COURT FILE AND PARTIES

COURT FILE NO.: CV-12-9667-00CL
DATE: 20120727

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 and Jonathan Bell, for the Applicant
Jennifer Stam, for the Monitor
Kenneth Dekker, for BDO Limited
Peter Griffin and Peter Osborne, for Ernst & Young LLP
Benjamin Zarnett, Robert Chadwick and Brendan O’Neill, for the Ad Hoc Committee of Noteholders
James Grout, for the Ontario Securities Commission
Emily Cole and Joseph Marin, for Allen Chan
Simon Bieber, for David Horsley
David Bish, John Fabello and Adam Slavens, for the Underwriters Named in the Class Action
Max Starnino and Kirk Baert, for the Ontario Plaintiffs
Larry Lowenstein, for the Board of Directors

HEARD: June 26, 2012

ENDORSEMENT

Overview

[ 1 ] Sino-Forest Corporation (“SFC” or the “Applicant”) seeks an order directing that claims against SFC, which result from the ownership, purchase or sale of an equity interest in SFC, are “equity claims” as defined in section 2 of the Companies’ Creditors Arrangement Act (“CCAA”) including, without limitation: (i) the claims by or on behalf of current or former shareholders asserted in the proceedings listed in Schedule “A” (collectively, the “Shareholder Claims”); and (ii) any indemnification claims against SFC related to or arising from the Shareholder Claims, including, without limitation, those by or on behalf of any of the other defendants to the proceedings listed in Schedule “A” (the “Related Indemnity Claims”).

[ 2 ] SFC takes the position that the Shareholder Claims are “equity claims” as defined in the CCAA as they are claims in respect of a monetary loss resulting from the ownership, purchase or sale of an equity interest in SFC and, therefore, come within the definition. SFC also takes the position that the Related Indemnity Claims are “equity claims” as defined in the CCAA as they are claims for contribution or indemnity in respect of a claim that is an equity claim and, therefore, also come within the definition.

[ 3 ] On March 30, 2012, the court granted the Initial Order providing for the CCAA stay against SFC and certain of its subsidiaries. FTI Consulting Canada Inc. was appointed as Monitor.

[ 4 ] On the same day, the Sales Process Order was granted, approving Sales Process procedures and authorizing and directing SFC, the Monitor and Houlihan Lokey to carry out the Sales Process.

[ 5 ] On May 14, 2012, the court issued a Claims Procedure Order, which established June 20, 2012 as the Claims Bar Date.

[ 6 ] The stay of proceedings has since been extended to September 28, 2012.

[ 7 ] Since the outset of the proceedings, SFC has taken the position that it is important for these proceedings to be completed as soon as possible in order to, among other things, (i) enable the business operated in the Peoples Republic of China (“PRC”) to be separated from SFC and put under new ownership; (ii) enable the restructured business to participate in the Q4 sales season in the PRC market; and (iii) maintain the confidence of stakeholders in the PRC (including local and national governmental bodies, PRC lenders and other stakeholders) that the business in the PRC can be successfully separated from SFC and operate in the ordinary course in the near future.

[ 8 ] SFC has negotiated a Support Agreement with the Ad Hoc Committee of Noteholders and intends to file a plan of compromise or arrangement (the “Plan”) under the CCAA by no later than August 27, 2012, based on the deadline set out in the Support Agreement and what they submit is the commercial reality that SFC must complete its restructuring as soon as possible.

[ 9 ] Noteholders holding in excess of $1.296 billion, or approximately 72% of the approximately $1.8 billion of SFC’s noteholders’ debt, have executed written support agreements to support the SFC CCAA Plan as of March 30, 2012.

Shareholder Claims Asserted Against SFC

(i) Ontario

[ 10 ] By Fresh as Amended Statement of Claim dated April 26, 2012 (the “Ontario Statement of Claim”), the Trustees of the Labourers’ Pension Fund of Central and Eastern Canada and other plaintiffs asserted various claims in a class proceeding (the “Ontario Class Proceedings”) against SFC, certain of its current and former officers and directors, Ernst & Young LLP (“E&Y”), BDO Limited (“BDO”), Poyry (Beijing) Consulting Company Limited (“Poyry”) and SFC’s underwriters (collectively, the “Underwriters”).

