The Dana Gas Sukuk: An Example of Why We Need the Proposed Sukuk Bankruptcy Tribunal (SBT)
By: Camille Paldi
According to S&P Global Ratings, one of the main faults of the Islamic financial system in 2019 is the lack of standardization of legal contracts. The lack of standardization expels potential investors as they are uncertain about the dispute resolution process and outcome in the event of a dispute or for example a sukuk bankruptcy or default. As the Islamic finance industry is nearing US$2.4 trillion in assets, it is about time that the Islamic finance industry created a unique and independent dispute resolution mechanism, which would boost investor confidence and solidify the Islamic finance industry for many years into the future. This brief article aims to show how the Dana Gas debacle reveals that the Islamic finance industry is ill-equipped to handle sukuk defaults and introduces the concept of the Sukuk Bankruptcy Tribunal (“SBT”), which is part of the wider (“DWIFAC”) or Dubai World Islamic Finance Arbitration Centre dispute resolution mechanism.
The Dana Gas Sukuk
Dana Gas is an independent gas company headquartered in Sharjah, United Arab Emirates. (Wikipedia, 2019) Dana Gas was established in December, 2005 with a public listing on the Abu Dhabi Securities Exchange (ADX). (Wikipedia, 2019) Dana Gas has exploration and production assets in Egypt, Kurdistan Region of Iraq, and the UAE, with an average production output of 67,600 boepd in 2017. (Wikipedia, 2019)
In 2013, Dana Gas issued a dual-tranche Mudarabah sukuk with an aggregate principal amount of approximately US $950 million listed on the Irish Stock Exchange. (Cleary Gottlieb, 2018) Each tranche of the sukuk was subsequently reduced to US $350 million following sukuk buyback and conversion, bringing the total principal amount to US $700 million due in October 2017. (Cleary Gottlieb, 2018)
On May 3, 2017, Dana Gas asked sukuk-holders to form an Ad Hoc Committee to engage in talks on May 8, 2017 to discuss the restructuring of the debt. (Wikipedia, 2019) On June 13, 2017, Dana Gas presented an offer to the Ad Hoc Committee to restructure the $700 million sukuk. Dana Gas also explained that according to Dana Gas and its advisors, the sukuk were no longer Shari’ah compliant. (Wikipedia, 2019) Dana Gas declined to make payment on the sukuk. (Wikipedia, 2019) Dana Gas offered to exchange the sukuk with a new one, which would ‘confer rights to profit distributions at less than half of the current profit rates and without a conversion feature.’ (Wikipedia, 2019) The sukuk holders declined this offer. (Cleary Gottlieb, 2018)
According to White and Case, the move by Dana Gas to declare its approximately US$700 million of outstanding sukuk certificates unlawful and unenforceable on the grounds that in the company’s view and that of its advisors, the sukuk had ceased to be Shari’ah compliant is a potentially destabilizing development for the international sukuk market and to the Islamic Finance Industry as a whole with implications for the sukuk industry’s future survival. (White and Case, 2017) Conventional investors may come to view sukuk as ‘high-risk’ and uncertain financial instruments and the Dana Gas debacle may encourage other issuers to use the argument that their instruments are not Shari’ah compliant to force creditors into debt-restructurings in the future. (White and Case, 2017) There is an obvious and immediate need for a central Sukuk Bankruptcy Tribunal (“SBT”) to adjudicate all of the world’s sukuk disputes in one location under one mechanism according to a standardized sukuk dispute contract.
The key question in this case according to White and Case is whether non-compliance with Shari’ah principles effects the legal enforceability of these instruments. (White and Case, 2017) The outcome of this case may impact whether or not conventional investors wish to continue investing in Islamic sukuk versus conventional bonds in the future. The alternative is to implement the Sukuk Bankruptcy Tribunal or SBT with immediate effect to avoid this type of sukuk default dispute in the future. Rather than splitting jurisdiction between the UAE and the UK, a centralized Sukuk Bankruptcy Tribunal in Dubai, UAE would provide one jurisdiction with a standardized dispute resolution contract for the adjudication of all sukuk disputes under the auspices of the Higher Shari’ah Authority. The streamlined sukuk dispute mechanism would provide investor confidence in the sukuk instrument and encourage sukuk investing well into the future.
