*ST Middle Velvet (000982): Why Do Not Public Auctions Deal With Zhuo Wen'S Fashion Equity?

In October 16th, *ST Zhong Rong (000982) issued a reply to the Shenzhen securities Exchange Company semi annual inquiry letter [2019] eleventh, on the Ningxia semi annual report of the Bank of China cashmere industry.

About (1) the reason why the company did not deal with Zhuo Wen's fashion equity by way of public auction, and whether the 75% equity interest of Zhuo Wen fashion is directly used in debt paying is conducive to protecting the interests of listed companies.

Company replies: since the board of directors of the company was reelected in January 2018 and reappointed the senior management level of the company, Li Weidong, the former chairman and general manager of the listed company and the legal representative of Zhuo Wen fashion company no longer acted as the chairman and general manager of the listed company. He had been in contact with the new chairman and general manager of the company, and demanded that the company pay the equity transfer surplus to the original shareholder of Zhuo Wen as soon as possible. Beginning in the second quarter of 2018, the debt problem of the company accumulated earlier, and the creditors filed suit. The capital chain was nearly broken, and the liquidity was severely insufficient. It was constantly sued by creditors, and the company was unable to pay the debt. In addition, in November of 2018, the company was applied for reorganization by the creditor to the Yinchuan intermediate people's court.

In October 21, 2015, Li Weidong, chairman and general manager of the listed company, signed the "supplementary agreement on equity transfer" and "equity pledge contract" on behalf of the listed companies with Lhasa and Hongkong, Eastern cashmere and Hongkong Kaixin respectively, and accordingly pledged 50% of the 37 million 500 thousand rights of the 50% of Zhuo Wen fashion 75% to Hongkong and Kaixin 25% of the Zhuo Wen fashion (18 million 750 thousand shares). The signing and execution of the above agreements have not fully fulfilled the necessary internal deliberation procedures. The current board of Directors believes that the above-mentioned agreement has flaws in the internal review procedure and has not been disclosed externally, which has seriously damaged the fundamental interests of the listed company. The company entrusts the law firm to represent the arbitration matter and expects the arbitration tribunal to take full account of the above facts, and does not support the arbitration submitted by Zhuo Wen's original shareholders according to the 2015 agreement. Despite the full defence of the entrustment, the arbitration tribunal fully supported all the requests of Zhuo Wen's fashion.

Zhuowen fashion equity transfer arrears have been submitted for arbitration. The management of the company has also repeatedly discussed with Li Weidong the proper disposal methods, including the transfer of agreements, public auction, and the third party acquisition, while protecting the interests of listed companies to the maximum extent while resolving disputes. However, it has been unable to agree with the original shareholders of Zhuowen fashion. In addition, the company reorganization application is in the stage of the court audit. Taking into account that once the reorganization of the company is formally accepted by the court, the assets may enter the packaged auction process, and the corresponding assets are disposed of more likely to be disposed of by discount, and the debts of Zhuowen original shareholders can not be cleared. During this period, the arbitration agency made a final ruling in June 2019 and fully supported the arbitration application of Zhuo Wen's original shareholders. Taking into account the above factors, after consulting with Zhuo Wen Yuan shareholders and deliberated by the board of directors of the company, on the basis of the value of Zhuo Wen's stock valuation, the equity premium has reached the debt of equity transfer, which has better protected the interests of the company in the special period of the company and solved the arbitral tribunal's decisions.

(2) after the China International Economic and Trade Arbitration Commission makes a trade arbitration award, does the company report the legal liability of the authorities concerned to breach the interests of the company on the basis of the supplementary agreement of the equity transfer agreement?

The company replies: the company entrusts the law firm to represent the arbitration matter, makes full defense, expects the arbitration tribunal to consider the above facts, and does not support the arbitration submitted by the original shareholders of Zhuo Wen fashion in accordance with the 2015 agreement, but the China International Economic and Trade Arbitration Commission still fully supports all the requests of Zhuo Wen's fashion in the award.

Although the company did not endorse and retain some opinions and conclusions on the award, the company seriously and cautiously studied that after the China International Economic and Trade Arbitration Commission made the arbitral award, the company objectively failed to report the matter to the competent authority for the legal liability of the relevant organ on the supplementary agreement on the equity transfer agreement. 原因如下：1、貿(mào)仲裁決書一裁終局，且無法定撤銷情形，公司客觀上無法向法院起訴撤銷貿(mào)仲裁決書;2、公司調(diào)查手段和能力有限，難以取得相關(guān)人員的配合，無法取得足以支撐公司提起訴訟的有效證據(jù);3、根據(jù)貿(mào)仲裁決書，結(jié)合公司掌握現(xiàn)有證據(jù)，確實(shí)無有效證據(jù)能夠證明簽署《股權(quán)轉(zhuǎn)讓協(xié)議補(bǔ)充協(xié)議》的公司時(shí)任法定代表人是公司實(shí)際控制人，客觀上公司無法證明其在該協(xié)議上簽字行為構(gòu)成董事自我交易;4.根據(jù)貿(mào)仲裁決書，結(jié)合公司掌握現(xiàn)有證據(jù)，確實(shí)無有效證據(jù)能夠證明公司時(shí)任法定代表人在簽署《股權(quán)轉(zhuǎn)讓協(xié)議補(bǔ)充協(xié)議》時(shí)是主動(dòng)追求或者主動(dòng)促成該等股權(quán)轉(zhuǎn)讓交易各方簽署該協(xié)議的，客觀上、主觀上確無有效證據(jù)證明有關(guān)人員惡意串通并損害公司利益;5、證據(jù)是訴訟的基礎(chǔ)，在前述客觀證據(jù)不足情況下，有關(guān)人員是否惡意串通損害公司利益無法得到證實(shí) 6, based on the actual situation of the company's current funds, the company can not repay the outstanding debts of the original shareholders of the Zhuowen fashion, so that the company fails to comply with the effective award. 7, take the above effective arbitration into account and eliminate the potential impact of the trade arbitration award on the company. 8, after avoiding the company's entry into the bankruptcy reorganization process, the part of the equity assets may be sold at a discount price. The auction proceeds may not fully cover the debts owed by the company to the original shareholders of Zhuowen fashion, and the obligation of the award still needs to be fulfilled, resulting in greater losses. 9, Beijing

Zhuo Wen is a trade oriented company. The company still holds 25% of its equity after debt equity. Maintaining the stability of the company's management is conducive to safeguarding the interests of the company.

Based on the above considerations, the company agreed to negotiate with the other party, and the company agreed to settle the debt owed to the other party by the share premium.