[ 11 ] Section 1(m) of the Ontario Statement of Claim defines “class” and “class members” as:

All persons and entities, wherever they may reside who acquired Sino’s Securities during the Class Period by distribution in Canada or on the Toronto Stock Exchange or other secondary market in Canada, which securities include those acquired over the counter, and all persons and entities who acquired Sino’s Securities during the Class Period who are resident of Canada or were resident of Canada at the time of acquisition and who acquired Sino’s Securities outside of Canada, except the Excluded Persons.

[ 12 ] The term “Securities” is defined as “Sino’s common shares, notes and other securities, as defined in the OSA”. The term “Class Period” is defined as the period from and including March 19, 2007 up to and including June 2, 2011.

[ 13 ] The Ontario Class Proceedings seek damages in the amount of approximately $9.2 billion against SFC and the other defendants.

[ 14 ] The thrust of the complaint in the Ontario Class Proceedings is that the class members are alleged to have purchased securities at “inflated prices during the Class Period” and that absent the alleged misconduct, sales of such securities “would have occurred at prices that reflected the true value” of the securities. It is further alleged that “the price of Sino’s Securities was directly affected during the Class Period by the issuance of the Impugned Documents”.

(ii) Quebec

[ 15 ] By action filed in Quebec on June 9, 2011, Guining Liu commenced an action (the “Quebec Class Proceedings”) against SFC, certain of its current and former officers and directors, E&Y and Poyry. The Quebec Class Proceedings do not name BDO or the Underwriters as defendants. The Quebec Class Proceedings also do not specify the quantum of damages sought, but rather reference “damages in an amount equal to the losses that it and the other members of the group suffered as a result of purchasing or acquiring securities of Sino at inflated prices during the Class Period”.

[ 16 ] The complaints in the Quebec Class Proceedings centre on the effect of alleged misrepresentations on the share price. The duty allegedly owed to the class members is said to be based in “law and other provisions of the Securities Act ”, to ensure the prompt dissemination of truthful, complete and accurate statements regarding SFC’s business and affairs and to correct any previously-issued materially inaccurate statements.

(iii) Saskatchewan

[ 17 ] By Statement of Claim dated December 1, 2011 (the “Saskatchewan Statement of Claim”), Mr. Allan Haigh commenced an action (the “Saskatchewan Class Proceedings”) against SFC, Allen Chan and David Horsley.

[ 18 ] The Saskatchewan Statement of Claim does not specify the quantum of damages sought, but instead states in more general terms that the plaintiff seeks “aggravated and compensatory damages against the defendants in an amount to be determined at trial”.

[ 19 ] The Saskatchewan Class Proceedings focus on the effect of the alleged wrongful acts upon the trading price of SFC’s securities:

The price of Sino’s securities was directly affected during the Class Period by the issuance of the Impugned Documents. The defendants were aware at all material times that the effect of Sino’s disclosure documents upon the price of its Sino’s [sic] securities.

(iv) New York

[ 20 ] By Verified Class Action Complaint dated January 27, 2012, (the “New York Complaint”), Mr. David Leapard and IMF Finance SA commenced a class proceeding against SFC, Mr. Allen Chan, Mr. David Horsley, Mr. Kai Kit Poon, a subset of the Underwriters, E&Y, and Ernst & Young Global Limited (the “New York Class Proceedings”).

[ 21 ] SFC contends that the New York Class Proceedings focus on the effect of the alleged wrongful acts upon the trading price of SFC’s securities.

[ 22 ] The plaintiffs in the various class actions have named parties other than SFC as defendants, notably, the Underwriters and the auditors, E&Y, and BDO, as summarized in the table below. The positions of those parties are detailed later in these reasons.

