By Davide Barbuscia

DUBAI, July 31 (Reuters) - Dana Gas has cancelled its offer to exchange its outstanding $700 million sukuk, or Islamic bond, with new notes, and will pursue "litigation-driven outcomes" with regards to its restructuring, the Abu Dhabi-listed energy producer said on Monday.

Dana last month offered to replace its current sukuk, which it deems no longer sharia-compliant and therefore unlawful and unenforceable under United Arab Emirates law, with new notes.

The move sparked concerns in the Islamic finance industry regarding the impact it could have on sukuk as a debt instrument.

But as Dana's attempts to pursue the sukuk replacement offer and to reach a consensual agreement on the sukuk restructuring were rejected by its creditors, Dana Gas told an ad hoc committee of sukuk holders on July 27 that the offer to exchange the notes was now "off the table", it said.

Last month Dana said that it had received legal advice that its sukuk were not sharia-compliant and were therefore unlawful in the UAE.

It proposed to exchange the notes with new Islamic bonds with four-year maturities and new profit distributions at less than half the profit rate of its outstanding sukuk.

Dana, which said it was seeking a consensual agreement with the bond holders, started legal proceedings in the emirate of Sharjah last month to seek a declaration on the lawfulness of the sukuk.

In mid-June it obtained an injunction from London's High Court blocking the holders of the bonds, which mature in October, from taking action against the company.

Deutsche Bank, on behalf of the sukuk holders, opposed Dana's proposal to exchange the sukuk in the London court. The bank last week also asked Dana for $14 million as a sukuk profit payment for the period ending on July 31 - a request that Dana refused on the grounds that the sukuk are unlawful.

"The Ad Hoc Committee actively sought to prevent the company from pursuing any exchange offer through its actions during UK court proceedings, which the Company believes was not in the interests of the sukuk holders," Dana said on Monday.

The creditor committee's rejection of Dana's offer and the opposition to Dana's proposal in court are "incomprehensible and are totally against the interests of sukuk holders," a source close to the company told Reuters.

"Litigation will be long and drawn out, lasting up to 10 years. And if the UAE court finds in Dana Gas's favour as expected, sukuk holders will not only face full impairment but will be required to refund Dana Gas over $100 million of subsidised profit payments that the Company previously paid on account," the source said.

The case is being disputed in the UK and the United Arab Emirates because the purchase undertaking for the original sukuk is governed by English law, while the gas production assets behind the sukuk fall under UAE law.



(Reporting by Davide Barbuscia; editing by Saeed Azhar and Jason Neely) ((Davide.Barbuscia@thomsonreuters.com;))