On June 14, 2017, Dana Gas obtained an injunction from the Sharjah Federal Court of First Instance restraining anyone from taking any action, inside or outside the UAE, to enforce against any of the securities Dana Gas and its affiliates under Dana Gas’s Security Agreement until a final determination was made by the Court in the lawsuit. (Wikipedia) This was followed by an injunction in the English High Court of Justice and the British Virgin Islands. (Wikipedia, 2019) On July 5, 2017, Dana Gas and the CEO held a scheduled call to explain to the sukuk holders why this deal offered to them was to their benefit. (Wikipedia, 2019)
In September, 2017, a creditor’s committee supported by 70% of the sukuk holders offered Dana Gas a restructuring proposal involving a US $300 million cash payment and a three-year extension of the outstanding sukuk’s life. (Cleary Gottlieb, 2018) Dana Gas rejected the proposal and the dispute between Dana Gas and the sukuk holders was left to the courts to resolve. (Cleary Gottlieb, 2018)
Dana Gas brought an action in the High Court of London requesting that the English law governed purchase undertaking between Dana Gas and the SPV (the “Purchase Undertaking”) be declared void and unenforceable. (Cleary Gottlieb, 2018) Simultaneously, Dana Gas brought an action in the UAE seeking to challenge the validity of the UAE law governed Mudarabah documents for their non-compliance with the Shari’ah law. (Cleary Gottlieb, 2018)
In November 2017, the High Court rendered a preliminary judgment rejecting the arguments put forward by Dana Gas and ruling the English law governed Purchase Undertaking to be valid. (Cleary Gottlieb, 2018)
On May 13, 2018, Dana Gas announced that it had reached an agreement with the Ad Hoc Committee of sukuk holders to restructure and refinance the Dana Gas Sukuk. (Wikipedia, 2019) Investors could exit the sukuk at 90.5 cents on the dollar or roll over into a new three-year US$530 million sukuk with a four percent profit rate, while receiving final profit payments owed to them before the old sukuk matured. (Reuters, 2018) On May 23, 2018, Dana Gas launched the tender. (Wikipedia, 2019)
In this case, while the Purchase Undertaking was subject to English Law and the non-exclusive jurisdiction of English Courts, and had been determined by the High Court to be valid under English Law, the Mudarabah Agreement was subject to UAE law and to the non-exclusive jurisdiction of UAE courts. (Cleary Gottlieb, 2018)
The UAE courts could have refused to apply English law to the Purchase Undertaking or denied enforcement of an English court judgment based on the enforceability of the Purchase Undertaking on the basis that the terms of the Purchase Undertaking violated the Shari’ah law and are contrary to the public order.
It is quite confusing and against the administration of justice that the terms in the Dana Gas prospectus stipulate that the governing law and jurisdiction were split between English and UAE law. The Declaration of Trust, the Agency Agreement, the Purchase Undertaking, the Sale Agreement, the Security Agreement, the Security Agency Agreement, the Ordinary Certificates, and the Exchangeable Certificates were governed by English law and subject to the non-exclusive jurisdiction of the English Courts. The Mudarabah Agreement, the UAE Share Pledges, and the UAE mortgage were governed by the laws of the UAE. The courts of the UAE had non-exclusive jurisdiction to hear all disputes relating to the UAE mortgage. (Hekmatyar and Parkar, 2018)
A question arises, if the Dana Gas Sukuk is partially or fully non-compliant with Shari’ah, does this entail it unlawful under UAE law? Secondly, does this negate the obligation of profit payments, rescinding the terms of the contract and making it unenforceable legally? (Hekmatyar and Parkar, 2018) These are serious questions for potential investors in future sukuk offerings and questions, which are essentially split between two possibly conflicting jurisdictions, the UK and the UAE. The time is ripe to create the Sukuk Bankruptcy Tribunal and the future of the sukuk industry depends on it.