Ontario
Quebec
Saskatchewan
New York

E&Y LLP
X
X
X

E&Y Global
X

BDO
X

Poyry
X
X

Underwriters
11
2

Legal Framework

[ 23 ] Even before the 2009 amendments to the CCAA dealing with equity claims, courts recognized that there is a fundamental difference between shareholder equity claims as they relate to an insolvent entity versus creditor claims. Essentially, shareholders cannot reasonably expect to maintain a financial interest in an insolvent company where creditor claims are not being paid in full. Simply put, shareholders have no economic interest in an insolvent enterprise: Blue Range Resource Corp. (Re) , (2004) 4 W.W.R. 738 (Alta. Q.B.) [ Blue Range Resources ]; Stelco Inc. (Re) , (2006) 1773 (Ont. S.C.J.) [ Stelco ]; Royal Bank of Canada v. Central Capital Corp . (1996), 27 O.R. (3d) 494 (C.A.).

[ 24 ] The basis for the differentiation flows from the fundamentally different nature of debt and equity investments. Shareholders have unlimited upside potential when purchasing shares. Creditors have no corresponding upside potential: Nelson Financial Group Limited (Re) , 2010 ONSC 6229 [ Nelson Financial ].

[ 25 ] As a result, courts subordinated equity claims and denied such claims a vote in plans of arrangement: Blue Range Resource , supra ; Stelco , supra ; EarthFirst Canada Inc. (Re) (2009), 2009 ABQB 316 , 56 C.B.R. (5 th ) 102 (Alta. Q.B.) [ EarthFirst Canada ]; and Nelson Financial , supra .

[ 26 ] In 2009, significant amendments were made to the CCAA. Specific amendments were made with the intention of clarifying that equity claims are subordinated to other claims.

[ 27 ] The 2009 amendments define an “equity claim” and an “equity interest”. Section 2 of the CCAA includes the following definitions:

“Equity Claim” means a claim that is in respect of an equity interest, including a claim for, among others, (…)

(d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or

(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d);

“Equity Interest” means

(a) in the case of a company other than an income trust, a share in the company – or a warrant or option or another right to acquire a share in the company – other than one that is derived from a convertible debt,

[ 28 ] Section 6(8) of the CCAA prohibits a distribution to equity claimants prior to payment in full of all non-equity claims.

[ 29 ] Section 22(1) of the CCAA provides that equity claimants are prohibited from voting on a plan unless the court orders otherwise.

Position of Ernst & Young

[ 30 ] E&Y opposes the relief sought, at least as against E&Y, since the E&Y proof of claim evidence demonstrates in its view that E&Y’s claim:

(a) is not an equity claim;

(b) does not derive from or depend upon an equity claim (in whole or in part);

(c) represents discreet and independent causes of action as against SFC and its directors and officers arising from E&Y’s direct contractual relationship with such parties (or certain of such parties) and/or the tortious conduct of SFC and/or its directors and officers for which they are in law responsible to E&Y; and

(d) can succeed independently of whether or not the claims of the plaintiffs in the class actions succeed.

[ 31 ] In its factum, counsel to E&Y acknowledges that during the periods relevant to the Class Action Proceedings, E&Y was retained as SFC’s auditor and acted as such from 2007 until it resigned on April 5, 2012.

[ 32 ] On June 2, 2011, Muddy Waters LLC (“Muddy Waters”) issued a report which purported to reveal fraud at SFC. In the wake of that report, SFC’s share price plummeted and Muddy Waters profited from its short position.

[ 33 ] E&Y was served with a multitude of class action claims in numerous jurisdictions.

[ 34 ] The plaintiffs in the Ontario Class Proceedings claim damages in the aggregate, as against all defendants, of $9.2 billion on behalf of resident and non-resident shareholders and noteholders. The causes of action alleged are both statutory, under the Securities Act (Ontario) and at common law, in negligence and negligent misrepresentation.

[ 35 ] In its factum, counsel to E&Y acknowledges that the central claim in the class actions is that SFC made a series of misrepresentations in respect of its timber assets. The claims against E&Y and the other third party defendants are that they failed to detect these misrepresentations and note in particular that E&Y’s audit did not comply with Canadian generally accepted accounting standards. Similar claims are advanced in Quebec and the U.S.

[ 36 ] Counsel to E&Y notes that on May 14, 2012 the court granted a Claims Procedure Order which, among other things, requires proofs of claim to be filed no later than June 20, 2012. E&Y takes issue with the fact that this motion was then brought notwithstanding that proofs of claim and D&O proofs of claim had not yet been filed.

