Dana Gas stunned investors and the wider Islamic finance community when it announced in June that it had reviewed its own Sharia-compliant bonds and found they were not, in fact, Sharia-compliant.

Holders of the securities, led by Goldman Sachs Group and BlackRock, hired investment bankers and then lawyers when it became clear they were facing losses of 90 per cent or more.

Now the case has arrived at a London court, where Judge George Leggatt will oversee a case that tests the principles underpinning Islamic finance. The trial in London is the first leg of a legal dispute that may also be fought in the UAE, where Dana is based.

It is “highly unusual” for a company to allege that its own finance agreement isn’t Sharia compliant, according to Rupert Reed, a barrister at London-based Serle Court, who isn’t involved in the case.

“When a financed party does this, it sends shock waves through the entire Islamic finance market” and may affect the value of an entire class of financial product, Reed said.

Sharia forbids earning interest as well as investments in companies that are involved in activities considered unethical. The Islamic finance industry emerged to fill the need for capital in markets where the participants are required to follow those laws.

In Dana’s case, the legal confusion arises because the sukuk guarantees a return for investors, regardless of whether the underlying asset is profitable. That, Dana argues, goes against Sharia requiring those providing finance to share in the risk.

In July, London judge David Waksman said that it was at least possible to make an argument that a valid English contract could be annulled if it required Dana to undertake a process that’s illegal in the place where it will be executed. He ordered a trial for September.

London courts, however, are reluctant to overturn contractual debts, one of the reasons they are favoured by banks pursuing debtors. Judge George Leggatt, who heard Dana’s first application for an injunction, observed that the company’s position was “about as unattractive as you can get in the commercial court,” according to court documents filed by Deutsche Bank, which represents the sukukholders.

The London trial is scheduled to last for a week and a final ruling could take months. Dana viewed a last-minute settlement offer by the ad hoc committee last week as unrealistic, according to a person familiar with the matter.

Goldman and BlackRock declined to comment. Lawyers for Deutsche Bank and Dana Gas didn’t respond to an email seeking comment.

Like other energy producers, Dana Gas was struggling with the impact of falling crude prices even before it sought to restructure $700 million worth of sukuk bonds in May 2017. Initially, Dana cited a need to “focus on short- to medium-term cash preservation.” The company was also trying to recover unpaid bills from Iraq’s Kurdistan region and Egypt.

Then, in June, the company said it had received legal advice that the sukuk was unlawful in the UAE and would need to be replaced. Analysts immediately questioned the company’s motives and the sukukholders rejected an offer that would have seen them repaid at par.

Since then, the positions of both sides have hardened. Dana got court injunctions in London and Sharjah stopping Deutsche Bank, the bondholder’s delegate, from declaring default and forcing repayment. By August, Dana was arguing that the sukukholders may end up owing the company money.