One analyst at UniCredit SpA, whose comments from a note were quoted in a Bloomberg article, described:
“The whole story leaves a bitter taste […]The reputational damage for Dubai World is enormous as its failed timely communication of its fiscal problems will alienate investors. Negative surprises like Dubai World’s debt restructuring announcement, which let the value of Nakheel’s bond plunge by 50% within two days, is definitely something investors do not appreciate.”The investors certainly have reason to complain about the incredible lack of certainty provided by Dubai World and the government of Dubai surrounding the sukuk repayment.
However, there is a positive development that I think has received far too little attention: Dubai appointed a three judge tribunal to review any disputes in the restructuring of the remainder of Dubai World’s debts. The panel was established so that it is based on the laws of the Dubai International Financial Center (DIFC).
“The Government decided to base the law of the Decree on the insolvency laws, rules and regulations of the DIFC because it determined that such such laws, rules and regulations were comprehensive and reflected international standards. In addition, such laws, rules and regulations were in English rather than Arabic, which the Government determined would facilitate a complex financial reorganization involving investors and professionals from all over the world.”The three judges appointed to the tribunal are all judges with experience in the English legal system (two are former English judges and one is a Singaporean judge and the legal system in Singapore is largely based on English law).
The main thing that this tribunal accomplishes is it provides a forum where the legal rights of creditors can be heard in a setting that may be more neutral than if the restructuring were accomplished based on negotiations with the various creditor groups of Dubai World’s subsidiaries. Although there is likely to be government involvement with the restructuring, the tribunal may provide for a forum that is viewed as more impartial. It also provides for a test case of how government-related entities in Dubai will react to a restructuring of debts.
However, the tribunal should also provide clarity on how well the creditors of Islamic financial products will be treated in a restructuring. Although the large Nakheel sukuk was repaid, there are two smaller sukuk maturing in 2010 and 2011, as well as $1.2 billion in Shari’ah-compliant bank financing provided to Dubai World’s international property development company Limitless. These will certainly be a part of the restructuring. Less clear is whether the DP World sukuk that financed the company’s acquisition of P&O Ports will be restructured. It is almost as large ($3.5 billion) as the Nakheel sukuk which was paid by Abu Dhabi.
There remain many uncertainties about how Dubai World will restructure its debts, particularly its Shari’ah-compliant ones. There will (or probably should be) a role for a Shari’ah review board to approve any restructuring of the Shari’ah-compliant debts of Nakheel, Limitless (and DP World if it is included). There is not much precedent for this to occur and it could affect whether the restructuring is accepted by Shari’ah-sensitive investors in the sukuk of Dubai World’s subsidiaries.
There are some nascent steps being taken to provide a forum for arbitration in Islamic finance that is based in Dubai (the International Islamic Centre for Reconciliation and Arbitration) although this is still a new effort and would probably not have the capacity or legal ability to become involved with the Dubai World restructuring. However, if issues do begin to arise surrounding the Shari’ah-compliance of any restructuring of sukuk or other Islamic financing, it will highlight the need for there to be an alternate dispute resolution mechanism to provide a forum where the unique features of Islamic finance with its reference to the Shari’ah can be applied before the dispute is escalated to a (secular) court that is unlikely to consider anything but the governing law—usually English—of the contract.
This type of dispute was heard by the English courts in a case between Shamil Bank of Bahrain and Beximo Pharmaceuticals whether the court found that it could not adjudicate based on Shari’ah because it was not the law of a country. The decision of an appeals court in England describes the logic used in reaching this conclusion.:
”The wording of Article 1.1 of the Rome Convention ("the rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries.") is not on the face of it applicable to a choice between the law of a country and a non-national system of law, such as the lex mercatoria, or "general principles of law", or as in this case, the law of Sharia. Nevertheless, that wording, taken with Article 3.1 ("a contract shall be governed by the law chosen by the parties") and the reference to choice of a "foreign law" in Article 3.3, make it clear that the Convention as a whole only contemplates and sanctions the choice of the law of a country.”If there does arise issues in the Shari'ah-compliance of a restructuring (for example, if sukuk creditors can receive partial payment with the remainder paid by issuing new debt), it could throw the entire restructuring into turmoil if some creditors believe that the Shari'ah-compliance of certain debts is providing an advantageous position for those creditors. In this case, the situation could turn back into a stand-off between Dubai and its creditors, which would benefit no one. It would only serve to highlight the need for greater clarity in Islamic financial products about what the role is of the Shari'ah-compliance in terms of enforcing the contracts.