The Influence of Old Islamic Law Rules over Contemporary Insolvency Procedures in Shari'a Countries (I. Stoyanov Lazarov, журнал "Kutafin University Law Review", N 1 (Volume 4), April 2017)

The Influence of Old Islamic Law Rules over Contemporary Insolvency Procedures in Shari'a Countries

I. Stoyanov Lazarov,

Research Associate and Ph.D., Candidate at the Chair of

International Law at Friedrich-Schiller-University (FSU),

Jena, Germany,

LL.M. (with great honors) in International and European

Business Law from Katholieke Universiteit Leuven (KU Leuven), Belgium

"Friedrich-Schiller-University (FSU), Jena, Germany,

Katholieke Universiteit Leuven (KU Leuven), Leuven, Belgium

Журнал "Kutafin University Law Review", N 1 (Volume 4), April 2017, р. 224-248.

This contribution outlines the main characteristics of insolvency rules under "classical" Islamic law, and then makes a comparison with the modern procedures in some Shari'a countries. The conclusion based on this comparison is, first, that nowadays rules are still heavily influenced by the classical concepts of Shari'a law, and, second, that this influence makes the system of insolvency highly outdated and ineffective. Thus, in general the insolvency procedure is hardly ever used in the Islamic world, with the parties preferring other means to resolve any issues arising from the default of one of them. Any modernization of the rules has to go through 'creative' interpretation of the primary sources of Islamic law, an exercise that was already conducted with respect to the rules on Islamic finance.

Table of contents

I. Introduction

II. Classical concept of insolvency under Islamic Law

III. Modern rules of insolvency in the Muslim world

IV. Conclusion

References

I. Introduction

This contribution is aimed at proving that the rules on insolvency under classical Islamic law influence heavily contemporary procedures in Islamic countries. Preliminary, it has to be noted that the set of rules with regard to insolvency vary in the different Islamic jurisdictions and therefore, one might not claim that there is universal modern-day Islamic insolvency law. However, the routes of these different rules might be found in the classic Islamic law and, therefore, this should be the starting point of any research in the area, and the potential reason for some common disadvantages.

The article will also examine how traditional concepts have developed in various Islamic jurisdictions under the influence of the colonial era and different historical, political and economic contexts. The common ground will be highlighted and some of the key differences outlined.

In conclusion, the paper will address some of the existing problems and propose possible solutions.

The issue at hand is now relevant more than ever due to the evergrowing market share of Islamic finance and banking that were a trillion dollar industry as early as 2009 and continue to grow nowadays*(1).

II. Classical concept of insolvency under Islamic Law

The Grundnorm for Islamic countries stems from the religion - a situation predetermined by the non-secularized character of the society in these states. This is, thus, reflected in their primary sources of law which are either the Quran itself*(2) or, at least at constitutional level, it is provided that all domestic legislation shall not infringe Islamic Law CShari'a)*(3). Therefore, the classical concepts of insolvency as they stem from the Shari'a are in any way still relevant nowadays.

There are 5 main principles that underpin the classical Islamic insolvency rules which are namely*(4):

(i) Prohibition of interest (riba) and the absence of a concept of the time value of money;

(ii) Requirement for social responsibility;

(iii) Duty to perform all obligations under the condition that one is able to do so but for an indefinite period, with death as the only source of final relief;

(iv) Lack of a concept for limited liability legal entities;

(v) Lack of a concept of intangible assets.

In order to properly understand the principles of Islamic insolvency law, one must always take into account the very nature of Shari'a which is intended to govern all kinds of interpersonal relations and the internal spiritual world of an individual. In other words, it regulates "every aspect of an observant Muslim's life, including commercial and financial dealings"*(5). Hence, insolvency laws are underpinned by the same principles as interpersonal relations such as "[...] honesty, good faith, an eye to fairness, social responsibility, and equity [...]"*(6). In particular, a lot of rules are intended to protect the poor from unjust treatment and exploitation by the rich*(7).

The Arabic word for bankruptcy is iflas and it includes both (i) balance sheet insolvency and (ii) cash flow insolvency*(8). When one is in a state of iflas there are only two methods to end that - extinguishment of the debt or death.

The lines of the Quran that are relevant with regard to insolvency are "O you who believe! Fulfill (your) obligations" (5:1) and "And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay, but if you remit it by way of charity, that is better for you if you did but know" (2:280)*(9). As can be seen, the general rule of Islamic law is essentially based on the principle pacta (and in general obligations) sunt servanda. This rule, pushed to its limits under Islamic Law by treating the death as the only relief, seems a bit harsh in the eyes of the Western lawyer where statutes of limitations rule and insolvency law are intended to, on the one hand, provide relief for the debtor, and, on the other - to punish non-active creditors. However, the Quran is balancing this rather severe provision by stipulating that a debtor shall be obliged to pay only when he/she has the opportunity to do so and is encouraging creditors to write-off fully or partially debts when the debtor is in difficulty.

Such a rule contradicts the general understanding in Western legal systems that the lack of resources of the debtor does not relieve him from liability or in other words - the lack of funds is not a ground to delay performance*(10). Hence, a major difference between Islamic and Western Law lies in what is considered to be a valid excuse not to perform - while the cornerstone principle in Western Law is that only objective impossibility*(11) to perform may serve as a ground to delay performance/not to perform altogether (depending on the temporary/ permanent character of the obstacle), Islamic Law takes into account subjective impossibility*(12) as well. Thus, the first relief from the obligation to perform is the possibility to rely on subjective impossibility or, put in another way - the Muslim must pay but only when has the ability to do so.