[ 37 ] E&Y has filed with the Monitor, in accordance with the Claims Procedure Order, a proof of claim against SFC and a proof of claim against the directors and officers of SFC.

[ 38 ] E&Y takes the position that it has contractual claims of indemnification against SFC and its subsidiaries and has statutory and common law claims of contribution and/or indemnity against SFC and its subsidiaries for all relevant years. E&Y contends that it has stand-alone claims for breach of contract and negligent and/or fraudulent misrepresentation against the company and its directors and officers.

[ 39 ] Counsel submits that E&Y’s claims against Sino-Forest and the SFC subsidiaries are:

(a) creditor claims;

(b) derived from E&Y retainers by and/or on behalf of Sino-Forest and the SFC subsidiaries and E&Y’s relationship with such parties, all of which are wholly independent and conceptually different from the claims advanced by the class action plaintiffs;

(c) claims that include the cost of defending and responding to various proceedings, both pre- and post-filing; and

(d) not equity claims in the sense contemplated by the CCAA. E&Y’s submission is that equity holders of Sino-Forest have not advanced, and could not advance, any claims against SFC’s subsidiaries.

[ 40 ] Counsel further contends that E&Y’s claim is distinct from any and all potential and actual claims by the plaintiffs in the class actions against Sino-Forest and that E&Y’s claim for contribution and/or indemnity is not based on the claims against Sino-Forest advanced in the class actions but rather only in part on those claims, as any success of the plaintiffs in the class actions against E&Y would not necessarily lead to success against Sino-Forest, and vice versa. Counsel contends that E&Y has a distinct claim against Sino-Forest independent of that of the plaintiffs in the class actions. The success of E&Y’s claims against Sino-Forest and the SFC subsidiaries, and the success of the claims advanced by the class action plaintiffs, are not co-dependent. Consequently, counsel contends that E&Y’s claim is that of an unsecured creditor.

[ 41 ] From a policy standpoint, counsel to E&Y contends that the nature of the relationship between a shareholder, who may be in a position to assert an equity claim (in addition to other claims) is fundamentally different from the relationship existing between a corporation and its auditors.

Position of BDO Limited

[ 42 ] BDO was auditor of Sino-Forest Corporation between 2005 and 2007, when it was replaced by E&Y.

[ 43 ] BDO has a filed a proof of claim against Sino-Forest pursuant to the Claims Procedure Order.

[ 44 ] BDO’s claim against Sino-Forest is primarily for breach of contract.

[ 45 ] BDO takes the position that its indemnity claims, similar to those advanced by E&Y and the Underwriters, are not equity claims within the meaning of s. 2 of the CCAA.

[ 46 ] BDO adopts the submissions of E&Y which, for the purposes of this endorsement, are not repeated.

Position of the Underwriters

[ 47 ] The Underwriters take the position that the court should not decide the equity claims motion at this time because it is premature or, alternatively, if the court decides the equity claims motion, the equity claims order should not be granted because the Related Indemnity Claims are not “equity claims” as defined in s. 2 of the CCAA.

[ 48 ] The Underwriters are among the defendants named in some of the class actions. In connection with the offerings, certain Underwriters entered into agreements with Sino-Forest and certain of its subsidiaries providing that Sino-Forest and, with respect to certain offerings, the Sino-Forest subsidiary companies, agree to indemnify and hold harmless the Underwriters in connection with an array of matters that could arise from the offerings.

[ 49 ] The Underwriters raise the following issues:

(i) Should this court decide the equity claims motion at this time?

(ii) If this court decides the equity claims motion at this time, should the equity claims order be granted?

[ 50 ] On the first issue, counsel to the Underwriters takes the position that the issue is not yet ripe for determination.

[ 51 ] Counsel submits that, by seeking the equity claims order at this time, Sino-Forest is attempting to pre-empt the Claims Procedure Order, which already provides a process for the determination of claims. Until such time as the claims procedure in respect of the Related Indemnity Claims is completed, and those claims are determined pursuant to that process, counsel contends the subject of the equity claims motion raises a merely hypothetical question as the court is being asked to determine the proper interpretation of s. 2 of the CCAA before it has the benefit of an actual claim in dispute before it.

