Dana Gas tried to void its $700M bond by calling it unlawful — the courts made it pay

Dana Gas, a natural-gas producer based in Sharjah in the United Arab Emirates, had issued a $700 million sukuk — an Islamic bond structured to comply with Shariah, which forbids the payment of interest. The sukuk, a 2013 financing deal, matured in October 2017, and Dana Gas was expected to repay it.

Instead, Dana Gas stunned the Islamic-finance community by declaring the sukuk Sharia-non-compliant. It argued that Islamic-finance standards had changed since the deal was signed, that it had received legal advice making part of the sukuk unlawful under UAE law, and that the whole arrangement was therefore invalid and unenforceable. In effect, the company was claiming its own bond was illegal, and that it should no longer have to honour it.

The bondholders did not accept that, and the fight went to court in London. On 17 November 2017 the High Court ruled against Dana Gas on every count; Mr Justice Leggatt found that all the grounds on which Dana Gas had challenged the validity and enforceability of the bond were unfounded. The gambit had failed: the court enforced the obligation Dana Gas had tried to void.

With the sukuk in default and the litigation lost, Dana Gas ultimately restructured the debt in 2018, with the majority of sukukholders agreeing to new terms. The lesson was about credibility. A company that tries to escape its debt by declaring the contract unlawful, and fails, ends up in default and in court — and damages its standing with the investors it will need again far more than the original debt ever did.