The second difference between Western and Islamic law lies in the absence of statutes of limitations (a deadline for bringing a claim by the creditor) and the prohibition of interest under classical Islamic law - as it would be seen, these concepts are interconnected. The statutes of limitations are aimed at providing incentive for creditors to act in due time when bringing a claim but also to protect debtors from incurring excessive interest debts, which is evident from the fact that usually the time period prescribed in the statutes of limitations is sometimes shorter with regard to the interest as compared to the principal*(13) and that with the extinguishing of the obligation to pay the principal, the obligation for the interest is also deemed extinguished*(14).

The approach under Islamic Law is different. First of all, classical Islamic Law encourages creditors not to act but, on the contrary, either to give the debtor temporary relief or to remit the debt partially or completely*(15). Secondly, the problem of incurring excessive interest is non-existing, since under Islamic Law interest (Riba) is prohibited by couple of explicit prohibitions in the Quran, inter alia - "Those who eat Riba (usury) will not stand (on the Day of Resurrection) [..]"*(16) and "Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.)"*(17). It is argued among Islamic Law scholars whether the term Riba includes only usury or has a broader meaning and, thus, the prohibition is on all kind of interest obligations. The majority of scholars take the view that it includes all interest relations and covers both the interest stipulated at the time of conclusion of a contract and the one that is incurred due to failure to pay on the maturity date*(18). Such an interpretation is in line with the fact that Islamic Law lacks the concept of time value of money since interest might be expressed as a reflection of that value. However, it has to be pointed out that Islamic law recognizes the time value of tangible assets other than money, as it is perfectly acceptable to charge 100 if the price is paid in full at closing and 120 if it is paid in installments over 12 months*(19).

The second major difference between Western and classical Islamic Law, which has substantial implications on insolvency law, is the absence of a concept for limited liability entities. As argued by Abraham Udovitch: "In Hanafi law, and indeed in all of Islamic law, the liability in all partnerships is unlimited. In all Islamic partnerships, the partners are liable in proportion to their share of the total investment. There is no limit whatsoever on the amount of the partnership's liability. Each partner is responsible for his share of the partnership's indebtedness regardless of what it amounts to, or by how much it exceeds the value of his own share of the company's assets"*(20). Of course, the aforesaid is not completely true nowadays when the business practice requires ways to ensure limited liability - such a vehicle is the Mudaraba - undoubtedly the most important building block of modern Islamic finance which, hence, requires further examination in this paper.

The Mudaraba structure allows for limitation of the liability of an investor. The vehicle consists of two main partners (or groups of such) - the manager and the investor(s). All the equity for the operation of the venture is provided by the investor and he or she is the only one bearing the risk of any potential losses. The risk, nevertheless, is limited to the amount of capital provided. The manager is running the business on his own but does not have the position of a director in the Western sense, since he is also participating in the profits with a percentage stipulated in a contract between him and the investor (any potential losses are carried solely by the investor). However, the manager can be held personally liable for his actions in connection with the venture in a couple of cases - for example, if he exceeds his rights as stipulated in the contract with the investor. The Mudaraba differs from the Western limited liability entities by the fact that sensu stricto the investor retains ownership over the provided "capital" and the manager is formally dealing with another person's assets*(21). Mudaraba does not have legal personality and resembles more closely the trust structure under Common law rather than the Kommanditgesellschaft*(22) under Civil law.

The lack of a concept of legal personality, with its logical consequence - limited liability, is an expression of the lack of ideal concepts in classical Islamic Law which remains rather focused on what can be seen and touched. Of course, the time when that law was developed presupposes no other possible outcome. Hence, it is not a surprise that such notions as intellectual property rights, equity of redemption, non-possessory liens and security interests are also unknown*(23).

Bearing in mind the marked fundamental differences in the creditor-debtor relation and in the commercial Islamic world in general from its Western equivalent, one must then examine the treatment of a defaulting debtor under classical Islamic Law.

The Islamic word for a defaulting debtor is muflis. A person is considered to be muflis when two cumulative requirements are present - (i) the debtor should be in a factual position of iflas (a state of balance sheet/cash flow insolvency) and (ii) the creditor must take legal actions to collect*(24). The same rule applies equally to men, woman and businesses as no distinction is drawn between individual and business insolvency - a natural consequence of the fact that the notion of limited liability legal forms has not developed under classical Islamic Law*(25). Furthermore, due to the absence of developed concepts for legal personality, by definition, the insolvency proceedings will concern a natural person*(26).

The initiation of the insolvency proceedings is in the hands of creditors who shall request from a judge to issue an order which distrains the debtor and proclaims his status of muflis*(27). The judge will examine whether the claimed debt exists and is due (with the burden of proof laying on the creditor) and if the answer is in the affirmative he might issue one of the following decisions: (i) order performance without distraining the debtor if the debt is due but the debtor has enough assets to cover it, (ii) temporary distrain the debtor if further in debt examination is needed on his/her solvency, (iii) proclaim the insolvency and issue a Distraint Order*(28). It is important to note a central peculiarity of the initiation of insolvency proceedings in classical Islamic Law as compared to the Western one - under Islamic Law only creditors but not the debtor himself might request the initiation of the insolvency proceedings (as it would be seen this is no longer the case under modern Islamic Insolvency Law). On the contrary, in most Western jurisdictions the debtor is entitled and sometimes even obliged to file for insolvency within a stipulated time period after the state of insolvency occurs.

