Dana Gas Declares its Own Sukuk “Unlawful:” Issues, Questions, and Observations [1]  

June 18, 2017 | Author: Hdeel Abdelhady*


As discussed briefly in this June 16 MassPoint blog post, Dana Gas PJSC, the Sharjah, UAE-based gas producer, has unilaterally declared “unlawful” sukuk[2] instruments issued by the company in 2013 [3] (through, as issuer, Dana Gas Sukuk Limited, a Jersey public company with limited liability).

This post discusses some of the Shari’ah, UAE law, and factual issues triggered by the Dana Gas statement on the unlawfulness of its sukuk. Additional commentaries on the Dana Gas sukuk may follow.

Parsing Dana Gas’ Statement that Sukuk is “Unlawful”: Shari’ah, UAE Law, and Factual Questions

In a June 13 release, Dana Gas Explained that its sukuk is “unlawful” and “cannot be paid” due to illegality. Specifically, Dana Gas explained that:

“Due to the evolution and continual development of Islamic financial instruments and their interpretation, the Company has recently received legal advice that the Sukuk in its present form is not Shari’a compliant and is therefore unlawful under UAE law. As a result, a restructuring of the current Sukuk is necessary to ensure that it conforms to the relevant laws for the benefit of all stakeholders . . . The next two Distributions scheduled for 31 July 2017 and 31 October 2017 cannot be paid now that the existing Sukuk is deemed unlawful but will be accounted for as part of the new Sukuk instrument.”

The above statement raises several Shari’ah, UAE, and other legal issues and questions, as well as factual questions about events leading to Dana Gas’ stated position on the lawfulness of its sukuk. Some of these issues and questions, along with observations, are discussed here.

What “Islamic Financial Instruments”?

Dana Gas indicates that the “continual development of Islamic financial instruments and their interpretation” underlies the “legal advice.” Is Dana Gas referring only to sukuk “instruments,” mudaraba-based sukuk “instruments”, and/or other Islamic “financial instruments”? The reference to “Islamic financial instruments” is vague and the relevance of such instruments and their interpretation to the Dana Gas sukuk is not at all clear. Presumably, Dana Gas will, in court filings[4] and elsewhere, identify the “interpretations” and related instruments that support its conclusion as to the sukuk’s unlawfulness (but as stated below, a court or other appropriate authority would ultimately need to decide the legality of the sukuk).

Which “Interpretations” of “Islamic Financial Instruments”?

Which “interpretation(s)” have been considered by Dana Gas and/or its legal advisors? The UAE does not have a functioning national Shari’ah Board (the UAE Cabinet reportedly approved the formation of a Board earlier this year). In the UAE, the Shari’ah soundness and legality of Islamic financial offerings are determined by Shari’ah advisors that are associated with or engaged by Islamic financial institutions (such as standing Shari’ah Supervisory Boards or ad hoc advisors engaged by individual Islamic financial or other institutions). These determinations/legal opinions are not legally binding and largely serve commercial and institutional purposes (e.g., to assure the market of Shari’ah compliance and comply with a financial institution’s applicable processes). Thus, if the Dana Gas reference to “interpretations” includes interpretations of Shari’ah advisors about the Dana Gas sukuk or other “Islamic financial instruments,” the relevance of such interpretations can easily be challenged.

What Circumstances Led to the Provision of the “Legal Advice,” When Was the “Legal Advice” Received, Who Provided the “Legal Advice”?   

Dana Gas indicated that it had “recently received legal advice that the Sukuk in its present form is not Shari’a compliant and is therefore unlawful under UAE law.” This phrasing is striking as it casts Dana Gas as a passive actor, intimating that the “legal advice” was thrust on the company, or was otherwise not solicited by Dana Gas. The events leading to the provision of the “legal advice” that purportedly prompted Dana Gas’ recent actions are relevant to establishing facts and assessing their potential legal and tactical significance for all concerned parties (and the courts).

The identity of the “legal advisors” and the timing of requests for and receipt of the legal advice are also relevant, not only in connection with the sukuk controversy but also potentially in connection with any disclosure obligations that may have arisen before the June 13 statement .

What Characteristics of the Sukuk Render Them Not Shari’ah-Compliant? Should Any Shari’ah Defects Have Been Known and Avoided at the Time of Issuance? Revisiting 2007 and 2008 Sukuk Clarifications of Shiekh Taqi Usmani and AAOIFI

The part of Dana Gas’ statement indicating that the sukuk “in its present form is not Shari’a compliant and is therefore unlawful under UAE law” requires elaboration and legal analysis. For now, a few points.

The specific Shari’ah defects of the sukuk have not been disclosed (to my knowledge) by Dana Gas, and ultimately first-hand explanations of the defects will be key. In the meantime, there is speculation as to what the Shari’a defects might be. For example, according to the Bloomberg Article,

“[a] person familiar with the arguments the company [Dana Gas] will present said the [sukuk] structure isn’t legally sound because of the following characteristics:

The purchase price is pre-fixed

Profit payment is guaranteed regardless of the company’s performance

Distributions are based on interest and not profit-based calculations”

If the three Shari’ah defects reported in the Bloomberg article accurately reflect (in part or more) the position of Dana Gas and/or its legal advisors with respect to the non-Shari’ah compliance of the sukuk, questions must be asked about why the sukuk, understood to have been issued in 2013, would have Shari’ah defects that may have been publicly addressed and analyzed years prior to the sukuk issuance.

