Can a Director of a Limited Company Draw a Regular Salary Along With Dividends?

directors of limited company

Question:

Assalamu alaikum

I and three others are shareholders in our company which is a limited company.  Two of the four work and receive salaries.  We have been told that this setup is impermissible.  Is it permissible for me as a director to get paid? If it is haram, do I have to give all my salary in charity?   Can you kindly guide us on this matter. 

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

The Answer:

It is permissible to draw a salary from your company on condition[1]:

1)     You have an employment agreement with a defined job description, hours of work and salary which is independent to your contract and shareholding as a director

2)     Your salary is independent to dividends you receive or retain in the business such that you receive salary in lieu of work regardless of profits or loss

 

The Fiqh (jurisprudence of the answer):

A shareholder in a partnership cannot fix a wage for himself along with dividends as that nullifies the risk of his capital investment and in addition, there is an element of gharar (uncertainty) as to whether the fixed amount will be reaped or not.  Bearing risk in an investment is a requirement for the return to be lawful.  The possibility of loss and gain are vital for a venture to be regarded as a valid investment.  The Fuqahā’ (jurists) state: 

“Profit is in accordance to the agreed ratio & loss is proportionate to the amount of wealth staked.”[2]

The Fuqahā’ have placed down the following principles and maxims to highlight the importance of risk taking:  

“Al-Kharāj bi al-ḍamān” (profits come with liability)[3]

 “Al-ghunm bi al-ghurm” (reward comes with risk)[4]

Risk comes with one of three factors[5]:

1) Staking wealth
2) Staking labour
3) Assuming responsibility

Hence, a person who hasn’t staked his wealth or labour or has not assumed responsibility has not assumed risk and cannot gain a profit.

However, when the contract of employment is independent to the contract as a director, the risks and rewards of each contract is independent.  The risks as a shareholder are independent and exogenous to the risks as an employee.  Dividends received as a shareholder are dependent upon the number of shares and performance of the company, whereas, the salary received is based on one’s own performance and services delivered in the company.  In addition, a shareholder can liquidate his shares and still continue to work as an employee.  In the same manner, an employee can resign from work and keep his shares in the company.  Therefore, the agreements are independent with the rewards and risks of each arrangement independent of the other.  Therefore, in your scenario, as long as the two are independent, it is permissible to withdraw a salary.      

The wisdom of the law:

Note: The law is not dependent on wisdom and benefits.  It is possible that not all said benefits are found at a given time.  The absence of any or all benefits will not change the ruling or law.  The law is not deduced nor determined through benefits.  The benefits of the law are enumerated to complement rationale minds.

Investment risk is necessary to prevent a person gaining wealth without risk which is unfair and unjust.  Equality demands every person in a transaction to bear risk to gain. Shariah promotes justice and equality which is exhibited by every partner bearing risk to gain profit. 

 

And Allah Ta’ālā Alone Knows Best

Mufti Faraz Adam al-Mahmudi,
www.darulfiqh.com

 

DISCLAIMER:

The views and opinions expressed in this answer belong only to the author and do not in any way represent or reflect the views of any institutions to which he may be affiliated.

Arguments and ideas propounded in this answer are based on the juristic interpretations and reasoning of the author. Given that contemporary issues and interpretations of contemporary issues are subjective in nature, another Mufti may reach different conclusions to the one expressed by the author. Whilst every effort has been taken to ensure total accuracy and soundness from a Shari’ah perspective, the author is open to any correction or juristic guidance. On the event of any juristic shortcomings, the author will retract any or all of the conclusions expressed within this answer.

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[1] AAOIFI (2010) Sharia Standards: Sharia Standard No.12 Sharika (Musharaka) and Modern Corporations.  Article no. 3/1/3/5, pp.199-230, Accounting and Auditing Organization for Islamic Financial Institutions, Manama, Bahrain

Mufti Radha al-Haq (2012), Fixing a wage for a Mudharib. Fatawa Darul Uloom Zakariyya 5, pp.751-754, Karachi: Zam Zam Publishers

[2]  ولنا ما روى أصحابنا في كتبهم عن علي – رَضِيَ اللَّهُ عَنْهُ – أنه قال: الربح على ما اشترط العاقدان والوضيعة على قدر المال، وكذا قال أكثر الشراح (البناية ج 7 ص 398)