An issued Distraint Order has the following legal consequences:*(29)

The legal capacity of the debtor is restrained;

A Receiver is appointed, who is responsible for looking after the affairs of the debtor and shall gather, liquidate and distribute the remaining of his/her assets among the creditors;

The creditor's rights are attached to the debtor's property.

It must be underlined that the debts that are not yet due are not accelerated by the Distrain Order*(30).

Islamic Law strongly encourages settlements between creditors and debtors as a means to resolve the dispute and end the litigation. There are two types of settlements depending on whether the debtor concedes that he owes the debt or not. Some Islamic scholars argue that when a debtor is entering into a settlement in order to avoid litigation but denies the debt, such a settlement is either invalid altogether as it is based on an unfound claim or it is valid but only under the condition that the debtor truly believes that he does not owe the debt. Both views are based on the directive in the Quran to fulfill one's obligations*(31). The other type of settlement, where the debtor admits that he owes, is a classical type of admission against interest - the debtor admits in order to get a reduction on the sum due and the creditor agrees on receiving less so that his/her claim is settled immediately.

The next question that will be dealt with concerns classes of creditors, an issue central to each insolvency legal framework. The order of priority under the classical Islamic insolvency law is as follows:

(i) Expenses - the general rule in most insolvency legislations is present also in Islamic insolvency law - the first in line are the expenses incurred with regard to the insolvency proceedings, including the fee paid to the Receiver (unless he/she performs the service for free)*(32).

(iI) Secured creditor - a main principle of virtually all modern insolvency legislations is that the secured creditor has priority over the other creditors against the collateral. Classical Islamic law makes no exception. However, it must be noted that under Islamic law the main vehicles used to achieve the effect of securing the rights of a creditor over property bought on credit are Murabaha and Ijara as well as Rahn, which differ from the perception of collateral known to the Western lawyers*(33).

Murabaha*(34) is a very commonly used structure. It is used often not only as a way of credit but also in corporate finance as a tool for working capital and liquidity management*(35). The basic Murabaha structure looks as follows - it is a transaction whereas a customer requests from a seller (usually a bank) to acquire an asset from a third party and then to resell it to the customer at a predetermined price with an agreed profit margin*(36). The resell price is paid in installments. The difference between the acquisition price and the resell price plays the economic role of interest, thus, circumventing the explicit prohibition of Riba under Islamic law*(37). The title of the assets is passed first to the seller and then from the seller to the customer but usually the seller does not have the asset in its physical possession*(38). In order to mitigate its risks the bank might adopt certain legal measures such as: to conclude the initial purchase and the resell simultaneously to mitigate the risk of losses due to destruction or damaging of the asset; to make the customer waive all rights of claims against the bank with regard to the transferred assets (usually the rights of warranty of the bank itself are reassigned to the customer); to appoint the customer as an agent for the initial purchase in order to make sure the purchase will be in conformity with the specifications*(39). For counterparty risk mitigation during the operational stage of the Murabaha it is accepted that the bank might require a guarantee which might be called upon in case of default thereunder and in the event of execution of an acceleration clause*(40) (such an event might be the insolvency of the customer).

Ijara closely resembles the Western lease contract in its both forms - operating and finance lease. Under an Ijara contract, the lessee will enter into an agreement with a financial institution for the lease of an asset*(41) at a predetermined price and period*(42). As adopted in the Shari'ah Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the lessor can also require and receive any form of lawful collateral to secure the obligations of the lessee under the Ijara contract*(43).

A type of security that might be requested from the creditor is Rahn which is the Islamic equivalent of pledge. The legal basis might be found in the Quran 2:28з*(44) and couple of Sunnah concerning a pledge given by the Prophet - Mohamed. The contract is similar to the so-called real contracts under Roman law where the physical delivery of the asset (res corporalis) is a condition for the validity of the contract itself. Hence, the Rahn contract becomes binding only when the possession over the pledged asset is transferred to the pledge*(45). The contract, however, does not lead to the transfer of ownership rights over the asset provided as collateral but only creates the right for the creditor to utilize the collateral in order to settle the debt in case of default of a debtor*(46). It is important to note that not only movable but also immovable property might be provided under the Rahn contract in which case all expenses in connection with preserving or improving it fall on the pledgor*(47). In the case of default of the debtor, the pledgee cannot automatically utilize the asset pledged but shall refer the matter to the competent court*(48).

(iii) Reclamation creditors - in case an asset is sold on credit and still remains in the debtor's possession in the same condition as when transferred, the seller has the priority right over such an asset in case of insolvency. The aforesaid is based on a saying by the Prophet - Mohamed that "If a man finds his same things with a bankrupt, he has more right to take them back than anyone else"*(49). However, in order to benefit from this special rule the reclaiming creditor should make sure that 4 conditions are fulfilled:

The debtor must be alive. Otherwise, the creditor loses the right of priority return of the property but joins the other creditors and receives a proportionate share after liquidation*(50).

The property must be in the same condition as when transferred*(51).

The property must be in the possession of the debtor*(52).

The debtor must not have made any down payments or paid any installments in connection with the sale. Since in practice this would hardly be the case, some scholars argue that if any payments are made, the creditor has the choice to either return the already paid sum and retrieve the property or join the other creditors*(53).

(iv) Lessor - the position of the lessor-creditor depends on the moment when the lessee-debtor becomes insolvent in relation to the lease commencement date*(54) - if the lease commencement date has not yet passed, the lessor might annul the contract and return back his property; if the lease period began but has not yet expired, the right to use the property remains an asset of the insolvent debtor and the lessor has no right to terminate the contract but is a creditor for the unpaid rent; if the lease period has finished, the lessor is just an ordinary creditor for the unpaid rent*(55). Of course the aforesaid only applies if the lessor is not secured under the Ijara contract, which practically would be rather rare.