It is and has for years been well-known that key Shari’ah mechanics of sukuk and sukuk offerings were clarified in 2007 and 2008. In 2007, noted Shari’ah scholar Sheikh Taqi Usmani issued a market-shaking analysis of why, in his sole but influential opinion, the majority of musharakah- and mudaraba-based sukuk then on the market were not Shari’ah compliant. In response, in 2008, the highly influential Account and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued a clarifying statement on sukuk. (Subsequently, in 2012, the also influential OIC Fiqh Academy issued the related Resolution on the Completion of Islamic Bonds (Sukuk)).

These clarifications, particularly Sheikh Taqi Usmani’s 2007 analysis, Sukuk and Their Contemporary Applications, addressed, inter alia, profit guarantees (achieved by various means) and interest-based profit calculations in musharakah and mudaraba-based sukuk. Thus, if the 2013 Dana Gas sukuk were issued with Shari’ah defects previously addressed (and known to the Islamic finance industry), issues as to the role and responsibilities of the sukuk issuer and the mudarib (and others) could be raised, along with other legal and tactical points. (For more on the substantive issues addressed in 2007/2008 and their potential implications, contact the author).

Even if the Sukuk Instruments Are Partly, Materially, or Entirely Not Shari’ah-Compliant, it Does Not Necessarily Follow That the Dana Gas Sukuk Are or Can at this Time Be Deemed Unlawful Under UAE Law

Again, Dana Gas has stated the following with respect to the “unlawfulness” of the sukuk under UAE law:

Due to the evolution and continual development of Islamic financial instruments and their interpretation, the Company has recently received legal advice that the Sukuk in its present form is not Shari’a compliant and is therefore unlawful under UAE law.

This language here is interesting and appears to be based on some premises that may not hold. Even if the sukuk are partly, materially, or entirely not Shari’ah-compliant, it does not necessarily follow that the sukuk are or could properly have been deemed unlawful under UAE law.

As discussed above, Dana Gas has not specified (publicly) which “interpretations” of “Islamic financial instruments” support its conclusion of the sukuk’s unlawfulness. Again, If the interpretations are those of individual Shari’ah scholars or Shari’ah Supervisory Boards, for example, they are not (or should not be) binding on parties or instruments to which they do not pertain. If binding laws or regulations applicable in the UAE and/or in the Emirate of Sharjah are the “interpretations” or bases for the “interpretations,” the substance, scope, and applicability of such laws or regulations must be ascertained (including their retroactivity or any carve outs for previously issued instruments).[5]

Moreover, and importantly, if the “interpretations” are those of Sharjah courts or other UAE courts, such court decisions would not necessarily apply to the Dana Gas sukuk because court decisions in the UAE are not binding precedent. Thus, the existence of one or more court decisions from which the non-Shari’ah compliance of the Dana Gas sukuk could be inferred cannot be said to affect the legality of the Dana Gas sukuk.

Ultimately, the legality of the sukuk must ultimately be determined by a competent authority, such as (and most likely) by a court of competent jurisdiction.

If a Sharjah Court Applies Shari’ah, Other Shari’ah Issues, Claims, and Counterclaims May Arise 

If Shari’ah is applied in a Sharjah court, then the issues may not (or should not) be limited to the lawfulness of the sukuk. Islamic law is clear not only as to the substance and particulars of transactions (such as with respect to riba or gharar), but also as to the manner in which market particpants conduct themselves vis-a-vis the market generally and counter-parties specifically. Thus, issues of and related to good faith, fair dealing, disclosure quality, usurpation (ghasb), and others could arise in the Sharjah court and potentially give rise to claims or counterclaims.

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*Hdeel Abdelhady is MassPoint’s Founder and Principal. Her experience includes Islamic banking and finance matters, including acting on behalf of Islamic banks; advising sovereign-affiliated and other parties on Islamic investment, development finance, and philanthropic structures; and Shari’ah- and secular-law governance, market conduct, and compliance issues. Ms. Abdelhady teaches Transactional Islamic Law at The George Washington University Law School and has published on Islamic banking and legal topics, including in the World Bank Legal Review and industry and academic publications.

 


NOTES 

[1] This post reflects information available in the public domain, such as through Dana Gas and news accounts. Should new or additional information necessitate corrections or other modifications to this post, appropriate edits will be made.

[2] Sukuk. “Sukuk” are Islamic investment certificates often referred to as “Islamic bonds.” Sukuk is the plural of “sakk,” the Arabic term meaning, e.g., title deed.

[3] See, e.g., Arif Sharif, Why Everyone’s Talking About Dana Gas’s Sukuk, Bloomberg, June 15, 2017. This article provides an informative account of events and is discussed further herein [hereinafter “Bloomberg Article”].

[4] As of the time of publication of this post, Dana Gas has disclosed that it initiated three legal actions in connection with the sukuk. The company has obtained injunctions from courts in Sharjah, the British Virgin Islands, and in England barring the sukuk holders from taking certain actions

[5] For example, the OIC Fiqh Academy’s 2012 non-binding but influential Resolution on sukuk (discussed above) stated expressly that “Resolutions passed by the Academy enter into force from the date they are issued and do not affect any contracts entered into earlier such as the Sukuk which are based on considered religious rulings.” OIC Fiqh Academy Resolution 188 (3/20) at 6/1. The OIC Fiqh Academy Resolution is not, as noted, binding (and obviously differs from a law or regulation). However, the express clarification that the Resolution was not intended to apply to or affect certain previously issued sukuk is noteworthy and illustrates the recognition that new and/or clarifying interpretations of Shari’ah regarding Islamic financial instruments should not be unduly disruptive to the market (national and other lawmakers and regulators have tended to share this view and approach).