English court ruling credit positive for Dana Gas Sukuk investors and Islamic finance industry
The ruling is credit positive for Dana Gas Sukuk investors because the investors’ claims are enforceable, according to Moody’s.
On 19 November 2017 United Arab Emirates-based (UAE) Dana Gas PJSC announced that the English High Court of Justice on 17 November ruled that the purchase undertaking attached to the Sukuk Al Mudarabah that it issued is valid and enforceable under English law. English law is the governing law of the Sukuk documents, other than the Mudarabah agreement, which is governed by UAE law.
The ruling, which is in line with the market’s expectation, is also credit positive for the Islamic finance industry generally because it adds certainty around the legal enforceability of the Sukuk transaction documents, which tend to be complex in order to comply with Shari’ah principles. The judge made the ruling without representation from Dana Gas, which claimed it could not attend because Sharjah UAE Federal Court of First Instance issued an anti-suit injunction at the request of and in response to the action by several Dana Gas shareholders, who sought to have the UAE Sharjah Court decide the matter.
The issue began in June 2017 when Dana Gas, facing liquidity challenges at the time, announced that amid the continual development of Islamic financial instruments and their interpretation, it had received legal advice that its Sukuk was not Shari’ah compliant and was therefore unlawful under UAE law. As a result, the company advised that restructuring the Sukuk was necessary to ensure it complied with the law. The company started legal proceedings in the UAE and UK to protect its interest against any hostile action from the Sukuk holders.
Despite the UK ruling, the case is far from ended. Dana Gas advised that it will appeal Friday’s ruling to the English Court of Appeal. Furthermore, the company’s injunction in the UAE courts still stands and it expects a hearing on that in December. Still, the English court ruling is a positive outcome for the investors. We expect going forward that the industry will introduce tighter legal requirements to protect investors from similar issues. In addition, regulatory efforts, especially in the Gulf Cooperation Council countries, to standardise the Shari’ah governing module will help standardise Sukuk structures and support the enforceability of the Shari'ah’h opinion at origination, thereby reducing the complexity and uncertainty associated with these instruments.