Bahrain investment firm Arcapita Bank received approval from a US Bankruptcy Court on Tuesday for its plan to repay creditors, thought to be the first that is compliant with sharia, Islamic law.
"I'm happy to confirm the plan," said Judge Sean Lane of the US Bankruptcy Court in Manhattan. "This has been a fascinating case for me."
Under the plan of reorganisation, 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 a firesale 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 $1.9bn they are owed, according to court documents.
The largest unsecured creditor is the Central Bank of Bahrain, which was owed $255.1m.
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 $1.1bn loan came due.
The fund's investment were 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 so-called 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 $7.4bn in assets under management.
The move was unprecedented in a region where most debt workouts have involved consensual talks that ended in long maturity extensions.
Arcapita was represented by Michael Rosenthal of Gibson, Dunn & Crutcher.
The case is In Re: Arcapita Bank BSC et al, U.S. Bankruptcy Court, Southern District of New York, No. 12-11076.