(v) Specific priorities - some unsecured creditors get special preferential treatment under classical Islamic Law - for example, compensation of workers for their wages or carrier of goods as long as the goods are still in his/her position*(56).

(vi) Other creditors - the regular creditors share an amount of liquidated assets between each other proportionate to their claims. However, what is interesting, unlike in the Western jurisdictions, there is no final discharge as the debtor is responsible indefinitely for repayment of his/her debts*(57).

Some specific personal exemptions with regard to a certain type of the debtor's assets apply which are rather generous and make sure that the debtor and his/her family would have enough means of living. These exemptions, however, do not cover assets explicitly provided as collateral*(58). As in many jurisdictions, protected assets include real property which is used as a home by the debtor, enough food for his/her extended family, clothing, professional tools of the debtor, enough of his/her income to take care of his/her family and some scholars argue, even enough capital so that the debtor may continue his/her business*(59). The next and final point that needs to be covered with regard to classical Islamic insolvency laws is the issue of enforcement mechanisms that are at the creditors' disposal. Among these are: (i) imprisonment, (ii) monitoring of the daily activities of the debtor, and (iii) restrictions to traveling.

(i) Imprisonment - the rule under Sheri'a law is that if the debtor can show that he/she has no assets that can be liquidated or that his/her default is a consequence of an event beyond his/her control, he/she shall not be imprisoned*(60). The reason for that is that imprisonment is simply a tool of making the debtor perform his/her obligations. However, if the debtor has no means to perform whatsoever, imprisonment cannot serve its purpose and, thus, would be an excessive limitation of his/her rights. From the point of view of the Western legal systems, imprisonment as a means of enforcement seems excessive in all cases, since there are other alternatives that are more cost effective and do not interfere in the personal sphere of the debtor to such an extent. These means vary but in the end of the day are connected with different forms of compulsory liquidation of the debtor's assets and distribution of the received cash among different classes of creditors.

(ii) Debtor Surveillance - less severe measure under classical Islamic Law is the right of creditors to put the debtor under surveillance and monitor his/her daily activities in order to find some assets that might be liquidated*(61).

Restrictions on traveling - the creditor might also request from the court to restrict the debtor's right to travel outside the town he is living in*(62). The rationale behind such a restriction is to prevent the debtor from the opportunity to hide or sell assets that might be liquidated*(63).

What all these possible restrictions have in common is the fact that all of them might be applied as long as the court does not reach a conclusion that the debtor is unable to settle his/her debts*(64). After that their application would lack justification because they will not serve their purpose, namely - to prevent the debtor from hiding assets and once such are found, to make him/her perform. Furthermore, all three means of enforcement under classical Islamic Law are manifestly outdated and are not only excessive but cannot in any way play a meaningful role in a contemporary insolvency procedure.

III. Modern rules of insolvency in the Muslim world

Before starting to discuss contemporary rules of insolvency in the Muslim world, it has to be highlighted that the jurisdictions where Islamic Law applies do not form a homogenous group. The differences stem to a great extent from the different colonial past of the countries and their approach to the relation between the Islamic and the former colonial law. These states might be divided into three big groups - countries whose legal system is based on civil law (e.g. Egypt), countries whose legal system is based on common law (e.g. Sudan), and hybrid countries (e.g. Qatar)*(65). However, regardless of the differences in legal systems, the Islamic countries share to some extent similar insolvency rules not only between themselves but also with other jurisdictions*(66), of course bearing in mind the peculiarities arising from the fact that the Grundnorm is based on the Islamic religion.

In order to properly understand the content and functioning of any legal rule, one must first examine the factual context in which it operates. Thus, the features of the Islamic market underpin the very nature of insolvency laws. As it would be seen from the subsequent analysis, the economic and social reality in the Arab countries serves as a powerful deterrent against legal commencement of insolvency proceedings.

The first important feature to note is that the majority of the businesses are family-owned (over 90%) but the main portion of capital is predominantly concentrated in the hand of small elite*(67). The elite often holds a controlling stock of shares in credit institutions as well, and hence, rather often than not, the same shareholder stands behind both the creditor and the borrower*(68). It comes only natural that in such environment of a high indebtedness between related parties problematic loans are dealt with silently and behind the scenes*(69). The aforesaid leads to a situation where a big percentage of large exposures that end up in default are handled unofficially and no insolvency procedure is requested by the creditor.

As it was seen from the analysis of the classical Islamic Law, a fundamental duty of the Muslim is to abide by his/her obligations.

This, taken together with the huge importance of the reputation of the family name, leads to yet another safety net against official filing for insolvency*(70). Relatives often will bail out a borrower under social pressure in order to preserve their collective reputation*(71). Furthermore, most of the family-owned businesses remain informal and with no access to credit altogether making it harder for borrowers to end up in a situation of over-indebtedness*(72).

Moreover, even when possible, lending is usually collateral-based and backed by real property which lowers the credit risk to a considerable extent, and makes it possible for credit institutions to close an exposure without or at a minimum loss even in the event of default*(73).

