Recent News / September 2007

4 September 2007
McBRIDE FOREST INDUSTRIES UPDATE.

To The Creditors of McBride Forest Industries Ltd.

Re: Status Report on the Proposal of McBride Forest Industries Ltd.
(the "Company" or "McBride")

We are writing to you in connection with the Proposal of McBride. As you are aware on June 13, 2007 the unsecured creditors voted unanimously in favor of the Proposal.

In June 2007 McBride completed the sale of its forest license to Carrier Lumber ("Carrier") for the sum of $16,001,500. The sale to Carrier was approved by the Court, following a sealed bid process that was directed and supervised by the Court.

As part of the Court order approving the sale of the license, the court directed that the money owing to McBride's secured creditors, which included the Royal Bank of Canada, and the Western Diversification Fund of approximately $6 million, be paid to those creditors directly from the sale proceeds.

McBride had provided the Proposal Trustee with the sum of $3,850,000 from the sale proceeds to fund the Proposal. The Proposal provided for payment in full of all McBride's known pre-filing creditors. The amount of $3,850,000 was sufficient to pay the pre filing unsecured creditors in full.

Carrier Lawsuit

Subsequent to the completion of the sale of the forest license, Carrier issued a Writ against McBride and its legal counsel, claiming a constructive trust of $9,051,000 against the balance of the sale proceeds which had yet to be paid out. This amount included $3,850,000 which the Company had paid to the Trustee for the benefit of its creditors.

Carrier is also claiming damages alleging a breach of confidentiality by the Company and others. Their claim of $9,051,000 represents the difference between Carrier's original offer of $6,950,000 and the amount they finally agreed to pay for the forest license.

Carrier is claiming that McBride has become a constructive trustee of the $9,051,000 based on the fact that they ended up paying this amount as a result of an alleged breach of confidentiality by McBride, its legal counsel Lawson Lundell ("Lawson") and John McEown, a director of McBride.

The Carrier action means that there is an outstanding claim against McBride and others of approximately $9 million. The constructive trust claim also gives rise to the potential that the $9 million is held in trust for Carrier and therefore would not form part of the property of the bankrupt if McBride becomes bankrupt, either through an assignment or the failure of the Court to approve the Proposal.

The action against Lawson and Mr. McEown is being defended by their insurers.

The intervention of insurance counsel has complicated matters because insurance counsel take the position it could prejudice their client if a determination of the obligation of McBride was made without their participation. Insurance counsel for Lawson have not completed their review nor obtained instructions with respect to this matter due to summer vacations.

Trustee's Position and Actions Taken

The Trustee filed a motion with the BC Supreme Court to obtain an order authorising the Trustee to proceed with the payment of the $3,850,000 to the unsecured creditors under the Proposal notwithstanding the Carrier claim. In the alternative, we sought an order that the Trustee be authorised to payout approximately 28¢ on the dollar of the unsecured creditor claims.

The alternative payment order that we sought was on the basis that even if McBride was assigned into bankruptcy, all creditors (including Carrier should it prove it had a valid claim) would rank equally. In that event the unsecured creditors would be entitled to a distribution of 28¢ on the dollar.

Unfortunately, Carrier's allegation of constructive trust effectively derails the alternative relief because if it was successful, none of the money that either the Trustee or McBride holds could be paid out to anyone but Carrier because it would not form part of the property of the bankrupt.

On August 1st, the day before the scheduled hearing of the above matter, settlement discussions commenced between the Trustee and Carrier. Ultimately it was not possible to conclude a settlement which was supported by all parties.

Next Steps

The Trustee is now proceeding to resolve the matter through the Court by seeking:

• A determination that Carrier does not have a trust claim over the funds held by the Trustee and an Order allowing the Trustee to pay the full amount of the $3,850,000 dividend to the unsecured creditors without reference to Carrier's claim; and
• A summary determination of Carrier's claim.

The Trustee and its counsel remain confident that the claims of the unsecured creditors over the funds held by the trustee will prevail. However, given its size and the parties involved, the matter does need to be addressed by the Court and Mr. Justice Rice, who is familiar with the circumstances, is the appropriate judge to hear the matter. We regret not being able to bring this matter on for hearing sooner, but as a result of Justice Rice's schedule and the many counsel involved, these were the first available dates.

We will advise creditors if there are any further developments prior to the hearing date. In the meantime, we are unable to make any payment on creditors' claims.

If you have any questions in connection with the above matter please do not hesitate to contact the writer.

The Bowra Group Inc.
Trustee