COURT FILE NO.: CV-12-9667-00CL

DATE: 20120402

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF SINO-FOREST CORPORATION, Applicant

BEFORE: MORAWETZ J.

COUNSEL:
Robert W. Staley, Kevin Zych, Derek J. Bell and Jonathan Bell, for the Applicant

E. A. Sellers for the Sino Forest Corporation Board of Directors

Derrick Tay and Jennifer Stam for the Proposed Monitor, FTI Consulting Canada, Inc.

R. J. Chadwick, B. O’Neill and C. Descours for the Ad Hoc Noteholders

M. Starnino for counsel in the Ontario class action

P. Griffin for Ernst & Young

Jim Grout and Hugh Craig for the Ontario Securities Commission

Scott Bomhof for Credit Suisse, TD and the underwriter defendants in the Canadian class action

HEARD: MARCH 30, 2012

ENDORSED: MARCH 30, 2012

REASONS: APRIL 2, 2012

ENDORSEMENT

OVERVIEW

[ 1 ] The Applicant, Sino-Forest Corporation (“SFC”), moves for an Initial Order and Sale Process Order under the Companies’ Creditors Arrangement Act (“CCAA”).

[ 2 ] The factual basis for the application is set out in the affidavit of Mr. W. Judson Martin, sworn March 30, 2012. Additional detail has been provided in a pre-filing report provided by the proposed monitor, FTI Consulting Canada Inc. (“FTI”).

[ 3 ] Counsel to SFC advise that, after extensive arm’s-length negotiations, SFC has entered into a Support Agreement with a substantial number of its Noteholders, which requires SFC to pursue a CCAA plan as well as a Sale Process.

[ 4 ] Counsel to SFC advises that the restructuring transactions contemplated by this proceeding are intended to:

(a) separate Sino-Forest’s business operations from the problems facing SFC outside the People’s Republic of China (“PRC”) by transferring the intermediate holding companies that own the “business” and SFC’s inter-company claims against its subsidiaries to a newly formed company owned primarily by the Noteholders in compromise of their claims;

(b) effect a Sale Process to determine whether anyone will purchase SFC’s business operations for an amount of consideration acceptable to SFC and its Noteholders, with potential excess being made available to Junior Constituents;

(c) create a structure that will enable litigation claims to be pursued for the benefit of SFC’s stakeholders; and

(d) allow Junior Constituents some “upside” in the form of a profit participation if Sino-Forest’s business operations acquired by the Noteholders are monetized at a profit within seven years from Plan implementation.

[ 5 ] The relief sought by SFC in this application includes:

(i) a stay of proceedings against SFC, its current or former directors or officers, any of SFC’s property, and in respect of certain of SFC’s subsidiaries with respect to the note indentures issued by SFC;

(ii) the granting of a Directors’ Charge and Administration Charge on certain of SFC’s property;

(iii) the approval of the engagement letter of SFC’s financial advisor, Houlihan Lokey;

(iv) the relieving of SFC of any obligation to call and hold an annual meeting of shareholders until further order of this court; and

(v) the approval of sales process procedures.

FACTS

[ 6 ] SFC was formed under the Business Corporations Act (Ontario) , R.S.O. 1990, c. B-16, and in 2002 filed articles of continuance under the Canada Business Corporations Act , R.S.C. 1985 c. C-44 (“CBCA”).

[ 7 ] Since 1995, SFC has been a publicly-listed company on the TSX. SFC’s registered office is in Mississauga, Ontario, and its principal executive office is in Hong Kong.

[ 8 ] A total of 137 entities make up the Sino-Forest Companies: 67 PRC incorporated entities (with 12 branch companies), 58 BVI incorporated entities, 7 Hong Kong incorporated entities, 2 Canadian entities and 3 entities incorporated in other jurisdictions.

[ 9 ] SFC currently has three employees. Collectively, the Sino-Forest Companies employ a total of approximately 3,553 employees, with approximately 3,460 located in the PRC and approximately 90 located in Hong Kong.

[ 10 ] Sino-Forest is a publicly-listed major integrated forest plantation operator and forest productions company, with assets predominantly in the PRC. Its principal businesses include the sale of standing timber and wood logs, the ownership and management of forest plantation trees, and the complementary manufacturing of downstream engineered-wood products.

[ 11 ] Substantially all of Sino-Forest’s sales are generated in the PRC.

[ 12 ] On June 2, 2011, Muddy Waters LLC published a report (the “MW Report”) which, according to submissions made by SFC, alleged, among other things, that SFC is a “near total fraud” and a “ponzi scheme”.

[ 13 ] On the same day that the MW Report was released, the board of directors of SFC appointed an independent committee to investigate the allegations set out in the MW Report.

[ 14 ] In addition, investigations have been launched by the Ontario Securities Commission (“OSC”), the Hong Kong Securities and Futures Commissions (“HKSFC”) and the Royal Canadian Mounted Police (“RCMP”).

[ 15 ] On August 26, 2011, the OSC issued a cease trade order with respect to the securities of SFC and with respect to certain senior management personnel. With the consent of SFC, the cease trade order was extended by subsequent orders of the OSC.

