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Debt holders of Sino-Forest Corp. have seized effective control of the company in exchange for agreeing not to push it into bankruptcy, and are now expected to oversee the liquidation of the scandal-plagued Chinese forestry firm's assets.

Facing fraud allegations and an imminent default on its debt that would mean certain insolvency, Sino-Forest has ceded command over any significant governance matters and major decisions to a group of investors that holds a sizable amount of the company's $1.8-billion (U.S.) of debt.

The loss of control foreshadows the likely dismantling of a company that was once the largest publicly traded forestry firm on the TSX. Sino-Forest boasted a market valuation of more than $6-billion before fraud allegations made by a short-seller caused the company's shares to collapse in June. With the goal of maximizing the recovery of their investments in the troubled company, a committee representing two groups of bondholders will now supervise the expected sale of timber assets in mainland China.

Under a waiver agreement, Sino-Forest has agreed to deliver by March 31 a "strategic plan" to an ad hoc committee of debt holders that will outline the timeline and particulars of the asset sales. The company has agreed to inform the committee of any discussions regarding potential transactions and allow for a representative of the committee to participate in the talks.

The company has also agreed not to add any directors to its board or sell assets worth more than $10-million without consulting the committee. It will give the committee access to its "premises, assets, accounts, book and records," as well as "appropriate officers of the company," the waiver agreement says.

"They've certainly surrendered a considerable degree of control to the ad hoc committee. I suppose that's not surprising in light of the circumstances," said Dimitri Lascaris, of Siskinds LLP which is one of two law firms leading a class action lawsuit against Sino-Forests, its advisors and auditors.

"This resolution has come with a hefty price," Mr. Lascaris added.

Sino-Forest disclosed it had less than $600-million in cash when it last reported financial results in early November. Earlier this week, the company said its historical financial results should "not be relied upon." A special committee of company directors investigating the fraud allegations has spent $35-million but has been unable to unravel the tangled web of relationships between Sino-Forest and its business partners in China. As a result, the company's board and auditors have refused to release the company's third-quarter financial results, breaching debt covenants and forcing a showdown with the debt holders that resulted in the waiver agreement which is in place until April 30.

The special committee of directors now expects to release its final report on the fraud allegations before the end of January, but sources close to the situation are cautioning that the report is unlikely to put to rest all the questions surrounding the company, its executives and its business practices in China.

The Ontario Securities Commission halted trading in Sino-Forest's shares in August and accused co-founder and former chairman and chief executive officer Allen Chan and other executives of participating in fraudulent activity. The company said Thursday it has agreed to extend the cease-trade order beyond Jan. 25, when the current order is set to expire. Mr. Chan and the company have denied the allegations, which have not been proven in court.

Under the waiver agreement, Sino-Forest will resume interest payments on its debt, including a $9.775-million payment it skipped in December. It will also pay a so-called "waiver fee" of $10-million to debt holders and pay for the cost of advisers to the ad hoc committee. Sino-Forest has also agreed to maintain minimum cash balances of $165-million inside mainland China and $140-million outside of China.


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