Dana is refusing to repay holders of its Islamic bond, or sukuk, which matures in October. The energy firm said last month it had received legal advice that the bond was no longer syariah-compliant in the UAE following changes in Islamic finance interpretations over recent years, and was therefore unlawful.Creditors say Dana has to pay them back. They say if the sukuk was legal when the deal was struck, it holds, and if it was illegal then it would mean the company is in default.

The dispute – which now looks set to be decided in the courts – is being closely watched by investors and banks across the Islamic finance industry because it could set a precedent for other sukuk issuers to refuse to redeem their paper on the grounds that it is no longer sharia-compliant.

Dana, which is seeking to restructure the sukuk, last month outlined a potential offer to replace the bond with new notes with less than half the profit rate of its outstanding sukuk.

The company said on Monday that this had been rejected by creditors and that the proposal was now ”off the table”. It said it would now pursue ”litigation-driven outcomes”.

It now falls to courts in Britain and the UAE to decide whether the sukuk is legal and if the original deal is valid.

“This is a lose-lose for the company and for sukuk holders, as it will draw out the whole process,” said Abdul Kadir Hussain, head of fixed income asset management at Arqaam Capital in Dubai.

Religious scholars

In Islamic finance there are a wide range of opinions about what is syariah-compliant. The compliance, or religious permissibility of an instrument, is decided by the scholars who design instruments and advise investors on what is permissible to buy. Views can change over time.

The Dana Gas case could lead investors to seek multiple fatwas, or religious rulings, endorsing a sukuk.

The case is being disputed in Britain and the United Arab Emirates because the purchase undertaking for the sukuk is governed by English law, while the gas production assets behind the sukuk fall under UAE law.

London’s High Court is due to hold a full hearing in September on efforts by Dana to restructure the US$700mil bond, while a court hearing in Sharjah is scheduled for December 25.

Dana, which is based in Sharjah, started legal proceedings in the emirate last month to seek a declaration on the lawfulness of the sukuk. In mid-June it obtained an injunction from London’s High Court blocking the holders of the bonds from taking action against the company.

Deutsche Bank, on behalf of the sukuk holders, last week asked Dana for US$14mil as a sukuk profit payment for the period ending on July 31 – a request that the energy producer refused on the grounds that the sukuk are unlawful. – Reuters