Dana Gas PJSC (a company incorporated under the laws of the United Arab Emirates) v Dana Gas Sukuk Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Leggatt |
| Judgment Date | 17 November 2017 |
| Neutral Citation | [2017] EWHC 2928 (Comm) |
| Docket Number | Case No: FL-2017-000004 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 17 November 2017 |
[2017] EWHC 2928 (Comm)
Mr Justice Leggatt
Case No: FL-2017-000004
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
FINANCIAL LIST
Royal Courts of Justice
Strand, London, WC2A 2LL
Neil Kitchener QC, Sam O'Leary and Maximilian Schlote (instructed by Squire Patton Boggs) for the Claimant
Richard Handyside QC and Rebecca Loveridge (instructed by Weil, Gotshal and Manges (London) LLP) for the Fifth Defendant
The First to Fourth Defendants did not appear
Hearing dates: 25 September and 13 November 2017
Introduction
In his Commentaries on the Laws of England (1765–69) William Blackstone observed that "when money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, … [the increase] is called interest by those who think it lawful, and usury by those who do not." 1 Different views about the lawfulness of paying compensation for the use of money continue to be taken in different legal systems. The present case concerns a financial transaction which is governed partly by English law and partly by the law of the United Arab Emirates (UAE). The claimant has alleged that the transaction infringes principles of Islamic Shari'a which form part of UAE law and prohibit usury ( riba) and is thus invalid and unenforceable under the law of the UAE. The defendants deny this. The defendants also contend that, even if the claimant's case on UAE law is correct, this does not affect the validity of a Purchase Undertaking governed by English law, which they wish to enforce.
This judgment follows the trial of a preliminary issue to determine whether this last contention is correct: in other words, assuming without deciding in the claimant's favour that the transaction is invalid under the law of the UAE, is the Purchase Undertaking nevertheless valid and enforceable?
Before addressing the issue (and framing it more precisely), I will first identify the parties and outline the structure of the transaction.
The parties
The claimant ("Dana Gas") is a Public Joint Stock Company incorporated under the laws of the UAE. Its shares are listed on the Abu Dhabi Stock Exchange. Dana Gas was founded in 2005 and is the first private sector regional gas company in the Middle East, with businesses in Egypt, the Kurdistan region of Iraq and the UAE.
In 2007 Dana Gas raised finance of US$1 billion through an issue of certificates. The transaction was restructured in 2013 when new certificates were issued with an aggregate face value of US$850,080,000. The certificates are tradeable and are listed on the Irish Stock Exchange. They were due for redemption on 31 October 2017.
The certificates were issued by the first defendant (the "Trustee"). The proceeds of the issue and the assets derived from those proceeds are held by the Trustee absolutely on trust for the Certificateholders on the terms of an Amended and Restated Declaration of Trust dated 8 May 2013, which is governed by English law. Pursuant to clause 6 of the Declaration of Trust, all of the Trustee's powers are exercised under delegated authority by the second defendant (the "Delegate").
The third and fourth defendants are agents of the Trustee in relation to assets provided as security by Dana Gas for certain of its obligations. They have taken no active part in the proceedings.
The fifth defendant ("BlackRock") is an investor which holds a substantial number of the certificates.
The certificates
There are two classes of certificate: Exchangeable Certificates, which can be exchanged for shares in Dana Gas, and Ordinary Certificates. Pursuant to the Conditions governing each class of certificate which are scheduled to the Declaration of Trust, a sum described as the "Periodic Distribution Amount" was payable quarterly at a rate of 7% per annum on the Exchangeable Certificates and 9% per annum on the Ordinary Certificates. The Conditions further provide that on the "Scheduled Redemption Date", which is defined as 31 October 2017, a sum referred to in the transaction documents as the "Standard Redemption Amount" comprising the principal amount of the certificates plus any accrued and unpaid distribution amounts was to be paid to the Certificateholders.
The certificates were issued to raise money for investment which was intended to be made in a manner compliant with Islamic religious law ( Shari'a). Such certificates are known as sukuk. Sukuk may be issued to finance a variety of different Shari'a-compliant investment activities or structures. One such structure, used in this case, is known as a mudarabah and hence the certificates were described in the listing particulars as sukuk al-mudarabah. A mudarabah is a form of joint venture in which one party (the rab al-maal) invests capital and the other party (the mudarib) invests skill or labour with a view to making a profit which will ultimately be shared between them on an agreed basis.
