Troubled Chinese dairy producer Sanlu Group, at the center of the melamine scandal, was declared bankrupt by a court in Shijiazhuang on December 24.

A court-appointed receiver in the dairy’s hometown will take over Sanlu’s management to monitor the sale of its assets and payment of creditors within six months.

After months of speculation, the announcement put rumors over Sanlu’s future to rest. However, as Sanlu entered bankruptcy proceedings, public concern stirred: How will the company’s massive debts be repaid? Who will compensate children sickened by tainted milk powder?

Huge Debts

Sanlu’s operation has halted since September 12, after its milk powder was found contaminated by melamine, an industrial chemical added to diluted milk to falsify tests of protein content. On December 25, Wang Jianguo, spokesman for the Shijiazhuang government, told media at a briefing that Sanlu Group faces a total debt of 2.66 billion yuan against assets valued at 1.56 billion yuan.

Several creditors of Sanlu filed liquidation petition with local courts. Wang confirmed that the Intermediate People's Court of Shijiazhuang City accepted the petition made by the Heipingxi Road branch of the Shijiazhuang City Commercial Bank, a major creditor of Sanlu.

Sanlu's bankruptcy also sent hundreds of distributors of the company rushing to Shijiazhuang to ask for refunds.

After the melamine scandal broke in September, Sanlu recalled and destroyed more than 10,000 tons of poisoned milk powder, worth up to 600 million yuan to about 1000 distributors across China.

“If Sanlu goes bankrupt, we cannot get our money back, so we have to come to ask for the refunds,” said Zhang Bao’an, a distributor of Sanlu in Hebei.

On late December 24, with mediators from the local government, Sanlu’s management agreed with representatives of distributors to a new timeline for their refunds. Sanlu promised to refund 60 percent of the 600 million yuan to its distributors by January 10, and the rest within six months. The company also pledged to pay the salaries of its more than 10,000 salesmen across the country.

According to Wang Jianguo, the local government will help Sanlu pay back what it owes to the distributors. 

Compensation Issues

With the announcement of Sanlu's bankruptcy, legal experts warned that families of the nearly 300,000 babies affected by tainted milk will face a new hurdle in seeking compensation.

On December 25, a team formed by eight volunteer lawyers published a legal statement against Sanlu's bankruptcy. They claimed that bankruptcy of Sanlu will leave unsolved the issue of compensation and future medical treatment for victims.

Since the scandal surfaced in September, the compensation issue has topped public concerns. However, no clear compensation plan has been issued so far.

Lawsuits against Sanlu were already stuck in a legal limbo. On December 8, 63 victims jointly sued Sanlu to Hebei Higher People's Court, asking for about 75 million yuan in compensation. However, the case was rejected by the court, which said the scandal is still under investigation.

Caijing learned that the trial of Tian Wenhua, the former general manager of Sanlu whose was detained in September, will begin on Dec. 31. He is accused of producing and selling shoddy products.

According to the Shijiazhuang government, Sanlu on December 19 borrowed 902 million yuan to pay the medical fees and compensations of victims, which is the first ever official statement concerning Sanlu's compensation. So far, medical bills of sick children were paid by governments or hospitals. 

As Sanlu went into bankruptcy proceeding, the families of nearly 300,000 victims wondered: who will pay compensation?

After Bankruptcy

Sanlu's bankruptcy resulted in an 846 million yuan investment loss of its major foreign investor, New Zealand Fonterra, the world's biggest international trader of dairy products.

"We were aware that Sanlu was in a very difficult situation and faced mounting debts as a result of the melamine-contamination crisis," Fonterra Chief Executive Andrew Ferrier said in the statement concerning Sanlu's bankruptcy.

Fonterra has held 43 percent stake in Sanlu since 2003, hoping to profit from China's booming dairy market. However, the tainted milk scandal has hurt the dairy badly.

In an early interview with Caijing, Ferrier said that "our investment in Sanlu will be totally lost." Fonterra wrote off its 846 million yuan investment in Sanlu.

After Fonterra’s exit, another Chinese dairy company, Sanyuan Food Group, was expected to take over the assets of Sanlu. Sanyuan started negotiation with Sanlu on a possible acquisition in September. However, not until late October did Sanyuan admit to such talks.

In mid December, Sanyuan took over the operation of several Sanlu plants in Shijiazhuang and resumed production, though the acquisition deal was still in negotiation.

In an earlier interview with Caijing, a source close to the situation expected Sanlu’s reorganization to be complete by the end of the year. But the negotiations over the deal have been surrounded by questions such as debts, compensation and shareholding issues. Industry insiders have doubted that Sanyuan would take over the company entirely, facing huge liabilities.

After the announcement of Sanlu's bankruptcy, Sanyuan announced that it would adjust its acquisition plan. Wang Qin, the board secretary of Sanyuan, told Caijing that the company's board would soon meet to study the adjustment of the acquisition, but she refused to elaborate the possible change.

Experts predicted Sanyuan would participate in the sale of Sanlu’s assets during the bankruptcy process.

Li Shuguang, legal expert at China University of Political Science and Law, said that the bankruptcy of Sanlu will benefit Sanyuan in the future takeover deal.

In early December, Beijing-based Sanyuan set up a wholly-owned subsidiary in Shijiazhuang with 5 million yuan investment. According to Wang Qin, the company will help Sanyuan expand business, and it may also become a vehicle for the future takeover of Sanlu's assets.