[ 52 ] Counsel further contends that by asking the court to render judgment on the proper interpretation of s. 2 of the CCAA in the hypothetical, Sino-Forest has put the court in a position where its judgment will not be made in the context of particular facts or with a full and complete evidentiary record.

[ 53 ] Even if the court determines that it can decide this motion at this time, the Underwriters submit that the relief requested should not be granted.

Position of the Applicant

[ 54 ] The Applicant submits that the amendments to the CCAA relating to equity claims closely parallel existing U.S. law on the subject and that Canadian courts have looked to U.S. courts for guidance on the issue of equity claims as the subordination of equity claims has long been codified there: see e.g. Blue Range Resources , supra , and Nelson Financial, supra .

[ 55 ] The Applicant takes the position that based on the plain language of the CCAA, the Shareholder Claims are “equity claims” as defined in s. 2 as they are claims in respect of a “monetary loss resulting from the ownership, purchase or sale of an equity interest”.

[ 56 ] The Applicant also submits the following:

(a) the Ontario, Quebec, Saskatchewan and New York Class Actions (collectively, the “Class Actions”) all advance claims on behalf of shareholders.

(b) the Class Actions also allege wrongful conduct that affected the trading price of the shares, in that the alleged misrepresentation “artificially inflated” the share price; and

(c) the Class Actions seek damages relating to the trading price of SFC shares and, as such, allege a “monetary loss” that resulted from the ownership, purchase or sale of shares, as defined in s. 2 of the CCAA.

[ 57 ] Counsel further submits that, as the Shareholder Claims are “equity claims”, they are expressly subordinated to creditor claims and are prohibited from voting on the plan of arrangement.

[ 58 ] Counsel to the Applicant also submits that the definition of “equity claims” in s. 2 of the CCAA expressly includes indemnity claims that relate to other equity claims. As such, the Related Indemnity Claims are equity claims within the meaning of s. 2.

[ 59 ] Counsel further submits that there is no distinction in the CCAA between the source of any claim for contribution or indemnity; whether by statute, common law, contractual or otherwise. Further, and to the contrary, counsel submits that the legal characterization of a contribution or indemnity claim depends solely on the characterization of the primary claim upon which contribution or indemnity is sought.

[ 60 ] Counsel points out that in Return on Innovation Capital v. Gandi Innovations Limited , 2011 ONSC 5018 , leave to appeal denied, 2012 ONCA 10 [ Return on Innovation ] this court characterized the contractual indemnification claims of directors and officers in respect of an equity claim as “equity claims”.

[ 61 ] Counsel also submits that guidance on the treatment of underwriter and auditor indemnification claims can be obtained from the U.S. experience. In the U.S., courts have held that the indemnification claims of underwriters for liability or defence costs constitute equity claims that are subordinated to the claims of general creditors. Counsel submits that insofar as the primary source of liability is characterized as an equity claim, so too is any claim for contribution and indemnity based on that equity claim.

[ 62 ] In this case, counsel contends, the Related Indemnity Claims are clearly claims for “contribution and indemnity” based on the Shareholder Claims.

Analysis

Is it Premature to Determine the Issue?

[ 71 ] The class action litigation was commenced prior to the CCAA Proceedings. It is clear that the claims of shareholders as set out in the class action claims against SFC are “equity claims” within the meaning of the CCAA.

[ 72 ] In my view, this issue is not premature for determination, as is submitted by the Underwriters.

[ 73 ] The Class Action Proceedings preceded the CCAA Proceedings. It has been clear since the outset of the CCAA Proceedings that this issue – namely, whether the claims of E&Y, BDO and the Underwriters as against SFC, would be considered “equity claims” – would have to be determined.

[ 74 ] It has also been clear from the outset of the CCAA Proceedings, that a Sales Process would be undertaken and the expected proceeds arising from the Sales Process would generate proceeds insufficient to satisfy the claims of creditors.

