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Sino-Foret Corp.

Two of Sino-Forest Corp.'s one-time largest investors have signalled approval for a court challenge of the company's plan to use bankruptcy-protection proceedings to sell its assets.

According to court documents, the company's second-largest shareholder, U.S.-based Davis Selected Advisers LP, has signed on for the potential $9.18-billion class-action lawsuit against the company.

The documents also say U.S. hedge fund Paulson & Co., at one time the company's single biggest shareholder, also supports an attempt by lawyers for the plaintiffs in that potential class action to quash Sino-Forest's bankruptcy protection and restructuring plans.

The embattled forestry company, once worth $6-billion, saw its shares collapse after it faced fraud allegations last year. The controversy has prompted investigations by the Ontario Securities Commission and the RCMP, as well as the potential class-action lawsuit. The allegations against the company have not been proved.

On March 30, Sino-Forest went to court seek bankruptcy protection under the Companies' Creditors Arrangement Act (CCAA), buying time to find bidders for its subsidiaries and forestry assets.

Lawyers in the potential class action are trying to challenge this plan. They demand instead that the company be put into receivership, and its board of directors replaced because of the allegations the company faces.

They also want to lift the stay, or freeze on litigation, imposed by the CCAA proceedings in order to move ahead with their lawsuit against the company, its auditors and underwriters.

An affidavit filed by lawyer Daniel Bach of Siskinds LLP, one of the law firms acting for the plaintiffs, said Davis had recently retained Siskinds. Davis, which manages a family of mutual funds and has about $35-billion, held 12.6 per cent of Sino-Forest's shares as of April, 2011.

According to the affidavit, the U.S. investment firm "completely supports" the plaintiff lawyers' demands, including the quashing of the bankruptcy protection process and the replacement of Sino-Forest's board.

The documents also say that on April 10, 2012, Mr. Bach spoke to a lawyer for New York-based Paulson & Co. Inc., a hedge fund run by John Paulson, a prominent figure in the U.S. financial world. The fund was at one time Sino-Forest's largest shareholder, but sold its stake after the allegations surfaced in June, 2011.

Paulson & Co. also supports the class-action lawyers' demands, the affidavit says. Representatives from both U.S. firms could not be reached for comment.

In Ontario Superior Court in Toronto on Friday, lawyers for the plaintiffs raised their objections to the company's plan to seek buyers for its subsidiaries and forestry holdings in order to pay off the holders of $1.8-billion in outstanding debt.

Plaintiffs lawyer Ken Rosenberg told the court his clients objected to Sino-Forest's request to extend the CCAA's stay to July 9, after the company's deadline for expressions of interest from potential buyers. Mr. Rosenberg called the proposal "excessive and beyond all reason in the circumstances of this case."

He also said his motion calling for the removal of the board of directors was necessary because the OSC notices sent to Sino-Forest and six former and current executives, disclosed this week, create a "cloud of fraud allegations."

After hearing Mr. Rosenberg's arguments, Mr. Justice Geoffrey Morawetz ruled that the company has until June 1 before it must return to court to renew the stay. He also scheduled a hearing later this month to hear other arguments in the case.

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