[ 16 ] SFC and certain of its officers, directors and employees, along with SFC’s current and former auditors, technical consultants and various underwriters involved in prior equity and debt offerings, have been named as defendants in eight class action lawsuits in Canada. Additionally, a class action was commenced against SFC and other defendants in the State of New York.

[ 17 ] The affidavit of Mr. Martin also points out that circumstances are such that SFC has not been able to release Q3 2011 results and these circumstances could also impact SFC’s historical financial statements and its ability to obtain an audit for its 2011 fiscal year. On January 10, 2012, SFC cautioned that its historic financial statements and related audit reports should not be relied upon.

[ 18 ] SFC has issued four series of notes (two senior notes and two convertible notes), with a combined principal amount of approximately $1.8 billion, which remain outstanding and mature at various times between 2013 and 2017. The notes are supported by various guarantees from subsidiaries of SFC, and some are also supported by share pledges from certain of SFC’s subsidiaries.

[ 19 ] Mr. Martin has acknowledged that SFC’s failure to file the Q3 results constitutes a default under the note indentures.

[ 20 ] On January 12, 2012, SFC announced that holders of a majority in principal amount of SFC’s senior notes due 2014 and its senior notes due 2017 agreed to waive the default arising from SFC’s failure to release the Q3 results on a timely basis.

[ 21 ] The waiver agreements expire on the earlier of April 30, 2012 and any earlier termination of the waiver agreements in accordance with their terms. In addition, should SFC fail to file its audited financial statements for its fiscal year ended December 31, 2011 by March 30, 2012, the indenture trustees would be in a position to accelerate and enforce the approximately $1.8 billion in notes.

[ 22 ] The audited financial statements for the fiscal year that ended on December 31, 2011 have not yet been filed.

[ 23 ] Mr. Martin also deposes that, although the allegations in the MW Report have not been substantiated, the allegations have had a catastrophic negative impact on Sino-Forest’s business activities and there has been a material decline in the market value of SFC’s common shares and notes. Further, credit ratings were lowered and ultimately withdrawn.

[ 24 ] Mr. Martin contends that the various investigations and class action lawsuits have required, and will continue to require, that significant resources be expended by directors, officers and employees of Sino-Forest. This has also affected Sino-Forest’s ability to conduct its operations in the normal course of business and the business has effectively been frozen and ground to a halt. In addition, SFC has been unable to secure or renew certain existing onshore banking facilities and has been unable to obtain offshore letters of credit to facilitate its trading business. Further, relationships with the PRC government, local government, and suppliers have become strained, making it increasingly difficult to conduct any business operations.

[ 25 ] As noted above, following arm’s-length negotiations between SFC and the Ad Hoc Noteholders, the parties entered into a Support Agreement which provides that SFC will pursue a CCAA plan on the terms set out in the Support Agreement in order to implement the agreed upon restructuring transaction.

APPLICATION OF THE CCAA

[ 26 ] SFC is a corporation continued under the CBCA and is a “company” as defined in the CCAA.

[ 27 ] SFC also takes the position that it is a “debtor company” within the meaning of the CCAA. A “debtor company” includes a company that is insolvent.

[ 28 ] The issued and outstanding convertible and senior notes of SFC total approximately $1.8 billion. The waiver agreements with respect to SFC’s defaults under the senior notes expire on April 30, 2012. Mr. Martin contends that, but for the Support Agreement, which requires SFC to pursue a CCAA plan, the indenture trustees under the notes would be entitled to accelerate and enforce the rights of the Noteholders as soon as April 30, 2012. As such, SFC contends that it is insolvent as it is “reasonably expected to run out of liquidity within a reasonable proximity of time” and would be unable to meet its obligations as they come due or continue as a going concern. See Re Stelco 2004 24933 (ON SC) , [2004] O.J. No. 1257 at para. 26 ; leave to appeal to C.A. refused [2004] O.J. No. 1903 ; leave to appeal to S.C.C. refused [2004] S.C.C.A. No. 336; and ATB Financial v. Metcalfe and Mansfield Alternative Investments II Corp ., [2008] O.J. No. 1818 (S.C.J.) at paras. 12 and 32 .

[ 29 ] For the purposes of this application, I accept that SFC is a “debtor company” within the meaning of the CCAA and is insolvent; and, as a CBCA company that is insolvent with debts in excess of $5 million, SFC meets the statutory requirements for relief under the CCAA.

[ 30 ] The required financial information, including cash-flow information, has been filed.

[ 31 ] I am satisfied that it is appropriate to grant SFC relief under the CCAA and to provide for a stay of proceedings. FTI Consulting Canada, Inc., having filed its Consent to act, is appointed Monitor.

THE ADMINISTRATION CHARGE

[ 32 ] SFC has also requested an Administration Charge. Section 11.52 of the CCAA provides the court with the jurisdiction to grant an Administration Charge in respect of the fees and expenses of FTI and other professionals.

[ 33 ] I am satisfied that, in the circumstances of this case, an Administration Charge in the requested amount is appropriate. In making this determination I have taken into account the complexity of the business, the proposed role of the beneficiaries of the charge, whether the quantum of the proposed charge appears to be fair and reasonable, the position of the secured creditors likely to be affected by the charge and the position of FTI.