[ 75 ] The Claims Procedure is in place but, it seems to me that the issue that has been placed before the court on this motion can be determined independently of the Claims Procedure. I do not accept that any party can be said to be prejudiced if this threshold issue is determined at this time. The threshold issue does not depend upon a determination of quantification of any claim. Rather, its effect will be to establish whether the claims of E&Y, BDO and the Underwriters will be subordinated pursuant to the provisions of the CCAA. This is independent from a determination as to the validity of any claim and the quantification thereof.

Should the Equity Claims Order be Granted?

[ 76 ] I am in agreement with the submission of counsel for the Ad Hoc Noteholders to the effect that the characterization of claims for indemnity turns on the characterization of the underlying primary claims.

[ 77 ] In my view, the claims advanced in the Shareholder Claims are clearly equity claims. The Shareholder Claims underlie the Related Indemnity Claims.

[ 78 ] In my view, the CCAA Amendments have codified the treatment of claims addressed in pre-amendment cases and have further broadened the scope of equity claims.

[ 79 ] The plain language in the definition of “equity claim” does not focus on the identity of the claimant. Rather, it focuses on the nature of the claim. In this case, it seems clear that the Shareholder Claims led to the Related Indemnity Claims. Put another way, the inescapable conclusion is that the Related Indemnity Claims are being used to recover an equity investment.

[ 80 ] The plain language of the CCAA dictates the outcome, namely, that the Shareholder Claims and the Related Indemnity Claims constitute “equity claims” within the meaning of the CCAA. This conclusion is consistent with the trend towards an expansive interpretation of the definition of “equity claims” to achieve the purpose of the CCAA.

[ 81 ] In Return on Innovation , Newbould J. characterized the contractual indemnification claims of directors and officers as “equity claims”. The Court of Appeal denied leave to appeal. The analysis in Return on Innovation leads to the conclusion that the Related Indemnity Claims are also equity claims under the CCAA.

[ 82 ] It would be totally inconsistent to arrive at a conclusion that would enable either the auditors or the Underwriters, through a claim for indemnification, to be treated as creditors when the underlying actions of the shareholders cannot achieve the same status. To hold otherwise would indeed provide an indirect remedy where a direct remedy is not available.

[ 83 ] Further, on the issue of whether the claims of E&Y, BDO and the Underwriters fall within the definition of equity claims, there are, in my view, two aspects of these claims and it is necessary to keep them conceptually separate.

[ 84 ] The first and most significant aspect of the claims of E&Y, BDO and the Underwriters constitutes an “equity claim” within the meaning of the CCAA. Simply put, but for the Class Action Proceedings, it is inconceivable that claims of this magnitude would have been launched by E&Y, BDO and the Underwriters as against SFC. The class action plaintiffs have launched their actions against SFC, the auditors and the Underwriters. In turn, E&Y, BDO and the Underwriters have launched actions against SFC and its subsidiaries. The claims of the shareholders are clearly “equity claims” and a plain reading of s. 2(1)(e) of the CCAA leads to the same conclusion with respect to the claims of E&Y, BDO and the Underwriters. To hold otherwise, would, as stated above, lead to a result that is inconsistent with the principles of the CCAA. It would potentially put the shareholders in a position to achieve creditor status through their claim against E&Y, BDO and the Underwriters even though a direct claim against SFC would rank as an “equity claim”.

[ 85 ] I also recognize that the legal construction of the claims of the auditors and the Underwriters as against SFC is different than the claims of the shareholders against SFC. However, that distinction is not, in my view, reflected in the language of the CCAA which makes no distinction based on the status of the party but rather focuses on the substance of the claim.

[ 86 ] Critical to my analysis of this issue is the statutory language and the fact that the CCAA Amendments came into force after the cases relied upon by the Underwriters and the auditors.

[ 87 ] It has been argued that the amendments did nothing more than codify pre-existing common law. In many respects, I accept this submission. However, I am unable to accept this submission when considering s. 2(1) of the CCAA, which provides clear and specific language directing that “equity claim” means a claim that is in respect of an equity interest, including a claim for, among other things, “(e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d)”.

[ 88 ] Given that a shareholder claim falls within s. 2(1)(d), the plain words of subsections (d) and (e) lead to the conclusions that I have set out above.

[ 89 ] I fail to see how the very clear words of subsection (e) can be seen to be a codification of existing law. To arrive at the conclusion put forth by E&Y, BDO and the Underwriters would require me to ignore the specific words that Parliament has recently enacted.