Last but not least, it is claimed that the very nature of Islamic banking serves as a "safety valve against borrower insolvency"*(74). It is argued that a concept deeply rooted in Islamic banking is risk sharing rather than a classical creditor-debtor relation that is typical in the Western world. In order to understand this fundamental difference between commercial and Islamic banking, one shall examine their definitions. Art. 4, par. 1, (1) of Regulation 575/2013/EU on prudential requirements for credit institutions and investment firms*(75), stipulates that a credit institution (the term for a bank under EU law) is "cm undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account." It is generally accepted in the legal framework of virtually all countries which comply with the Basel Committee's standards that commercial banks are not allowed to engage in any other activity but the one they have received a license for and, in principle, general commercial activity is prohibited. However, what differentiates banks from other financial

institutions is their core activity which is namely - to take deposits and provide credit. A similar definition for banking is adopted in Malaysia where the Financial Services Act 2013 defines*(76) it as the business of accepting deposits and provision of finance. Provision of finance is further defined rather broadly as including lending of money, leasing and factoring business, purchase of financial instruments and guaranteeing the liability of another person. Malaysia is an interesting example for the purposes of examining the differences between a commercial bank in the Western sense (as defined in the Financial Services Act) and an Islamic bank because both are regulated in its legislation. The Islamic Financial Services Act 2013 defines Islamic banking business as accepting Islamic deposits and provision of finance. Both Islamic deposits and provision of finance differ from their equivalent in commercial banking. Provision of Islamic deposits will not be further examined here because, for the purposes of this paper, only the credit side of the banking activity holds relevance. Provision of finance under Islamic banking law in Malaysia includes: equity or partnership financing (inter alia Mudaraba), lease-based financing (e.g. Ijara), sale based financing (e.g. Murabaha) and few other activities*(77). The major and obvious difference is that lending of money is not among the list of services that constitute provision of finance by an Islamic bank. The reason for that is the already discussed prohibition of Riba interest. However, Islamic banking concepts go much further than this prohibition and extend beyond it by having risk sharing as a cornerstone principle*(78). This is the theory. However, although it might be true to a certain extent in practice with regard to the Mudaraba (where the bank takes the role of an investor), it definitely is not with respect to other transactions such as Ijara and Murabaha which economically serve the purpose of credit, are in practice secured and the bank is usually taking all measures to mitigate the risk it takes to the minimum possible extent (such as any commercial bank)*(79).

The comparison between the regulations on Islamic and commercial banking activities leads to the following conclusions: (i) stricto sensu an Islamic bank does not meet the definition of a credit institution in the Western sense, since neither of the two cumulative criteria is satisfied - Islamic banks do not take regular deposits, nor they provide loans; (ii) in some transactions they perform Islamic banks share the risk with the customer, making it more unlikely for the customer to default; (iii) other transactions serve economically the same purpose as a loan/ lease/other types of credit-based arrangements where the Islamic bank essentially shares no risk with the customer but takes only the risks inherent to banking activity such as credit risk, operational risk, etc.

The performed brief analysis of Islamic banking and the social-economic reality in the Arab countries leads to the conclusion that in comparison with the Western world, insolvency proceedings are in practice rather rare for several reasons including: a) a risk-sharing character of Islamic banking, b) bail-outs provided by family members, c) concentration of capital in few highly solvent market players, d) lack of access to credit for small businesses and e) lack of trust in the legal system and the state courts, which leads to informal dispute resolution*(80).

The next step of the analysis is to review the main rules and practice on insolvency in a couple of Muslim states, namely - Saudi Arabia, the United Arab Emirates, Indonesia, and Malaysia.

Saudi Arabian insolvency laws are regulated under the Commercial Code Law*(81) and the Bankruptcy Avoidance Regulation*(82). Both the debtor herself and her creditors are entitled to initiate insolvency proceedings before the competent court*(83). However, if it is the debtor who files for insolvency the consent of the shareholders is needed*(84). Upon initiation of the proceedings, the debtor is restrained and has no further capacity to contract*(85), all claims by creditors are stayed and a receiver is appointed by the court*(86). The classes of creditors go as follows: 1) secured creditors have first priority over the collateral, 2) expenses connected with liquidation proceedings, 3) remuneration for wages, and 4) all other unsecured creditors and secured creditors for the outstanding debt after liquidation and distribution of the collateral*(87). Although restructuring or rescheduling of the debt is not regulated by law, it is often used on the basis of creditor-debtor agreements*(88). In practice, the insolvency system is hardly ever used due to its inefficiency and high costs*(89). Because of practical inefficiency of a current system a reform of the Saudi Arabian insolvency laws has been proposed*(90).

The United Arab Emirates (UAE) insolvency laws share a lot in common with the Saudi Arabian rules so the focus here would be only on the existing differences. Like Saudi Arabia, the proceedings take a long time, are expensive and lack efficiency*(91). Thus, it is not surprising they are also hardly ever used*(92). A difference with Saudi Arabia might be found in the fact that out of court settlements as well as debt for equity swaps although permissible, do not take place regularly*(93). Another notable difference is the so called Dubai International Financial Center Zone (DIFC) where leading international standards with regard to insolvency laws apply*(94).

The third country that will be examined is Malaysia. Its insolvency rules are influenced to a great extent by UK law due to the colonial past of the country. What is interesting is that the court might order detention of a debtor in case it is considered that there is a flight risk*(95). The correspondence of the debtor might be put under surveillance and in essence an insolvent person is treated to a large extend as a criminal offender*(96).

Thelast country to look at is Indonesia. Few are the particularities - first, it is the priority treatment granted to employees who are provided with unequivocal protection by receiving payments from the liquidated assets even before secured creditors*(97). Secondly, not only a debtor himself/herself and his/her creditors are entitled to file for insolvency but also the public prosecutor*(98). Further, as in Malaysia, debtors are treated as criminals and are released from custody only when the insolvency decision is issued*(99). As in many other Islamic jurisdictions the court proceedings are slow, unreliable and, thus, creditors often prefer to settle their disputes informally and out of the courtroom*(100).