[ 34 ] In this case, FTI supports the Administration Charge. Further, it is noted that the Administration Charge does not seek a super priority charge ranking ahead of the secured creditors.

THE DIRECTORS’ CHARGE

[ 35 ] SFC also requests a Directors’ Charge. Section 11.51 of the CCAA provides the court with the jurisdiction to grant a charge in favour of any director to indemnify the director against obligations and liabilities that they may incur as a director of the company after commencement of the CCAA proceedings.

[ 36 ] Having reviewed the record, I am satisfied that the Directors’ Charge in the requested amount is appropriate and necessary. In making this determination, I have taken into account that the continued participation of directors is desirable and, in this particular case, absent the Directors’ Charge, the directors have indicated they will not continue in their participation in the restructuring of SFC. I am also satisfied that the insurance policies currently in place contain exclusions and limitations of coverage which could leave SFC’s directors without coverage in certain circumstances.

[ 37 ] In addition, the Directors’ Charge is intended to rank behind the Administration Charge. Further, FTI supports the Directors’ Charge and the Directors’ Charge does not seek a super priority charge ranking ahead of secured creditors.

[ 38 ] Based on the above, I am satisfied that the Directors’ Charge is fair and reasonable in the circumstances.

THE SALE PROCESS

[ 39 ] SFC has also requested approval for the Sale Process.

[ 40 ] The CCAA is to be given a broad and liberal interpretation to achieve its objectives and to facilitate the restructuring of an insolvent company. It has been held that a sale by a debtor, which preserves its businesses as a going concern, is consistent with these objectives, and the court has the jurisdiction to authorize such a sale under the CCAA in the absence of a plan. See Re Nortel Networks Corp. , 2009 39492 (ON SC) , [2009] O.J. No. 3169 (S.C.J.) at paras. 47-48 .

[ 41 ] The following questions may be considered when determining whether to authorize a sale under the CCAA in the absence of a plan (See Re Nortel Networks Corp. , supra at para. 49 ):

(i) Is the sale transaction warranted at this time?

(ii) Will the sale benefit the “whole economic community”?

(iii) Do any of the debtors’ creditors have a bone fide reason to object to the sale of the business?

(iv) Is there a better alternative?

[ 42 ] Counsel submits that as a result of the uncertainty surrounding SFC, it is impossible to know what an interested third party might be willing to pay for the underlying business operations of SFC once they are separated from the problems facing SFC outside the PRC. Counsel further contends that it is only by running the Sale Process that SFC and the court can determine whether there is an interested party that would be willing to purchase SFC’s business operations for an amount of consideration that is acceptable to SFC and its Noteholders while also making excess funds available to Junior Constituents.

[ 43 ] Based on a review of the record, the comments of FTI, and the support levels being provided by the Ad Hoc Noteholders Committee, I am satisfied that the aforementioned factors, when considered in the circumstances of this case, justify the approval of the Sale Process at this point in time.

ANCILLARY RELIEF

[ 44 ] I am also of the view that it is impractical for SFC to call and hold its annual general meeting at this time and, therefore, I am of the view that it is appropriate to grant an order relieving SFC of this obligation.

[ 45 ] SFC seeks to have FTI authorized, as a formal representative of SFC, to apply for recognition of these proceedings, as necessary, in any jurisdiction outside of Canada, including as “foreign main proceedings” in the United States pursuant to Chapter 15 of the U.S. Bankruptcy Code. Counsel contends that such an order is necessary to facilitate the restructuring as, among other things, SFC faces class action lawsuits in New York, the notes are governed by New York law, the indenture trustees are located in New York and certain of the SFC subsidiaries may face proceedings in foreign jurisdictions in respect of certain notes issued by SFC. In my view, this relief is appropriate and is granted.

[ 46 ] SFC also requests an order approving:

(i) the Financial Advisor Agreement; and

(ii) Houlihan Lokey’s retention by SFC under the terms of the agreement.

[ 47 ] Both SFC and FTI believe that the quantum and nature of the remuneration provided for in the Financial Advisor Agreement is fair and reasonable and that an order approving the Financial Advisor Agreement is appropriate and essential to a successful restructuring of SFC. This request has the support of parties appearing today and, in my view, is appropriate in the circumstances and is therefore granted.

DISPOSITION

[ 48 ] Accordingly, the relief requested by SFC is granted and orders shall issue substantially in the form of the Initial Order and the Sale Process Order included the Application Record.

MISCELLANEOUS

[ 49 ] SFC has confirmed that it is bound by the Support Agreement and intends to comply with it.

[ 50 ] The come-back hearing is scheduled for Friday, April 13, 2012. The orders granted today contain a come-back clause. The orders were made on extremely short notice and for all practical purposes are to be treated as being made ex parte .

[ 51 ] The scheduling of future hearings in this matter shall be coordinated through counsel to the Monitor and the Commercial List Office.

[ 52 ] Finally, it would be helpful if counsel could also file materials on a USB key in addition to a paper record.

MORAWETZ J.

Date: April 2, 2012