China's Sanlu Enters Bankruptcy Process

The Shijiazhuang-headquartered Chinese dairy group Sanlu has confirmed that the group had handed in a bankruptcy liquidation application to the Intermediate People's Court of Shijiazhuang and all the work was being carried out in accordance with legal procedures.

At the same time, Sanlu's largest foreign shareholder Fonterra Cooperative Group of New Zealand released the information on its website that the local court in Shijiazhuang had issued a bankruptcy order against Sanlu, in response to a petition from a creditor. Fonterra said Sanlu would be managed by a court-appointed receiver who would assume responsibility for an orderly sale of the company's assets and payment of creditors. The receiver will have six months to conclude this process.

Andrew Ferrier, CEO for Fonterra, said, "This bankruptcy order is not a surprise to us. We were aware that Sanlu was in a very difficult situation and faced mounting debts as a result of the melamine contamination crisis. We have been aware of this commercial reality and that was the reason we elected to write down the full value of our investment in Sanlu. There will now be a formal process to ensure that creditors are dealt with in accordance with Chinese law."

According to public documents, by the end of 2007, Sanlu had total assets of CNY1.619 billion, including total debts of CNY395 million and net assets of CNY1.224 billion. Sanlu's sales in 2007 were CNY10 billion.

Several days ago, more than 400 Sanlu's first-tier agents around China gathered in Sanlu's headquarters in Shijiazhuang to ask for their monetary advance for the recalled products of Sanlu. By the estimation of these agents, Sanlu's total debts might be nearly CNY2 billion, including payments to distributors, suppliers, and employee compensation.

Dairy expert Wang Dingmian told local Chinese media that parts of Sanlu's assets had been transferred to its eight plants, so the group might only get about CNY1 billion through the bankruptcy auction, which was far from enough to meet its CNY2 billion debts. According to the bankruptcy procedures, the child victims in the melamine scandal and the dismissed employees would be the first ones to gain the compensation.