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Defaults On Sharia-Compliant Bonds Create New Legal Issues

By Howard M. Friedman

Today's Wall Street Journal reports that new legal problems face U.S. bankruptcy judges as for the first time two issues of Sharia-compliant bonds have defaulted. A case in bankruptcy court in Louisiana,--proceedings against energy firm East Cameron Partners LP-- has become the test case. The problem is how to apply Western legal principles to instruments issued under Islamic law. Sukuk bonds avoid the Islamic ban on interest by being structured as a sale-repurchase arrangement. In the East Cameron Partners bankruptcy, bankruptcy judge Robert Summerhays ruled that purchasers of the Sukuk certificates issued by a special purpose entity relied on the fact that they were becoming owners of royalty interests transferred to the entity. East Cameron had argued that Sukuk holders were merely lending money secured by the royalties-- and thus other creditors also had an interest in the royalties.

Full post as published by Religion Clause on June 16, 2009 (boomark / email).