Bahrain-based Arcapita Bank received approval from a US Bankruptcy Court for its plan to repay creditors, thought to be the first that is compliant with sharia, Islamic laws.
Judge Sean Lane of the US Bankruptcy Court in Manhattan confirmed the plan and he observed that it was a fascinating case for him.
Under the plan of reorganization, Arcapita will repay its only secured creditor, Standard Chartered Plc, in full. Arcapita will transfer its assets to a new holding company which will dispose of its investments over time, in an attempt to avoid fire sale liquidation.
The company’s unsecured creditors will receive the equity in the new holding company as well as their pro rata share in a sharia-compliant loan. General unsecured creditors are expected to receive around 7.7 percent of the $1.9 billion they are owed, according to court documents.
The largest unsecured creditor is the Central Bank of Bahrain, which owed $255.1 million.
The company provided alternative investment opportunities for rich families, institutions and sovereign wealth funds in the Gulf region, but sought bankruptcy last year as a $1.1 billion loan came due.
The fund’s investment was sharia-compliant, as is the $350 million loan that Arcapita arranged to fund its wind-down operations after its exits bankruptcy.
Sharia prohibits borrowing money with interest. Instead, the murabahah structure effectively treats the arrangement as a sale, incorporating a profit margin and fees instead of interest.
Arcapita filed for bankruptcy protection in March 2012 with about $7.4 billion in assets under management.