Chinese dairy is bankrupt after tainted milk scandal

BEIJING -- The dairy at the center of China's deadly tainted milk scandal has been declared bankrupt by a court, one of the firm's owners said Wednesday — a development lawyers say adds to concerns about how and when those sickened by the doctored products will be compensated.

A court in Shijiazhuang issued a bankruptcy order against Sanlu Group in response to a petition from a creditor, according to New Zealand's Fonterra Group, which owns 43% of Sanlu.

The official Xinhua News Agency said the court in Hebei province accepted the filing. Xinhua, citing a spokesman for the company, also said Sanlu confirmed its bankruptcy. Phones rang unanswered at the company and the court on Wednesday.

Sanlu, like a number of major Chinese dairies, had long been exempt from government inspections because it was deemed to have superior quality controls — until high levels of the industrial chemical melamine were found in its baby formula and other products earlier this year. Several more dairies were also found to have doctored their goods in a scandal blamed for killing six babies and sickening 294,000 children.

Thousands of parents — angered by what they say was the government's breech of their trust — have been demanding compensation.

At least a dozen individual lawsuits have been filed against Sanlu, but they are in limbo because courts have neither accepted nor refused the cases — a sign of the scandal's political sensitivity.

A lawyer representing dozens of families with children sickened by tainted milk said that the bankruptcy order raised concerns that his clients might be outmaneuvered by the dairy's creditors.

"In theory, those who were physically harmed should get compensation first," Beijing-based lawyer Xu Zhiyong said in a telephone interview. "But our concern right now is that they might act in a brazen way, namely that the creditor bank or banks will collude with the local government to make Sanlu's assets go to compensating themselves first."

According to Chinese bankruptcy law, a company's liquidated assets are distributed first to employees who are owed salaries or insurance payments, then to pay off taxes, and finally to "common creditors."

Another lawyer, Li Fangping, said because the government has not yet specified the amount victims should receive, families of sickened children must seek legal orders to be declared "creditors."

"Unless the government issues a regulation for compensation, the families have to go to court to ask for compensation," Li said. "But until now the courts still have not accepted any lawsuits on this matter."

The Health Ministry has yet to announce a compensation plan but said earlier this month that officials were finalizing details and the dairy companies involved would be expected to contribute.

Fonterra chief executive Andrew Ferrier said Sanlu will be managed by a court-appointed receiver who will oversee the sale of the company's assets and payment of creditors. The receiver has six months to conclude the sale process, he said.

Fonterra was responsible for alerting Chinese authorities to the tainted milk scandal in August, and by late September had slashed the value of its investment in the Chinese dairy group by $139 million to an estimated $62 million.

"This bankruptcy order is not a surprise to us," Ferrier said. "We were aware that Sanlu was in a very difficult situation and faced mounting debts as a result of the melamine contamination crisis."

Citing an unnamed official at Sanlu, the Chinese financial newspaper National Business Daily reported Wednesday that the company's current remaining assets — including factory buildings and equipment — are valued at about 1.6 billion yuan ($230 million).

The official said in the report that the government is likely to require Sanlu to pay 900 million yuan ($130 million) in compensation to families. The dairy also owes more than 600 million yuan ($88 million) in payments to distributors for goods they returned when the dairy had to recall its products nationwide.

Worried they will be left out in the cold, nearly 1,000 distributors from across the country turned up in Shijiazhuang Tuesday hoping to have Sanlu certify their debts, Chinese media reports said.