The brief overview that was performed shows that despite the differences between various Islamic jurisdictions they have some elements and underlying principles in common. The origins of these similarities might be traced back to the classical Islamic law, discussed in Chapter 2. Among these are the principle of strong social responsibility (especially evident in Indonesia with its extensive employee protection), the general underdevelopment of the insolvency framework and its rare practical usage, implementation in certain jurisdictions of some "ancient" practices such as imprisonment of the debtor, restriction of the debtor's legal capacity and the wide spread of out-of-court-room settlements of debtor creditor relations.

It might be summarized that the classical Islamic Law to a considerable degree still underpins the legal framework of insolvency in various Islamic jurisdictions. This is only natural due to the strong connection between the Islamic religion and the legal framework. However, "classical" Islamic insolvency law proves itself incapable of dealing with the complicated economic and financial reality of the modern world. Unlike Islamic banking which manages to adjust itself to the needs of the financial system and is extensively used among Muslims, Islamic insolvency laws lack the same success and are hardly ever used in practice. The fact that some Islamic jurisdictions initiate drastic reforms*(101) in the area might serve as a further argument to support such a statement.

However, in some Islamic countries such a reform faces strong resistance. UAE is a good example where the government struggles to introduce new insolvency rules due to "cultural resistance, lack of information on company accounts and challenges ensuring that the new law complies with Sharia principles"*(102). The lack of information on enterprise accounts is a direct consequence of the informal character of many businesses in the economy of Islamic countries*(103) but not keeping accurate and reliable accounts is a clear barrier for successful initiation and conclusion of insolvency proceedings. Furthermore, it is being argued that the Quran treats as a sin voluntary forgiveness of debt*(104). However, it was seen in the above analysis that such a point of view indeed exists among the scholars but it is not a way unanimously held. Nevertheless, it is evident that structural amendments aimed at updating insolvency rules, although undeniably needed, will potentially face resistance in Sheri'a countries.

IV. Conclusion

In conclusion, it might be summarized that studying classical Islamic insolvency rules is still of great worth as the underpinning principles of insolvency rules of many Islamic jurisdictions might be traced there. Although different in their 'dots and comas', contemporary insolvency laws in the countries where laws are based on the Sheri'a not only have common roots but also one shared feature - they are highly ineffective and inadequate for the economic and financial relations of the 21st century. The very reason that the practical application of these rules is, by all means, avoided serves as the greatest prove for that. The factual world will always overcome the normative one as the law is nothing but a means to serve the underlying social and economic relations. Lawmakers must take this into account if their purpose is to produce anything but "dead norms." Legislators in the Islamic jurisdictions make no exception.

A possible way forward with regard to insolvency law in Shari'a based legal systems is "contemporary" interpretation of the primary sources of law. Such construction was already implemented in connection with other areas such as financial transactions and is, by all means, also possible with respect to insolvency law. The Quran allows for an interpretation which would lead to a fair balance between the interests of creditors and an insolvent person. Furthermore, some archaic measures such as imprisonment of a debtor shall no longer be implemented, since they cannot serve their purpose and, thus, are redundant. Settlement of disputes has to be encouraged because it is not only effective but also compliant with the Sheri'a. Changes in insolvency laws can only be effective if complemented by amendments in other areas of law such as, for example mandatory bookkeeping of all undertakings, including a small family-owned once.

Modernization of insolvency laws is not just necessary but a conditio sine qua поп because it is an essential part of the legal framework that regulates the commercial life of a country. When commercial relations advance, so must do the rules on insolvency in order to provide a just system for restructuring when such is possible, protection of a debtor, and fair distribution of liquidated assets among the creditors. A non-working insolvency system serves essentially no one as it fails to protect not only a debtor and his/her creditors but also potentially viable businesses that would be beneficial for the society in the future.

References

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Ayub M. (2007). Understanding Islamic Finance. John Wiley & Sons Ltd.

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Kamali M.H. (2003). Principles of Islamic Jurisprudence. 1-2.

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*(1) Shayerahllias. Islamic Finance: Overview and Policy Concerns (Cong. Research Serv., RS 22931 2009) 1-2.

*(2) For example, in Saudi Arabia where Article 1 of its Basic Law provides that the Quran and the Sunnah are the country's Constitution.

*(3) As provided under Article 2, (l), A. of the 2005 Constitution of Iraq.

*(4) Awad A. and Michael R.E. Iflas and Chapter 11: Classical islamic law and modern bankruptcy (2010). The International Lawyer, 44(3), 976.

*(5) Awad A. and Michael R.E. Iflas and Chapter 11... 978.

*(6) Awad A. and Michael R.E. Iflas and Chapter 11... 978.

*(7) S.M. Ghazanfar and Azim Islahi, Explorations in Medieval Arab-Islamic Economic Thought: Some Aspects of Iim Qayyim's Economics, in Medieval Islamic Economic Thought, S. M. Ghazanfar ed., (2003), 128-141.

*(8) Awad A. and Michael R.E. Iflas and Chapter 11... 980.

*(9) Translation of the Noble Quran by Dr. Muhammad Taqi-ud-Din Al-Hilali, Ph.D. & Dr. Muhammad Muhsin Khan.

