Bahrain-based Islamic investment firm Arcapita has become the first Gulf company to emerge from U.S. bankruptcy under Chapter 11 rules, in a move that could help clarify how Islamic finance is treated in Western courts.
Arcapita’s plan, which came into effect on Tuesday, will see it transfer its assets into a new holding company which will dispose of them over time to pay off creditors, effectively a gradual wind-down of the firm.
“We expect to have a complete exit of the portfolio over the next four to five years,” a spokesman told Reuters. “Exits so far have been better than expected, and the reorganisation plan allows exactly just that in order to maximize values.”
The case could prove to be a step forward for the Islamic finance industry by offering a degree of certainty as to how Western courts treat contracts and disputes that make reference to sharia, or Islamic law.
Islamic finance follows religious principles such as bans on interest and gambling, but Islamic law is not codified in legal form and Western courts have often struggled over the treatment of such contracts.
Arcapita’s case was not straight-forward either. It filed for bankruptcy protection in March 2012 with about $7.4 billion in assets under management spread across the globe, as a $1.1 billion Islamic loan came due.
The portfolio includes holdings in 30 different investments covering private equity, real estate, infrastructure and a small portfolio of venture capital investments.
The U.S. court also had to approve a rare $350 million debtor-in-possession financing from Goldman Sachs, arranged to fund Arcapita’s wind-down operations, which was challenged by an Arcapita investor but eventually approved.
A search of court records in the Westlaw legal database suggests this was the first time a question of a fatwa, or Islamic ruling, had been presented to a U.S. bankruptcy judge.
Arcapita’s filing in a U.S. court was an unprecedented move by itself, in a region where debt workouts involve consensual talks that end in maturity extensions, as creditors have little recourse when dealing with insolvency.
The end to the 18 month-long proceedings, which some analysts estimated could have stretched to three years, will allow some secured creditors to recoup most of their money, while creditors in the $1.1 billion loan are projected to recover 64 per cent of their cash.
Arcapita’s creditors include Barclays, CIMB, Royal Bank of Scotland, Standard Bank, Standard Chartered and the Central Bank of Bahrain – its largest creditor with $255.1 million owed.