2021 has been a relatively quiet year in terms of UK disputes for the Islamic finance sector. Largely, this has been due to the impact of the COVID-19 pandemic on both lenders and borrowers and the desire to mitigate risks and preserve liquidity in times of uncertainty. However, with an increase in third-party funding, a growing focus on environmental, social and governance (ESG) issues, the relaxation of national insolvency moratorium regimes and the likelihood of increased defaults and non-performing loans, the expectation is that, in line with the rest of the finance industry, 2022 is primed to be a busy year for disputes in the Islamic finance sector.
Review of 2021
Unlike in recent years with notable judgments such as the Dana Gas case, there has been a dearth of UK litigation in the Islamic finance sector in 2021. The most high-profile judgment this year has been the judgment handed down by Justice Zacaroli in Golden Belt [2021] EWHC 2629.
While this case is notable for the fact that it relates to a claim by Golden Belt in relation to the default and non-payment by Saad of the US$650 million Sukuk and the case has, in the past, raised interesting questions in relation to the role of Shariah board scholars, the latest judgment is relatively benign insofar as it relates to Shariah principles and/or has any wider general significance or relevance for the Islamic finance sector.
The judgment handed down on the 30th September 2021 related more to questions of contractual interpretation and execution of a trust under English law (ie whether the issuer (Golden Belt) was permitted to enter into settlement negotiations and/or restructuring proposals with the debtor (Saad) in Saudi Arabia without the authorization of certificate holders (which the court held it absolutely and unconditionally could)) rather than the applicability of any general Shariah principles.
Otherwise, it has been a relatively sedate year from a disputes perspective. Despite increasing financial pressures in certain industries caused, principally, by supply chain disruption and/or a contraction in global GDP, there has been little appetite either from Islamic finance borrowers or lenders to engage in litigation.
There appears to have been a greater preference to try and resolve matters amicably without commencing legal proceedings in order to preserve liquidity and cash flow. This has also coincided with the gradual resumption of in-person court hearings following a year of lockdown, a backlog of cases and virtual hearings.
Preview of 2022
2022 is expected to be a far busier year from a disputes perspective. In my opinion, the following factors are likely to drive/result in greater litigation:
Litigation funding
There has been a huge growth in litigation funding globally. The UK litigation funding market alone is estimated to be worth in excess of US$2.5 billion. This provides an opportunity for claimants to pursue high-value, high-stakes litigation (often on an entirely funded, non-recourse basis) that they may not otherwise be able to pursue. To date, litigation funding has been relatively underutilized by the Islamic finance sector. However, with increased information and awareness, coupled with the fact that funding is regarded generally by the Islamic finance market as being inherently Shariah compliant, it is expected to become increasingly popular in the Islamic finance sector.
Non-performing assets
The pandemic has placed huge pressures on businesses as a result of enforced business closures, supply chain issues and contracting macroeconomic conditions. While businesses in 2021 have been relatively protected by government furlough schemes and insolvency moratorium regimes, 2022 is likely to see far less government support and protection. This is expected to result in businesses defaulting on their contractual obligations and/or entering into insolvency resulting in increased litigation.
Legal landscape
There is a growing trend (through recent UK judgments and the new EU Collective Redress Directive) for a more pro-consumer, collective redress-type regime. Taken together with an increase in litigation funding and a distressed financial market, this is likely to result in greater litigation across all sectors, including Islamic finance.
ESG
There is a greater legal and regulatory focus on ESG issues and disclosures particularly following the 2021 United Nations Climate Change Conference, also known as COP26. Coupled with increased shareholder/investor demands, there is expected to be a significant increase in ‘greenwashing’ litigation from 2022 onwards.
Given the recent heavy focus of the industry on green Sukuk and sustainable, social and impact financing, combined with the absence of any regulatory body monitoring ESG labeled products, there is a heightened risk for ESG-related litigation for the sector. Claims are expected to come not just from traditional sources but from shareholders, activists and non-governmental organizations.
This new ‘behavior/impact’-led class of claimants poses the greatest risk to an industry which has traditionally sought to resolve financial disputes with counterparties amicably.
Conclusion
2022 is likely to be a seminal moment for Islamic finance from a disputes perspective. The changing legal, regulatory and economic landscape provides both litigation/arbitration opportunities and risks for the sector. The sector will need to more proactively consider and engage with risk mitigation and dispute resolution in a manner that it has not previously done before.
Sohail Ali is a partner in the Litigation & Arbitration Team at DLA Piper. He can be contacted at [email protected]