The Mudarabah Agreement
The proceeds of the certificates were invested under an Amended and Restated Mudarabah Agreement dated 8 May 2013 made between the Trustee as rab-al-maal and Dana Gas as mudarib. The Mudarabah Agreement is governed by UAE law. It provides for the capital contributed by the Trustee to be invested by Dana Gas in accordance with an investment plan contained in a schedule to the agreement. The assets of the mudarabah are referred to in the Mudarabah Agreement and other transaction documents as the "Mudarabah Assets". Clause 5 of the Mudarabah Agreement provides for profits generated by the Mudarabah Assets to be distributed quarterly in a ratio of 99% to the Trustee as rab-al-maal and 1% to Dana Gas as the mudarib.
The expectation (warranted by Dana Gas in clause 6.2 of the Mudarabah Agreement) was that the Mudarabah Assets would generate sufficient cashflows to fund the payment of the Periodic Distribution Amounts to the Certificateholders throughout the term of the mudarabah. If in any quarter the distributable profit from the mudarabah exceeded the Periodic Distribution Amount, the excess was to be credited to a Reserve Account maintained by Dana Gas in accordance with clause 5.2 of the Mudarabah Agreement. If in any quarter the distributable profit was insufficient to pay the Periodic Distribution Amount, the shortfall was to be met, so far as possible, from the Reserve Account. Any surplus left in the Reserve Account at the end of the mudarabah may be retained by Dana Gas.
The Mudarabah Agreement also provides (in clause 2) for the liquidation of the Mudarabah Assets and the return of capital to the Trustee at the end of the mudarabah provided that the value of the Mudarabah Assets (when aggregated with any amounts standing to the credit of the Transaction Account and the Reserve Account) is at least equal to the "Redemption Required Amount" – which for all present purposes is equivalent to the Standard Redemption Amount. If that condition is met, Dana Gas is required two business days prior to the Scheduled Redemption Date of the certificates to liquidate the Mudarabah Assets and pay the Redemption Required Amount into the Transaction Account (being an account into which all payments by Dana Gas to the Trustee for the Certificateholders under the transaction documents are to be deposited.) Again, any surplus is to be retained by Dana Gas.
These arrangements are unproblematic so long as the mudarabah generates sufficient profits to enable the Periodic Distribution Amounts to be paid to the Certificateholders each quarter and provided that, when the time comes for the certificates to be redeemed, the value of the Mudarabah Assets (and any surplus profits which they have generated) are sufficient to return to the Certificateholders the principal amount of their investment. The dispute in the present case relates to the contractual arrangements which apply where – as is said to have happened – the profits and value of the Mudarabah Assets prove insufficient to fund these payments. To protect the Certificateholders against that eventuality, Dana Gas entered into the Purchase Undertaking.
The Purchase Undertaking
The Amended and Restated Purchase Undertaking was executed as a deed on 8 May 2013 by Dana Gas as Obligor in favour of the Trustee and the Delegate. The Purchase Undertaking is governed by English law (see clause 8). Pursuant to clause 2.1, Dana Gas irrevocably granted to the Trustee rights to oblige Dana Gas to buy "all of the Trustee's rights, benefits and entitlements in and to the Mudarabah Assets" on an "as is" basis at the relevant "Exercise Price". Clause 3.1 provides that the Trustee may exercise these rights following the occurrence of certain specified events. The events relevant for present purposes are a "Mudarabah Event" and a "Dissolution Event". Where the Trustee exercises its rights under clause 2.1 following such an event, the relevant Exercise Price is the Standard Redemption Amount.
A "Mudarabah Event" is defined in the Mudarabah Agreement (clause 12) to mean a failure to liquidate the Mudarabah Assets for an amount which (when aggregated with any amounts standing to the credit of the Transaction Account and the Reserve Account) is at least equal to the Redemption Required Amount and to pay this sum into the Transaction Account two business days prior to the Scheduled Redemption Date.
"Dissolution Events" are defined in the Conditions. They include a default in the payment of any Periodic Distribution Amount and also various "Events of Default" which are...
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