The end of Dana Gas saga?
Dana Gas PJSC (Dana Gas) recently announced that the majority of its sukukholders agreed to restructure its US$700 million worth of sukuk (the Sukuk) which was left in default when it matured in October last year.
The agreement which Dana Gas has reached with its creditors to restructure the Sukuk will potentially bring an end to the legal battles between Dana Gas and its sukukholders which began a year ago
In June 2017, the Islamic finance community were left reeling when Dana Gas, a Middle East energy company listed on the Abu Dhabi Securities Exchange, unilaterally declared that its US$700 million worth of Mudarabah sukuk (the Sukuk), which is still outstanding, was no longer Shari'a compliant and therefore, unlawful under the laws of United Arab Emirates (UAE).
Following the declaration, Dana Gas made an offer to its sukukholders to "exchange the sukuk with a new four-year enforceable, Shari'a compliant instrument, which would confer rights to profit distributions at less than half the current profit rate and without a conversion feature". The offer was subsequently retracted by Dana Gas and the Sukuk was left unredeemed when it matured in October 2017.
Dana Gas went on to pursue separate rulings, from the Sharjah Federal Court of First Instance and the English High Court, that the transaction documents were invalid and unenforceable in the relevant jurisdiction.
English High Court's Decision
Dana Gas made the following arguments, in support of its application, before the English High court:
- its obligation to pay the Exercise Price under the Purchase Undertaking was conditional upon the lawful transfer of the underlying Sukuk assets to Dana Gas under the Sale Agreement. Since the Sale Agreement would be invalid under UAE law, its payment obligations under the Purchase Undertaking could not come into effect.
- the Purchase Undertaking was void for mistake since parties have entered into it based on a mistaken belief that the Mudarabah structure for the Sukuk was lawful under UAE law
- all of the obligations under the Purchase Undertaking had to be performed in the UAE. Accordingly, the English courts should take into account whether or not the Purchase Undertaking was enforceable in the UAE. This move by Dana Gas backfired when the English High Court ruled against Dana Gas in November 2017 on all three grounds of its submissions.
The English law governed Purchase Undertaking which sets out Dana Gas' payment obligations under the Sukuk, was held to be valid and enforceable in accordance with its terms and Dana Gas is required to make the relevant payments to its creditors who purchased the Sukuk.
In its preliminary judgment, the English High Court held that:
- as drafted, the payment of the exercise price under the Purchase Undertaking was not conditional upon the transfer of assets under the UAE law governed documents and the exercise and the transfer were intended to be consecutive, rather than concurrent actions;
- the doctrine of mistake would only apply where there was a gap in the contract. If the parties had expressly or impliedly agreed on the consequences upon the occurrence of certain events, then there would be no gap in the contract and the doctrine of mistake would not apply in those circumstances. In this case, the parties had expressly agreed that the invalidity and unenforceability of the Mudarabah Agreement and Sale Agreement would trigger the dissolution of the Sukuk and as a result of that, the Sukuk Trustee has the right to issue an exercise notice the Purchase Undertaking. Under the terms of the Purchase Undertaking, Dana Gas would be required to pay the Exercise Price for the Sukuk once the exercise notice is issued. Since the terms of the Sukuk clearly provides for the situation where the validity and enforceability of the Mudarabah Agreement and Sale Agreement are being challenged, the English High Court concludes that there is no gap in the contract and therefore, the doctrine of mistake would not be applicable in this case;
- under the Sukuk structure, the place of performance of the payment obligations under the Purchase Undertaking was England since the account for the Sukuk transaction was maintained by the Sukuk Trustee with Deutsche Bank in London . In light of this, the High Court ruled that it does not need to take into consideration any overriding mandatory provisions of UAE law when ruling on the enforceability of the Purchase Undertaking as a matter of English law.
Restructuring the Sukuk
In hopes of ending the legal disputes in the UK and in the UAE, a committee was formed to represent the sukukholders, including BlackRock Inc. and Goldman Sachs Group Inc. to negotiate a new deal with Dana Gas.
Dana Gas reported that the committee has agreed to restructure the Sukuk with two options included for the creditors - (1) to exit the Sukuk at 90.5 US cents per dollar of the face value of the Sukuk or (2) to roll over the existing Sukuk into a new three-year sukuk with a coupon of 4% per annum.
Dana Gas has recently announced that an overwhelming majority of its sukukholders have voted in favour of restructuring the deal. In light of this decision, it is reported that Dana Gas will proceed to dismiss all litigation disputes in the Sharjah courts and the English courts associated with the Sukuk.
Patrick Allman-Ward, Chief Executive Officer of Dana Gas has assured the public that "[t]he proposed new sukuk instrument to be issued to sukukholders has been legally verified to be lawful without question".
That said, no legal documentation can be completely challenge-free.
The following suggestions however may be useful to keep in mind when drafting documentation for a sukuk (or indeed a facility agreement for an Islamic facility) :
- include a representation from the relevant obligor that the documentation is Shari'a compliant and lawful;
- include an undertaking from the obligor that it will not seek to challenge the Shari'a compliant nature of the documentation;
- ensure that the obligor's payment obligations would arise on the service of a demand by the financier / sukuk trustee (i.e. not the transfer of any underlying assets); and
- clearly allocate the risk of invalidity, illegality and repudiation of the documentation to the obligor and ensure that the documentation clearly sets out the consequence if such events have occurred, so that there is no gap in the contract which would allow the obligor to claim that the documentation which gives rise to its payment obligations, is void for mistake.