Sino-Forest: Accounts receivable collections hurt by deregistrations

By Caroline Salls

Pittsburgh, July 31 - Sino-Forest Corp. provided a status update Tuesday regarding its efforts to collect accounts receivable owed to subsidiaries, which have been complicated by what the company called improper deregistrations in China, according to a news release.

In support of its March 30 application under the Companies' Creditors Arrangement Act, the company said it filed an affidavit that described the two business models used to carry on its business in the People's Republic of China.

Business models

Sino-Forest said one of those business models involved the use of subsidiaries incorporated in the British Virgin Islands (BVI) and the other involved subsidiaries incorporated in China as a wholly foreign-owned enterprise.

As a result of historic restrictions on foreign companies carrying on business in China, the company said a substantial portion of its business in China has been conducted through "authorized intermediaries" that acted as sales agents.

Under this model, standing timber forestry assets are acquired by Sino-Forest through its subsidiaries incorporated in the BVI. Authorized intermediaries receive payments due to Sino-Forest from the sale of standing timber forestry assets owned by some of the BVI subsidiaries and, at the company's direction, make payments to suppliers on account of other standing timber forestry assets purchased by the BVI subsidiaries.

Under these set-off arrangements, Sino-Forest said no cash flows directly through the BVI subsidiaries.

After foreign ownership restrictions were relaxed, the company said it established WFOE subsidiaries that carry on the forestry business directly in China. Under the WFOE model, WFOEs directly pay suppliers for the purchase of forestry assets and directly receive payment from customers when forestry assets are sold.

Collection difficulties

According to the release, the initial affidavit discussed difficulties faced by Sino-Forest in collecting accounts receivable owed to subsidiaries. The affidavit reported that Sino-Forest's counsel in China had sent demand letters to 17 entities and that further demand letters were in preparation.

As at March 30, company records show a total of $79.6 million was owed to WFOE subsidiaries of Sino-Forest, a total of $887.4 million was owed to BVI subsidiaries from authorized intermediaries arising from the sale of standing timber forestry assets and a total of $126.2 million was owed to other BVI subsidiaries from China and BVI-based corporate customers from the sale of imported logs and wood products.

Subsequent to March 30, Sino-Forest said it has continued efforts to collect receivables owed to its WFOE subsidiaries and to preserve receivables owed to BVI subsidiaries held by authorized intermediaries and other China and BVI-based corporate customers.

Deregistered entities

In taking these steps, the company has learned that some of the entities with receivables owed to the subsidiaries have recently deregistered under Chinese law, terminating the existence of the entities.

Of the $887.4 million the company's records show as owed to BVI subsidiaries from authorized intermediaries, Sino-Forest said $504.8 million is owed by three authorized intermediaries that have been deregistered.

Meanwhile, of the $126.2 million owed to other BVI subsidiaries from China and BVI-based corporate customers, $63.8 million is owed by six Chinese corporate customers that have been deregistered. Sino-Forest said one of these six companies also is one of the three authorized intermediaries that deregistered.

Sino-Forest said it believes that the deregistrations were improper under Chinese law and that remedies are available to it as a result of the actions taken.

The company said it intends to take all steps necessary to collect receivables owed to it and to enforce its rights against persons and entities responsible for the deregistrations.

In addition, as part of its efforts to collect receivables, the company is closely monitoring the registrations and status of its counterparties, the release said.

Toronto-based Sino-Forest is a commercial forest plantation operator in China.

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