Sukuk Bankruptcy Tribunal (“SBT”)
The author proposes that for 2020 the Islamic finance industry aims to create (“DWIFAC”) or the Dubai World Islamic Finance Arbitration Centre and (“DWIFACJO”) or the Dubai World Islamic Finance Arbitration Centre Jurisprudence Office complete with a Sukuk Bankruptcy Tribunal (“SBT”) and a Takaful Tribunal (“TT”) and that DWIFACJO issue a standardized dispute resolution contract for each DWIFAC, SBT, and TT, which may be attached to the main contract. The DWIFACJO standardized dispute resolution contracts may contain a similar built-in dispute resolution mechanism as the FIDIC contract containing three stages including (1) the Dispute Resolution Board (DAB), (2) amicable settlement, and (3) final referral to DWIFAC, SBT, and TT arbitration. Within thirty days of the occurrence of the subject-matter of a dispute, any party to the contract may submit a claim to the DAB, addressed to the chairman of the DAB and with a copy to all parties of the contract. However, if any of the parties to the contract considers that there are circumstances, which justify the late submission, she may submit the details to the DAB for a ruling. If the DAB considers that it, in all the circumstances, is fair and reasonable that the late submission be accepted, the DAB shall have the authority to override the relevant thirty- day limit and if it so decides, it shall advise both the parties accordingly.
The DAB shall have sixty days to issue a binding ruling, which must be implemented immediately. If either party is not satisfied with the DAB ruling, either party can give notice of dissatisfaction to the other before the thirty days after the day on which she received the decision on or before the thirty days after the day on which the said period of sixty days expired. If there is no dissatisfaction within thirty days after the day on which she received the decision, the DAB’s decision shall become final and binding upon both parties. The DAB’s decision may then only be overturned by settlement or arbitration at DWIFAC, SBT, or TT.
The DAB shall consist of three people who must be suitably qualified in law, Islamic finance, and Shari’ah. Each party shall nominate one member for the approval of the other party. The parties shall consult both these members and shall agree upon the third member, who shall be appointed to act as chairman. However, if a list of potential members is included in the contract, the members shall be selected from those on the list, other than anyone who is unable or unwilling to accept appointment to the DAB.
The agreement between the parties and either a sole member (adjudicator) or each of the three members shall incorporate by reference the General Conditions as written by DWIFACJO, with such amendments as agreed between them. The composition of the DAB shall be by nomination and then joint-selection. DAB members are to be re-numerated jointly by the parties with each paying half of any fees. DAB members may only be replaced by mutual agreement. The appointment of any member may be terminated by mutual agreement of both parties, but not by any party acting alone. Unless otherwise agreed by both parties, the appointment of the DAB shall expire when the discharge of the matter shall have become effective. Where the parties fail or are otherwise unable to agree upon the appointment, nomination or replacement of any member of the DAB, then the appointing official so named in the contract shall make the appointment.
DWIFAC, SBT, and TT may establish an Ambassador’s List similar to the FIDIC President’s List, from which arbitrators and DAB members may be selected, if not specified in the contract. Persons who have successfully completed a DWIFAC Adjudication Assessment Workshop and International Arbitrator’s Islamic Finance Contracts Course and applied for entry to the DWIFAC Ambassador’s List of Approved Dispute Adjudicators are entered on the List for five years. Successful attendees at an Adjudication Assessment Workshop are required to be fluent in English and to be thoroughly familiar with Islamic finance, law, and Shari’ah.
There may be situations where a party fails to comply with a DAB decision. In such cases, the other party may refer the failure to DWIFAC, SBT, or TT arbitration. Where notice of dissatisfaction has been given, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fiftieth day after the day on which notice of dissatisfaction was given. The attempt to obtain an amicable settlement during this prescribed period of fifty days is a condition precedent to a referral to arbitration. There is no given time frame to refer a dispute to arbitration, however, it should be without undue delay. Once the arbitration procedure has been initiated, the DWIFAC arbitration shall commence according to the DWIFAC arbitration rules, the SBT arbitration shall commence according to the SBT arbitration rules, and the TT arbitration shall commence according to the TT arbitration rules.
