Dec. 24 (Bloomberg) -- Sanlu Group Co., the Chinese dairy company closed in September after it sold contaminated infant formula, has been declared bankrupt by a court in the city of Shijiazhuang, partner Fonterra Cooperative Group Ltd. said.

A receiver will take over management of the company and has six months to sell its assets and pay creditors, Auckland-based Fonterra said today in a statement. Shijiazhuang is the capital of Hebei province in northeast China where Sanlu is based.

At least six infants died and more than 54,000 were hospitalized after 22 companies including Sanlu sold formula made from milk contaminated with melamine, an industrial chemical. Fonterra has 43 percent of a venture with Sanlu and has written off the NZ$200 million ($113 million) investment.

“Bankruptcy may make it easier for Sanlu to sell its assets” as this allows them to be sold in parts, said Zhang Yun from Huatai Securities Co. Sanlu is China’s third-biggest dairy producer and the assets are probably of good value, Zhang said.

China’s $20 billion dairy industry was hobbled in September after the discovery of melamine in Sanlu formula prompted tests on hundreds of products industry wide and the destruction of thousands of tons of milk. As many as a third of the country’s milk producers were shut and dairy exports in October plunged 92 percent from a year earlier, the China Daily reported on Dec. 2.

‘Mounting Debts’

“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 Officer Andrew Ferrier said today. “This bankruptcy order is not a surprise.”

Ferrier had said on Sept. 17 local and regional officials in China “took too long” to issue a warning about the scandal. Still, the cooperative decided “we had to work within the Chinese system” to resolve the crisis, he said then.

China Mengniu Dairy Co., the nation’s biggest liquid-milk producer, yesterday said it expects to report a loss of about 900 million yuan ($131 million) for 2008 because of lost sales from the scandal and costs disposing of adulterated product.

The government is drawing up compensation plans for the families of the children killed or made ill by contaminated products, China’s health ministry said on Dec. 11.

Sanlu’s bankruptcy was sought by a creditor of the company, Auckland-based Fonterra said today. The court’s ruling will ensure the orderly disposal of the company’s assets and repayment of creditors according to Chinese law, it said.

Beijing Sanyuan Group Co. and Wondersun Dairy Product Co. are among Chinese milk producers seeking to buy some of Sanlu’s 30 processing plants, the Xinhua News Agency reported Nov. 4.

“There have been a few interested buyers since October, but Sanlu’s large-scale operations and the unknown size of the potential liabilities make it difficult for one company to make the acquisition,” Zhang, the analyst at Huatai Securities, said by phone from Nanjing.

Fonterra is aware of the reported interest in Sanlu’s assets and supports their sale, spokesman Greg Shand said in a telephone interview.

Calls made today to Sanlu’s president’s office and media contact were not answered.

To contact the reporters on this story: Gavin Evans at gavinevans@bloomberg.net; William Bi in Beijing at wbi@bloomberg.net

Last Updated: December 23, 2008 23:08 EST