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Abu Dhabi, UAESunday 16 December 2018

Dana Gas loses Islamic bond court battle

Judge says company’s stance over US$700 million debt was “untenable” but dispute set to rumble on

Sharjah-based Dana Gas, which recently came to an arrangement with its debt holders saw year-to-date gains of 40.74 per cent on the ADX. Jaime Puebla / The National
Sharjah-based Dana Gas, which recently came to an arrangement with its debt holders saw year-to-date gains of 40.74 per cent on the ADX. Jaime Puebla / The National

Sharjah-based Dana Gas has failed in a legal bid to have US$700 million worth of Islamic bonds declared unlawful to avoid repaying bond-holders, London’s High Court ruled on Friday.

The company had claimed that the 2013 financing deal was invalid owing to changes in Islamic financial practice but a judge found that its interpretation of legal documents was “untenable and flatly inconsistent”.

Mr Justice Leggatt found against the company on all counts in a ruling on the legality of the sukuk published nearly three weeks after bond-holders were due to get back their money back or secure stock of a subsidiary that runs its operations in Egypt.

The verdict in favour of the bondholder group does not mean immediate payment. The company has previously warned that litigation could last for a decade whatever the outcome of the London hearing and said that it would appeal Friday’s judgement.

“It is but one step in the litigation proceedings being undertaken in England and the UAE, which will ultimately lead to a final determination of the resolution of the legality of the Dana Gas Mudarabah sukuk under UAE law,” said a company spokesman in a statement.

The bondholder group, led by Blackrock, the world’s largest asset manager, called on the company to strike a deal.

“This outcome vindicates the position we have taken from the start,” said Andrew Wilkinson on behalf of the group. “We hope Dana will now come to the table to discuss possible consensual solutions.”

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The saga began after Dana Gas secured $850m from international investors in May 2013. It followed the restructuring of an earlier $1 billion deal that had been due to mature in 2012 because of payment delays from operations in Egypt and the Kurdish region of Iraq.

Dana Gas made quarterly payments according to the terms of the agreement until April 2017, but announced in May that it would embark on new restructuring talks with sukuk holders because of continued cash collection problems.

Dana Gas stunned the Islamic finance community the following month by declaring the sukuk Sharia non-compliant. It sought a court order in Sharjah arguing that it should no longer make payments because Islamic finance standards had changed making them unlawful under UAE law.

The company also took legal action in the UK and the British Virgin Islands, where its Egypt subsidiary was registered, to prevent further payments to investors.

The case was complex owing to a multiplicity of contracts signed in both UK and UAE jurisdictions over the deal.

The company contended that it received legal advice that made part of the sukuk illegal under the laws of the UAE, bringing down the whole deal. The investors claimed that part of the agreement was struck under UK corporate law, to ensure that their payments would be protected in the event of a change in Islamic financial practice.

The judge sided with the investors. “All the grounds on which Dana Gas has sought to challenge the validity and enforceability of the Trustee’s rights … are unfounded,” the judge wrote.

The case had added significance with both London and the UAE seeking to position themselves as world leaders in the Islamic finance sector.