[ 90 ] I cannot agree with the position put forth by the Underwriters or by the auditors on this point. The plain wording of the statute has persuaded me that it does not matter whether an indemnity claim is seeking no more than allocation of fault and contribution at common law, or whether there is a free-standing contribution and indemnity claim based on contracts.

[ 91 ] However, that is not to say that the full amount of the claim by the auditors and Underwriters can be characterized, at this time, as an “equity claim”.

[ 92 ] The second aspect to the claims of the auditors and underwriters can be illustrated by the following hypothetical: if the claim of the shareholders does not succeed against the class action defendants, E&Y, BDO and the Underwriters will not be liable to the class action plaintiffs. However, these parties may be in a position to demonstrate that they do have a claim against SFC for the costs of defending those actions, which claim does not arise as a result of “contribution or indemnity in respect of an equity claim”.

[ 93 ] It could very well be that each of E&Y, BDO and the Underwriters have expended significant amounts in defending the claims brought by the class action plaintiffs which, in turn, could give rise to contractual claims as against SFC. If there is no successful equity claim brought by the class action plaintiffs, it is arguable that any claim of E&Y, BDO and the Underwriters may legitimately be characterized as a claim for contribution or indemnity but not necessarily in respect of an equity claim. If so, there is no principled basis for subordinating this portion of the claim. At this point in time, the quantification of such a claim cannot be determined. This must be determined in accordance with the Claims Procedure.

[ 94 ] However, it must be recognized that, by far the most significant part of the claim, is an “equity claim”.

[ 95 ] In arriving at this determination, I have taken into account the arguments set forth by E&Y, BDO and the Underwriters. My conclusions recognize the separate aspects of the Related Indemnity Claims as submitted by counsel to the Underwriters at paragraph 40 of their factum which reads:

…it must be recognized that there are, in fact, at least two different kinds of Related Indemnity Claims:

(a) indemnity claims against SFC in respect of Shareholder Claims against the auditors and the Underwriters; and

(b) indemnity claims against SFC in respect of the defence costs of the auditors and the Underwriters in connection with defending themselves against Shareholder Claims.

Disposition

[ 96 ] In the result, an order shall issue that the claims against SFC resulting from the ownership, purchase or sale of equity interests in SFC, including, without limitation, the claims by or on behalf of current or former shareholders asserted in the proceedings listed in Schedule “A” are “equity claims” as defined in s. 2 of the CCAA, being claims in respect of monetary losses resulting from the ownership, purchase or sale of an equity interest. It is noted that counsel for the class action plaintiffs did not contest this issue.

[ 97 ] In addition, an order shall also issue that any indemnification claim against SFC related to or arising from the Shareholders Claims, including, without limitation, by or on behalf of any of the other defendants to the proceedings listed in Schedule “A” are “equity claims” under the CCAA, being claims for contribution or indemnity in respect of a claim that is an equity claim. However, I feel it is premature to determine whether this order extends to the aspect of the Related Indemnity Claims that corresponds to the defence costs of the Underwriters and the auditors in connection with defending themselves against the Shareholder Claims.

[ 98 ] A direction shall also issue that these orders are made without prejudice to SFC’s rights to apply for a similar order with respect to (i) any claims in the statement of claim that are in respect of securities other than shares and (ii) any indemnification claims against SFC related thereto.

MORAWETZ J.
Date: July 27, 2012

SCHEDULE “A” – SHAREHOLDER CLAIMS

1. Trustees of the Labourers’ Pension Fund of Central and Eastern Canada et al. v. Sino-Forest Corporation et al. (Ontario Superior Court of Justice, Court File No. CV-11-431153-00CP)

2. Guining Liu v. Sino-Forest Corporation et al. (Quebec Superior Court, Court File No.: 200-06-000132-111)

3. Allan Haigh v. Sino-Forest Corporation et al. (Saskatchewan Court of Queen’s Bench, Court File No. 2288 of 2011)

4. David Leapard et al. v. Allen T.Y. Chan et al. (District court of the Southern District of New York, Court File No. 650258/2012)