*(10) An example of that principle can he found for instance in Section 275, par. 1 of the German Civil Code (Biirgerliches Gesetzhuch BGB) - "A claim for performance is excluded to the extent that performance is impossible for the obligor or for any other person." ("Der Anspruch auf Leistung ist ausgeschlossen, soweit diese fiir den Schuldner odcrfur jedermann unmdglich ist.")

*(11) An objective impossibility exists where not only the debtor but also no one else is able to perform - e.g. individualized object that needs to be transferred ceases to exist (the horse "Hercules" dies) or where the debtor is unable to perform when the obligation is intuitu personae (a famous singer gets seriously ill before a concert).

*(12) The debtor at hand is unable to perform due to subjective circumstances but objectively the obligation might be performed - e.g. the debtor has no money but in general there is money in free circulation.

*(13) For example Article 2277 (2), par. 3 of the 2004 French Civil Code.

*(14) For example Article 119 of the Bulgarian Statute on Contracts and Obligations (1950).

*(15) Quran 2:280.

*(16) Quran 2:275.

*(17) Quran 2:276.

*(18) Mohammad Nejatullah Siddiqi. Riba, Bank Interest and the Rationale of its Prohibition. Islamic Development Bank, Islamic Research and Training Institute (2004), 37-38. See also: Awad A. and Michael R.E. Iflas and Chapter 11... 982.

*(19) Awad A. and Michael R.E. Iflas and Chapter 11... 983.

*(20) Abraham L. Udovitch. Partnership and Profit in Medieval Islam. Princeton University Press (1970).

*(21) Abraham L. Udovitch. Partners hip and Profit in Medieval Islam. 170.

*(22) A type of partnership existing hi Germany and many other civil law jurisdictions with two types of partners - (i) general partners that are unhmitedly liable and manage the enterprise (often limited liability companies themselves) and (ii) limited partners that provide the equity and whose liability is limited to the capital provided.

*(23) Awad A. and Michael R.E. Iflas and Chapter 11... 984; Mark J. Sundahl. Iraq, Secured Transaction, and the Promise of Islamic Law. Vanderhilt Journal of Transnational Law. 2007. 40. 1301.

*(24) Awad A. and Michael R.E. Iflas and Chapter 11... 985.

*(25) Awad A. and Michael R.E. Iflas and Chapter 11... 985.

*(26) It has to he highlighted that in some Western jurisdictions the notion of insolvency applies only to enterprises hut not to natural persons who are not engaged in commercial activity.

*(27) Awad A. and Michael R.E. Iflas and Chapter 11... 988 and the literature quoted therein in footnote 91.

*(28) Awad A. and Michael R.E. Iflas and Chapter 11... 989.

*(29) Awad A. and Michael R.E. Iflas and Chapter 11... 989.

*(30) Sina Ah Muscati. Late Payment in Islamic Finance. 6 UCLA Journal of Islamic and Near Eastern Law (JINEL). 47, 54 (2007).

*(31) Awad A. and Michael R.E. Iflas and Chapter 11... 991.

*(32) Mohammad Hashim Kamali. Principles of Islamic Jurisprudence. 1-2 (2003). 149.

*(33) Awad A. and Michael R.E. Iflas and Chapter 11... 995.

*(34) On the historical development of the structure see Abdullah Alwi Haji Hassan. Sales and Contracts in Early Islamic Law. Kuala Lumpur: The Other Press, 2007.134.

*(35) Craig R. Nethercott. Murahaha and Tawarruq in Islamic Finance, Law and Practice (edited hy Craig R. Nethercott and David M. Eisenherg). Oxford University Press (2012). 192-193.

*(36) Craig R. Nethercott. Murahaha and Tawarruq in Islamic Finance, Law and Practice. 193-194.

*(37) On how Murabaha differs from a bank loan see: Nik Norzrul Thani, Mohamed Ridza Mohamed Abdullah, Megat Hizini Hassan. Law and Practice of Islamic Banking and Finance. Sweet & Maxwell Asia (2003). 58.

*(38) Because the acquisition of the asset by the seller must be "real", Islamic scholars invented the concept of "implied or constructive possession" which is triggered by the mere fact that an asset is at one's disposal and he may deal with it as he seems fit. See in that regard The Council of the Islamic Fiqh Academy, Resolution No. 53 (4/6) concerning Possession: its different forms especially the modern forms and their rules.

*(39) N.N. Thani, M.R.M. Abdullah, M.H. Hassan. Law and Practice of Islamic Banking and Finance. 58.

*(40) Craig R. Nethercott. Murabaha and Tawarruq in Islamic Finance, Law and Practice. 199-200.

*(41) The Ijara contract might be used also in relation to the provision of services but for the purposes of this paper it is discussed only with regard to its more common form concerning usufruct of an asset.

*(42) C.R. Nethercott. Murabaha and Tawarruq in Islamic Finance, Law and Practice. 241.

*(43) AAOIFI Shari'a Standard No. 9, 6/1.

*(44) "And if you are on a journey and cannot find a scribe, then let there be a pledge taken (mortgaging); then if one of you entrust the other, let the one who is entrusted discharge his trust (faithfully), and let him be afraid of Allah, his Lord. And conceal not the evidence for he, who hides it, surely his heart is sinful. And Allah is All-Knower of what you do."

*(45) N.N. Thani, M. R. M. Abdullah, M. H. Hassan. Law and Practice of Islamic Banking and Finance. 59.

*(46) N.N. Thani, M.R.M. Abdullah, M.H. Hassan. Law and Practice of Islamic Banking and Finance. 59.

