The article discusses the halachic implications of a business investment structured as an interest-bearing loan to a corporation, focusing on the prohibition of ribbis (interest) and the use of a Heter Iska. The Bais Havaad was consulted to determine if a Heter Iska was necessary for Slim Delights, a company funded by J-tank moguls. The analysis considers whether the investment constitutes a loan with a borrower, given the lack of personal guarantees and limited assets of the borrowing entity. The article references the Igros Moshe's leniency on loans to corporations without personal guarantees, noting disputes among poskim. It also explores the possibility of leniency when funds are used strictly for business expenses, as opposed to personal needs. Despite uncertainties, the recommendation was to draft a Heter Iska to ensure compliance with halacha.
Halachic Analysis of Interest in Corporate Loans and Heter Iska
J-tank recently had an article about a business called Slim Delights which solicited funding from the moguls at J-tank. The moguls agreed to fund the business and structured the investment so that the investors would receive a share in the company and additionally earn a return on the money invested. Subsequently, an individual wrote a letter to the editor of Ami Magazine wondering how an upstanding Orthodox publication could be sanctioning what, in the letter writer’s view, was a transgression of the prohibition against charging interest on a loan. Ami Magazine requested that the Bais Havaad publish a response to the letter, which the Bais Havaad proceeded to do. While acknowledging that we were not familiar with the details of the final investment (which may not have run afoul of the laws of Ribbis), we discussed the issue of loans to corporations in general, focusing on the famous heter of the Igros Moshe.
Recently, the owner of Slim Delights reached out to the Bais Havaad to draft a Heter Iska pursuant to the conclusions of the article, which indicated that it praiseworthy to draft a Heter Iska in the case of a loan to a corporation and not rely on the aforementioned leniency.
Upon review of the investment details, it emerged that it was not so clear that a Heter Iska was required in this situation; however, we did recommend that a Heter Iska be executed to be on the safe side. It is worth delving more deeply into this matter because we have received numerous similar questions in the recent past, which indicates that this type of situation is not commonly understood.
As discussed in the previous article, in when a loan is made to a business without a personal guarantee, there is a major dispute in the Poskim running the full gamut of some poskim saying that it is biblically prohibited, others saying it is rabbinically prohibited, and others saying it is allowed.
However, it is important to point out that for any ribbis prohibition to be relevant, we need to have a situation where the recipient can be viewed as a “borrower”. It is important to keep in mind that the mere fact that a transaction is structured as an interest-bearing loan does not suffice to render it prohibited if there is no lender/borrower relationship.
The case at hand may be an interesting example of this. While the “investment” was structured as an interest-bearing loan, one can argue that it is a loan for which there is no borrower. This is based on the fact that there is a confluence of two factors: 1) the loan was made to an entity without any personal guarantee and 2) the entity doing the borrowing had very limited assets or value.
While the previous article quoted many poskim who dispute the leniency of the Igros Moshe who gives a blanket heter for loans to an entity without a personal guarantee, this would only apply when the owner of the entity can be seen as having a vested interest in paying off the loan. Such an interest can be a result of having invested his own money in the entity so that his investment is “collateral” for the loan. Additionally, it can be a result of borrowing against an entity which to which the owner has contributed significant value such as by giving the entity rights to intellectual property or by creating a client base for the entity. However, a loan to an entity which has no value or assets, is basically a loan from the lender to the lender i.e., the lender is taking money out of one pocket and putting it into the other pocket. This is because of the fact that any interest payments would only be able to be drawn from the profits of the company. Since the “lender” is the only investor, any profits would accrue to him regardless.
Upon investigation, it is not clear that Slim Delights had no inherent value before the “loan”. Therefore, I recommended that it is proper to draft a Heter Iska in this case.
However, there is another angle which may justify the “loan” even without a heter iska. The previous article had quoted many poskim who dispute the above-mentioned leniency of the Igros Moshe. However, I am not aware of any poskim who clearly dispute the leniency even in a case where the borrower may not use the money for personal needs. In fact, there are significant sources in earlier acharonim who seem to permit one partner charging interest to the partnership and structuring the distributions of the partnership in such a manner. In other words, it may be allowed for one partner to contribute money to the partnership and demand interest on his money before any profits are distributed to the other partners. The reason given for this leniency is that it is considered a normal distribution of profits by the partnership and not payment of interest on a loan. I have heard a theory being proposed that the Acharonim are only lenient in a case where the stipulation was that the interest would only be paid from profits of the partnership but not be paid in a situation where the partnership suffered a loss. However, I have not been able to substantiate that theory from the actual words of the Acharonim; and as such, am inclined to believe that the leniency would apply even in the case of loss. Although, as mentioned, the leniency of the Igros Moshe is subject to dispute and difficulty, I have not seen any disputant of the Igros Moshe who discusses a situation where it is stipulated that the funds must be used for business expenses. Additionally, the challenges raised against the heter of the Igros Moshe appear to be cases in which the borrower may use the funds for anything that he desires. One would be hard pressed to differentiate between the leniency of the Acharonim mentioned above, and a loan to an entity; if it is stipulated that the funds must be used for business expenses and not personal needs. This may be the implicit stipulation in the case under consideration and may also generally be the case when the entity is not putting up collateral against the loan. (I discussed the matter with a legal expert who was of the tentative opinion that an entity that borrows money would have restrictions on spending the money). I did recommend executing a Heter Iska in the situation at hand, since I have not found contemporary sources who apply this leniency to entity loans of the type that we are discussing. It is important to be aware however, that there are many angles to consider before reaching a conclusion, and that structures which appear to be prohibited, may in fact be permitted when analyzed carefully.
Igros Moshe