SS 43 · Dealing with debts

SS 43: Insolvency

What this standard is about

Insolvency (iflas) is the state of a debtor who cannot pay his debts. This standard — adopted in May 2010 — sets the Islamic rules for handling it: how insolvency is declared, what the debtor must and must not do, and how creditors share what is left.

A central point: insolvency is not automatic. It must be assessed and publicly declared by a competent authority, such as a court or judge.

Why it exists

Debt carries heavy moral weight in Islam, and unpaid debt is a serious matter. Modern economies also need orderly procedures so that one creditor does not grab everything while others get nothing. The standard brings the two together: moral responsibility plus a fair, public process.

The key rules, simply put

Insolvency must be declared by a competent authority after assessing the debtor's position. A debtor cannot simply declare himself insolvent.
The debtor has a moral duty not to take any action that further harms his creditors — for example, hiding assets or favoring one creditor over others.
If creditors ask, the court may physically sequester (take control of) the debtor's assets.
Creditors do not have to prove they are the only creditors.
The declaration is documented and certified through official procedures. If the insolvency is later revoked, the revocation must be announced publicly.
A creditor who appears after a distribution must recover his share from the creditors who already received theirs, by agreement or through the courts.

An everyday example

A small business owes money to five suppliers and cannot pay. One supplier goes to court, which examines the books and publicly declares the business insolvent. The court takes control of the remaining stock and equipment. After the first distribution, a sixth creditor appears with a valid claim — he must recover his share from the five suppliers who already received theirs, by agreement or through the courts.

Words to know

Iflas — insolvency: the state of being unable to pay one's debts.
Sequestration — the court taking control of a debtor's assets to protect creditors.

Source

AAOIFI Shariah Standard No. 43 — full text in the 2015 Shariah Standards book — https://aaoifi.com/download/24233/