*(47) N.N. Thani, M.R.M. Abdullah, M.H. Hassan. Law and Practice of Islamic Banking and Finance. 60.

*(48) N.N. Thani, M.R.M. Abdullah, M.H. Hassan. Law and Practice of Islamic Banking and Finance. 61.

*(49) Muhammad Ayub. Understanding Islamic Finance. John Wiley & Sons Ltd (2007). 167.

*(50) Awad A. and Michael R.E. Iflas and Chapter 11... 992.

*(51) Awad A. and Michael R.E. Iflas and Chapter 11.... 992.

*(52) Awad A. and Michael R.E. Iflas and Chapter 11.... 992.

*(53) Awad A. and Michael R.E. Iflas and Chapter 11.... 993.

*(54) The date on which the terms of the lease contract are implemented - usually the date when lessee gets the possession over the leased asset.

*(55) Awad A. and Michael R.E. Iflas and Chapter 11... 994.

*(56) Awad A. and Michael R.E.

*(57) Awad A. and Michael R.E.

*(58) Awad A. and Michael R.E.

*(59) Awad A. and Michael R.E.

*(60) Awad A. and Michael R.E.

*(61) Awad A. and Michael R.E. Iflas and Chapter 11.... 998.

*(62) Awad A. and Michael R.E. Iflas and Chapter 11.... 998.

*(63) Awad A. and Michael R.E. Iflas and Chapter 11....

*(64) Awad A. and Michael R.E. Iflas and Chapter 11....

*(65) Hiba Husseini. Bankruptcy and Insolvency Law in the Arab World. The Comparative Law Yearbook of International Business (volume 31, 2009). 3.

*(66) H. Husseini. Bankruptcy and Insolvency Law in the Arab World. 3.

*(67) H. Husseini. Bankruptcy and Insolvency Law in the Arab World. 4.

*(68) H. Husseini. Bankruptcy and Insolvency Law in the Arab World. 4.

*(69) H. Husseini. Bankruptcy and Insolvency Law in the Arab World. 4.

*(70) H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 5.

*(71) H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 5.

*(72) H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 5.

*(73) H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 5.

*(74) H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 6.

*(75) Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012, Official Journal of the EU L 176, 27.06.2013.

*(76) Part I, (2) of Financial Services Act 2013, Malaysia, published in State Gazatte on 22 March 2013.

*(77) Part I, par. 2, (l) of the Islamic Financial Services Act 2013, Malaysia, published in State Gazatte on 22 March 2013.

*(78) H. Husseini. Bankruptcy and Insolvency Law in the Arab World. 6. In general on Islamic banking core principles see further N. N. Thani, M.R.M. Abdullah, M.H. Hassan. Law and Practice of Islamic Banking and Finance. 79-83.

*(79) On Ijara and Murabaha transactions see ahove.

*(80) On the informal character of dispute resolution see further H. Husseini. Bankruptcy and Insolvency Law in the Arah World. 5.

*(81) The Commercial Court Law promulgated hy Royal Decree No. 32 from 1 June 1931.

*(82) The Bankruptcy Avoidance Regulations promulgated under Royal Decree No. M/16 from 24 January 1996

*(83) Adam Richard Taniehan. Part of an Exit Strategy, May 2011, available at: https://uaelaws.files.wordpress.com /2011/09/islamic-insolvency, pdf (accessed 09.10.2016)

*(84) Article 108 of the Commercial Court Law.

*(85) Latham & Watkins LLP. Doing Business in Saudi Arabia (2010). P. 9.

*(86) A.R. Taniehan. Part of an Exit Strategy. 3.

*(87) A.R. Taniehan. Part of an Exit Strategy. 3.

*(88) A.R. Taniehan. Part of an Exit Strategy. 3.

*(89) A.R. Taniehan. Part of an Exit Strategy. 3.

*(90) On the basics of the proposednewlegalframework-Paul Latto. OnThe Horizon: Saudi Arabia's Proposed New Insolvency Law and Commercial Pledge Law. Available at: https://www.dlapiper.c0m/~/media/Files/Insights/Pubhcati0ns/20i6/03/ Saudi_Arabia_new_insolvency_law_and_commercial_pledge_law. pdf (accessed on 09.10.2016)

*(91) See in that regard A. R. Taniehan. Part of an Exit Strategy. 4, where it is claimed that on average proceedings take 5,1 years, cost around 30% of the available assets and recover only 0,102 cents on the dollar.

*(92) A.R. Taniehan. Part of an Exit Strategy. 4.

*(93) A.R. Tanielian. Part of ail Exit Strategy. 4.

*(94) A.R. Tanielian. Part of an Exit Strategy. 6.

*(95) A.R. Tanielian. Part of an Exit Strategy. 8.

*(96) A.R. Tanielian. Part of an Exit Strategy. 8.

*(97) A.R. Tanielian. Part of an Exit Strategy. 6.

*(98) A.R. Tanielian. Part of an Exit Strategy. 6.

*(99) A.R. Tanielian. Part of an Exit Strategy. 6.

*(100) A.R. Tanielian. Part of an Exit Strategy. 6.

*(101) For example the already mentioned Saudi Arabia's 2016.

*(102) Sarah Townsend, Revealed: why the UAE government is struggling to reform insolvency law (7 February 2016). Available at: http://www.arabianbusiness.com/revealed-why-uae-government-is-struggling- reform-insolvency-law-6209l7.html#. Vzo7bJGLTIU (accessed 09.10.2016).

*(103) On that point see the analysis above on the social-economic features of the society in the Islamic countries.

*(104) ihid.