Troubled dairy producer Sanlu Group, at the center of a melamine scandal which sickened nearly 300,000 children in China, is likely to declare bankruptcy soon.

Sanlu's distributors gather around its headquarters, December 24, 2008, trying to get money back. [CFP]

A Xinhua News Agency report last evening said Sanlu had filed for bankruptcy and the Intermediate People's Court of Shijiazhuang City, where the company is headquartered, had notified the company that it would accept the bankruptcy petition.

Fonterra Cooperative Group of New Zealand, which owns a 43 percent stake in Sanlu, said earlier Wednesday that a creditor has petitioned the court to issue a bankruptcy order on Sanlu.

Sanlu executives could not be reached for comments.

Fonterra said in its statement that a court-appointed receiver would be in charge of managing Sanlu and would have six months to sell the company and pay the creditors.

In the same statement, Andrew Ferrier, chief executive officer of Fonterra, said: "The bankruptcy (of Sanlu) 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."

Sanlu was at the center of the infant formula contamination scandal in September, which led to the arrest of its chairperson and suspension of operations. Several dairy producers have shown keen interest in acquiring Sanlu's assets subsequently.

Beijing-based Sanyuan was reported to be close to reaching an agreement to take over part of Sanlu's production facilities and distribution network.

Industry insiders said the two sides had even agreed on a contract, with Sanyuan helping Sanlu recover its business first. They added seven quality manufacturing bases of Sanlu are now under Sanyuan management.

Analysts said Sanlu's receivership status would help speed up the troubled company's asset sales in a more orderly and structured way. This could make it less risky for Sanyuan and other interested bidders to make the acquisition.

A report from the Ministry of Health said that about 51,900 infants were hospitalized and 294,000 were found to be sick in the urinary system due to drinking milk contaminated with melamine. Sanlu, and to a lesser extent, 21 other producers were implicated.

A third of China's milk production facilities were temporarily shut down and dairy exports in October nosedived 92 percent year-on-year. Sanlu has not disclosed its losses.

Sanlu has also reportedly recalled over 10,000 tons of milk powder and owes about 1 billion yuan to its sales distributors nationwide.

In September, Fonterra wrote off its NZ$200 million investment in Sanlu.

The Chinese government is working on a compensation plan for families of the children killed or made ill by contaminated products. It was reported that Sanlu is expected to make the maximum payment of around 900 million yuan.