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Announcement By The China Heartland Fund Limited
Hamilton, Bermuda, May 12, 2006 - The China Heartland Fund Limited (MARCHII.BH) has today announced to the Bermuda Stock Exchange (BSX) that on 16 December 2005, the Beijing Municipal Government issued an administrative directive for the liquidation of China Securities Co., Ltd ("CSC"). Cinda Asset Management Company was appointed to conduct the affairs of CSC and has formed a liquidation committee for this purpose.
The China Heartland Fund (Mauritius) Limited (the "Subsidiary"), a wholly owned subsidiary of the Fund, is presently owed US$3.4 million by CSC pursuant to the Investment Services and Returns Agreement (the "Agreement") dated 18 July 1997. The Fund has, over a number of years, attempted to seek payment of amounts owing by CSC to the Subsidiary under the Agreement. These attempts have been rebuffed by CSC, the State Administration of Foreign Exchange ("SAFE") and the China Securities Regulatory Commission.
As part of the CSC's liquidation process, all creditors were required to file formal proofs of claim with the liquidation committee by 24 March 2006. The Subsidiary complied with this requirement, filing a formal claim with the liquidation committee for US$3.4 million (the "Outstanding Sum"). This claim has yet to be adjudicated upon by the liquidation committee. There is no certainty as to how long this process will take. The adjudication process is likely to involve consideration by the liquidation committee of issues which have historically been put forward by CSC as reasons for non-payment including the failure to obtain SAFE approval for the Agreement and for the repatriation to the Subsidiary of amounts owing pursuant to the Agreement. The directors and Martin Currie Investment Management Ltd ("MCIM") have also been informed by a representative of the liquidation committee that the Subsidiary is the only foreign creditor. This is likely to ensure that the claim for the Outstanding Sum will be fully scrutinised, although it is not yet clear whether being a foreign creditor will assist with or detract from the adjudication process.
In light of CSC's liquidation, there is uncertainty as to the recoverability of the Outstanding Sum whether in full or at all, and the timing of any payment or payments subsequent to the completion of the adjudication process. The directors consider it is likely that CSC has a significant deficiency of assets over liabilities. They have also been informed that SAFE has levied a fine on CSC as result of the alleged breaches of Chinese foreign exchange regulations, and that pending payment of this fine, SAFE may give written approval to the liquidation committee for the repatriation to the Subsidiary of such portion of the Outstanding Amount as is properly payable to the Subsidiary pursuant to the liquidation process. Neither the directors nor MICM have any way of verifying whether this is an accurate or reliable assessment of both CSC's financial position and the representation relating to SAFE approval for repatriation of the Outstanding Amount. Moreover, they also have no way of ascertaining when the liquidation committee will be in a position to commence making payments to creditors.
In the circumstance, the board has convened a further meeting to be held on 31 May 2006. At this meeting the board will be in a position to ascertain whether or not formal, written SAFE approval has been obtained as set out above. During the intervening period before the meeting, the board and MCIM will make further enquiries with the liquidation committee in an attempt to obtain more information about the progress of the Subsidiary's claim and the liquidation of CSC generally. If formal approval from SAFE has not been forthcoming and/or no further progress has been made with the liquidation committee, then the board will consider the available options including whether or not to liquidate the Fund and distribute its remaining assets.
A further announcement will be made in respect of the matters set out herein after the next board meeting which is scheduled to occur on 31 May 2006.
Please contact either of the below with any questions.
Enquiries:
James Dawnay Phone (00-44-1899-308264)
Chairman
Edith G. Conyers Phone (001-441-296-1300)
Forum Securities Services Ltd