Risk Management in
Islamic Financial Instruments
181
ruling, conciliation and arbitration may involve such a third party whose decision may be
binding on the parties. But any settlement agreement that emanates from the compromise of
action proceedings, which is duly signed by the parties, should be enforceable by the courts.
While the East Cameron case involved a junk sukuk issuance, which ended up in the U.S. courts,
the Nakheel debacle was properly managed through appropriate steps toward debt
restructuring with the creditors. After reaching a compromise with the trade creditors, it
completed the $10.9 billion debt restructuring in the first half of 2011. Recently, as part of its
restructuring plan, it issued $32.94 million sukuk on 7 January 2013, which represents the
third tranche in the restructuring process.
In 2009, the Investment Dar also defaulted on a $100 million sukuk, and it was restructured in
2011. Part of the arrangement was to convert part of the claims of the creditors into equity in
the company. In a similar vein, the near-default Dana Gas sukuk issue is being resolved
through compromise of action. Dana has proposed a $920 million debt restructuring deal
where it offered bondholders $70 million in cash, while the remaining $850 million debt will
be refinanced. At present, the shareholders are still considering this offer, but there are
indications that some of them will agree with the proposed plan.
Table A.2: Remedial Measures for Sukuk Defaults and Near Defaults
Name of Sukuk Immediate Cause of Default or
Near-default
Exit Strategy / Remedial
Measure
Year of
Default
The Investment
Dar
Default on a $100 million debt
repayment
Debt restructuring to revive the
sukuk sales
2009
Golden Belt 1
(Saad Group)
Default in repayment of $650 million
to Citicorp Trustee Co. Ltd.
Dissolution of the Trust 2009
East Cameron
Partners
Filing of one of the parties (East
Cameron Partners) for bankruptcy
Bankruptcy proceedings 2008
Nakheel Delay in repayments of $4 billion
sukuk
Default narrowly averted with the
rescue of Abu Dhabi
2009
IIG Funding
Limited
Inability to make periodic distribution
to sukuk holders
Looming debt restructuring plan 2012
Dana Gas Inability to repay outstanding $920
million of the sukuk, issued in 2007,
on time and in full
Presently seeking consensual deal
on sukuk by weighing options of
repayment
2012
Source: (Oseni, 2012)
What can be gleaned from Table A.5 above is the preference of stakeholders for remedial
measures as exit strategies for the sukuk debacle. Apart from the extreme situation where a
party has to commence bankruptcy proceedings, it appears parties prefer debt restructuring,
which agrees with the Qur’anic principles of forbearance and forgiveness in issues relating to
debt. Be that as it may, a clear legal framework is necessary for debt restructuring in cases of
sukuk defaults. The proposed Islamic bankruptcy law should be comprehensive enough to
accommodate pre-default issues that may require debt restructuring. A looming default should
ordinarily trigger the process of debt restructuring. Managing the dispute at its early stage will
help prevent an escalated dispute that may end up in bankruptcy proceedings.