The arbitrator(s) shall have full power to open up, review, and revise any decision of the DAB relevant to the dispute. Neither party shall be limited in the proceedings before the arbitrator(s) to the evidence or arguments previously put before the DAB to obtain its decision or to the reasons for dissatisfaction given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the arbitration. Arbitration may be commenced prior to or after completion of the contract. The obligations of the Parties and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the contract.
The arbitration at DWIFAC, SBT, and TT shall be conducted in the English language and any arbitral decision shall be final and binding. All of the DWIFAC, SBT, and TT decisions are to be published in English, French, and Arabic and the arbitration itself to be conducted in English. In the event of a conflict of laws, the Shari’ah shall prevail. A valid arbitration decision should lead to a verdict that conforms to the rules of the Shari’ah (AAOIFI 2004:559). The Shari’ah and legal basis of the arbitration decision shall be mentioned in the decision (AAOIFI 2004:559).
In the context of DWIFAC, SBT, and TT, the centers may make arrangements with the Dubai and DIFC courts and Abu Dhabi Courts and the ADGM or Abu Dhabi Global Markets Courts for enforceability of DWIFAC, SBT, and TT arbitration awards. However, parties to the dispute must realize that the arbitration award issued by DWIFAC, SBT, and TT may be overturned or enforced in other jurisdictions (International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai 300 F. Supp. 2d 112 (DDC. 2004)) or challenged in UAE courts based on Article 216 of the Civil Procedure Law (Now Article 53 of the Arbitration Law). Higher Shari’ah Authority decisions shall act as a source of precedent and shall be binding, thus providing legal certainty to Islamic finance and sukuk dispute adjudication. The Higher Shari’ah Authority shall act as the highest Shari’ah authority for DWIFAC, SBT, and TT arbitration, the UAE, and the DIFC and ADGM.
If the Sukuk Bankruptcy Tribunal was in existence at the time of the Dana Gas sukuk dispute, there would have been a contractual, streamlined, and standardized dispute resolution mechanism in place to resolve the dispute while the contract continued. Using a built-in-contractual dispute resolution mechanism such as the afore-mentioned system allows the contract to continue while solving the dispute through the Dispute Adjudication Board and if necessary, ultimately through arbitration. I believe the Islamic Finance Industry should seriously consider the implementation of the Sukuk Bankruptcy Tribunal as part of the wider DWIFAC dispute resolution mechanism.
- Billington, Daniel and Mohamed Taha (Cleary Gottlieb) (2017-2018), “Can the Sukuk Industry Survive the Dana Gas Dispute?” Emerging Markets Restructuring Journal, Issue No. 5 – Winter 2017-2018.
- Dey, Debashis, Xuan Jin, Sankalp Labroo, Hashim Eltumi (White & Case)(2017), “Dana Gas Sukuk: A Red Herring or Cause for Concern?” Client Alert Islamic Finance, August 2017.
- FIDIC Red Book (1999) London: Thomas Telford Publishing.
- Gnana, Jennifer (2018) “Dana Gas Issues New Sukuk, Drawing Earlier Dispute to a Close” The National.
- Hekmatyar, Muhammad Salahuddin and Ebrahim Parker (2018), “An Evaluation of Dana Gas’s Mudarabah Sukuk from Shari’ah and Legal Perspectives” European Journal of Islamic Finance, No. 9 April (2018).
- Paldi, Camille (2019) “Islamic Finance Dispute Resolution Proposal for 2020” Islamic Finance News, December 4, 2019, Volume 16 Issue 48.
- Smith, Robert (2018) “Dana Gas Strikes Restructuring Deal to End Sukuk Dispute” The Financial Times.
- Torchia, Andrew (2018) “Update 1 – UAE’s Dana Gas Agrees $700 Million Sukuk Restructuring Deal”
- Wikipedia, Dana Gas, [Online] Available: https://en.wikipedia.org/wiki/Dana_Gas [November 25, 2019].