Court Rules Citic Assignment Of Claim Unlawful

AUCKLAND, 1 March, 2002 – In a reserved judgment released today, Justice Potter has found that the purported assignment of the rights of action from CITIC to River 135 Limited, a related CITIC entity, was void. Fletcher Challenge Forests was successful on all counts.

This means that CITIC may not pursue its claims against Fletcher Challenge Forests other than through the CITIC company which is a partner in the CNIFP. That CITIC company is in Receivership.

The Court did not resolve the underlying substantive claims, but the effect of the decision is that the Receivers of the CNIFP and not CITIC will determine how, and possibly if, the litigation brought by CITIC will proceed.

The judgment follows a hearing in November where Fletcher Challenge Forests, the Receivers of the Central North Island Forest Partnership, and the Bank of New Zealand challenged the assignment made by CITIC before the appointment of the Receivers in February 2001.

“The Court had been asked to determine a very specific legal point, to clarify who has the legal right to pursue these claims. Now that this is clear we can re-evaluate how to bring this matter to a conclusion, as we remain of the view that the substantive claims are without merit” said Terry McFadgen, Chief Executive of Fletcher Challenge Forests.

Background to Legal Proceedings

As the judgment relates to a preliminary issue only, the following notes provide a summary of the substantive proceedings.

Fletcher Challenge Forests and a number of its subsidiaries have been named as defendants in an action brought by CITIC New Zealand Limited (now In Receivership). CITIC and Forestry Corporation of New Zealand Limited are equal partners in the Central North Island Forest Partnership (“the Partnership”), which is now in Receivership. The claims made by CITIC relate to a number of issues in connection with the management of the Partnership and to the value of the assets purchased by CITIC from the Fletcher Challenge Group upon the establishment of the Partnership in 1996. CITIC has sought a declaration that the management agreement between the Partnership and Fletcher Challenge Forests Industries has been validly cancelled by CITIC in December 1999. CITIC is also seeking a substantial award of damages, although it has not formally quantified its claims against the Fletcher Challenge Forests Group.

In November 2000, CITIC purported to assign its interest in the claims to an associated company. This was prior to the appointment of Receivers in February 2001. Fletcher Challenge Forests believes the claims are substantially without merit and if they are pursued they will be vigorously defended. A provision of $5 million was established in December 2000 to cover the costs of that defence.

The High Court proceedings filed by CITIC against Fletcher Challenge Forests do not formally quantify the losses that it claims to have suffered as a consequence of the allegations made against Fletcher Challenge Forests. However, in a letter to the Partnership in August 2000, CITIC separately itemised the claims against Fletcher Challenge Forests to be US$182 million, excluding any amount for the claim relating to the assets originally purchased from the Fletcher Challenge Group on the establishment of the Partnership. CITIC is seeking compensation for one-half of any losses suffered by the Partnership.

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