Dana Gas Sukuk Dispute

The Dana Gas sukuk dispute is the legal battle that began in June 2017, when Dana Gas PJSC, a natural gas company based in Sharjah in the United Arab Emirates, announced that its outstanding sukuk of about $700 million were no longer compliant with Islamic law and were therefore unlawful and unenforceable under UAE law. Investors, due to be repaid in October 2017, fought the claim in London, where key documents were governed by English law.

The case is a landmark in Islamic finance: the first time a large issuer tried to escape its obligations by arguing that its own instrument breached Sharia. It is distinct from an ordinary payment default: Dana Gas did not say it could not pay, but that it should not have to pay on the original terms. The dispute ended in 2018 with a restructured, smaller sukuk.

Picture a shop owner who borrows money from neighbours under a partnership arrangement approved by the local religious authority. Years later, just before the money is due back, the owner says, "I have been told the arrangement was never really allowed by our faith, so the contract is void and I owe less." The neighbours are alarmed, because that approval was why they agreed.

The investors had a backup promise, written under English law, that the company would buy back their certificates at a fixed price. They asked an English judge to confirm that the promise still stood, whatever a UAE court said about the rest of the paperwork. The judge agreed, and both sides then negotiated a compromise.

The certificates at the centre of the dispute came out of a 2013 restructuring of an earlier Dana Gas convertible sukuk, a Sharia-compliant cousin of the convertible bond. They used a mudarabah structure, in which investors provide capital and the company acts as manager of a business venture, with profits shared according to agreed ratios. A special purpose vehicle, Dana Gas Sukuk Ltd, issued the certificates and held the investors' interest.

The mudarabah agreement itself was governed by UAE law, but other key documents, including a purchase undertaking in which Dana Gas promised to buy the investors' interest at a set price on maturity or default, were governed by English law. This split design, common in Gulf issuance, became the hinge of the case. The certificates were listed in Ireland.

Dana Gas said it had received legal advice that, because interpretations of Islamic finance had evolved, the mudarabah arrangement no longer met Sharia requirements, so the sukuk were void under UAE law, which gives effect to Islamic principles in commercial matters. It proposed exchanging the certificates for new ones with a lower profit rate.

The argument drew on a long-running debate. In 2008 the AAOIFI issued guidance criticising equity-style sukuk in which the originator promises to repurchase assets at face value, because that promise makes the instrument behave like guaranteed debt. Critics pointed out, however, that the Dana Gas sukuk had been approved by a Sharia supervisory board at issue, and that investors relied on that Sharia opinion when they bought. Many analysts questioned the motive, as the company was not in obvious distress.

The fight ran in several jurisdictions at once:

• Sharjah. Dana Gas obtained an injunction from a Sharjah court restraining enforcement of the sukuk while it sought a declaration that they were unlawful.
• British Virgin Islands. On 13 June 2017 it also obtained an injunction from the commercial division of the High Court of the British Virgin Islands.
• England. The company brought proceedings in the High Court in London, and the investors counterclaimed to enforce the English-law documents.

On 17 November 2017, Mr Justice Leggatt ruled that the purchase undertaking was valid and enforceable under English law, even assuming the UAE-law documents were invalid. In February 2018 he rejected Dana Gas's attempt to set that judgment aside, and in March 2018 the Court of Appeal refused permission to appeal. Meanwhile, the sukuk matured on 31 October 2017 without being redeemed.

With the English rulings against it, Dana Gas returned to negotiations. A deal agreed in May 2018 was approved by sukukholders and shareholders, and in August 2018 the company completed a refinancing into a new $530 million sukuk with a three-year life, maturing in October 2020, and a profit rate of 4%. The parties ended all litigation as part of the deal. Dana Gas announced that it had fully redeemed the new sukuk in November 2020.

Investors did not receive the original terms in full, but the English court never upheld the claim that the sukuk were void.

The episode is cited as the clearest real-world example of Sharia non-compliance risk: the possibility that a structure approved at issue is later challenged on religious grounds. Its practical lessons were widely discussed among lawyers and investors:

• Governing law matters. English-law documents such as the purchase undertaking proved a robust fallback when the onshore contract was attacked.
• Structure matters. Equity-style sukuk such as mudarabah and musharakah carry more interpretive risk than structures with clearer asset backing, and the dispute renewed attention on the difference between asset-based sukuk and asset-backed ones.
• Pricing reacts. Investors began to weigh issuer conduct and documentation more heavily, and some argued such defences would raise the yield issuers pay on future deals.

The sukuk market kept growing after 2018 without copycat challenges on this scale, but the case remains a standard example of how religious, contractual and jurisdictional questions interact when Islamic securities are sold internationally alongside conventional bonds.

• Dana Gas PJSC
• Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)