bankruptcy is difficult to address from an Islamic law perspective, with even its fundamental issues needing to be explored from scratch. Second, looking at financial failure episodes around the world, the Islamic finance industry must be aware of the importance of this problem and try to come up with viable solutions before the industry is confronted with actual insolvency situations. This state of affairs requires rigorous and all-encompassing research on corporate insolvency law from the Islamic law perspective.