[3]  (الْمَادَّةُ 85) : الْخَرَاجُ بِالضَّمَانِ (المجلة)

[4]  لِأَنَّ نَفَقَاتِ هَذِهِ الْأَمْوَالِ هِيَ بِنِسْبَةِ حِصَصِهِمَا، اُنْظُرْ الْمَادَّةَ (1308) وَحَاصِلَاتِهَا أَيْضًا يَجِبُ أَنْ تَكُونَ عَلَى هَذِهِ النِّسْبَةِ؛ لِأَنَّ الْغُنْمَ بِالْغُرْمِ بِمُوجِبِ الْمَادَّةِ (88) . (شرح المجلة ج 3 ص 26 دار الجيل)

[5]  وَالْأَصْلُ أَنَّ الرِّبْحَ إنَّمَا يُسْتَحَقُّ عِنْدَنَا إمَّا بِالْمَالِ وَإِمَّا بِالْعَمَلِ وَإِمَّا بِالضَّمَانِ، أَمَّا ثُبُوتُ الِاسْتِحْقَاقِ بِالْمَالِ فَظَاهِرٌ؛ لِأَنَّ الرِّبْحَ نَمَاءُ رَأْسِ الْمَالِ فَيَكُونُ لِمَالِكِهِ، وَلِهَذَا اسْتَحَقَّ رَبُّ الْمَالِ الرِّبْحَ فِي الْمُضَارَبَةِ وَأَمَّا بِالْعَمَلِ، فَإِنَّ الْمُضَارِبَ يَسْتَحِقُّ الرِّبْحَ بِعَمَلِهِ فَكَذَا الشَّرِيكُ.

وَأَمَّا بِالضَّمَانِ فَإِنَّ الْمَالَ إذَا صَارَ مَضْمُونًا عَلَى الْمُضَارِبِ يَسْتَحِقُّ جَمِيعَ الرِّبْحِ، وَيَكُونُ ذَلِكَ بِمُقَابَلَةِ الضَّمَانِ خَرَاجًا بِضَمَانِ بِقَوْلِ النَّبِيِّ – عَلَيْهِ الصَّلَاةُ وَالسَّلَامُ – «الْخَرَاجُ بِالضَّمَانِ» ، فَإِذَا كَانَ ضَمَانُهُ عَلَيْهِ كَانَ خَرَاجُهُ لَهُ، وَالدَّلِيلُ عَلَيْهِ أَنَّ صَانِعًا تَقَبَّلَ عَمَلًا بِأَجْرٍ ثُمَّ لَمْ يَعْمَلْ بِنَفْسِهِ، وَلَكِنْ قَبِلَهُ لِغَيْرِهِ بِأَقَلَّ مِنْ ذَلِكَ طَابَ لَهُ الْفَضْلُ، وَلَا سَبَبَ لِاسْتِحْقَاقِ الْفَضْلِ إلَّا الضَّمَانَ، فَثَبَتَ أَنَّ كُلَّ وَاحِدٍ مِنْهُمَا سَبَبٌ صَالِحٌ لِاسْتِحْقَاقِ الرِّبْحِ، فَإِنْ لَمْ يُوجَدْ شَيْءٌ مِنْ ذَلِكَ لَا يَسْتَحِقُّ بِدَلِيلِ أَنَّ مَنْ قَالَ لِغَيْرِهِ: تَصَرَّفْ فِي مِلْكِكَ عَلَى أَنَّ لِي بَعْضَ رِبْحِهِ؛ لَمْ يَجُزْ، وَلَا يَسْتَحِقُّ شَيْئًا مِنْ الرِّبْحِ لِأَنَّهُ لَا مَالَ وَلَا عَمَلَ وَلَا ضَمَانَ، (بدائع الصنائع في ترتيب الشرائع ج 6 ص 62 دار الكتب)

[5]  وَرِبْحُ مَا لَمْ يُضْمَنْ لَا يَطِيبُ لِنَهْيِ النَّبِيِّ – عَلَيْهِ الصَّلَاةُ وَالسَّلَامُ – عَنْ رِبْحِ مَا لَمْ يُضْمَنْ، وَلِمَا فِيهِ مِنْ شُبْهَةِ الرِّبَا فَرِبْحُ مَا لَمْ يُضْمَنْ أَوْلَى، (بدائع الصنائع في ترتيب الشرائع ج 5 ص 239 دار الكتب)

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