Sino-Forest applies for credit protection

Sino-Forest Corp., the Chinesetimber company fighting allegations of fraud, is filing for court protection from creditors under the Companies' Creditors Arrangement Act andputting itself up for sale.

The Mississauga-based company said in a release Friday that if it doesn't get a good enough offer, it will hand over control to its bondholders.

Sino-Forest traded on the TSX and once had a market value of more than $6 billion.

But its shares were hammered last summer after short-seller Muddy Waters Researchalleged that it had exaggerated sales and assets. The allegations have not been proven.

The firm faces investigations by securities regulators and the police and its stock has been halted for months on the Toronto Stock Exchange.

Firm claims $4B in defamation damages

The firm also announced it is launching a defamation lawsuit againstMuddy Waters and its head, Carson Block, claiming damagesof $4 billion and the recovery of profits made by Muddy Waters.

"We believe the full value of our assets will only be achieved if we are able to continue operating the business, and repair and preserve relationships with our customers and suppliers," the release said.

"We believe that the CCAA restructuring process is the best method to secure our future and will allow the time and stability required to normalize operations following the allegations made against the Company by Muddy Waters, LLC."

Sino-Forest filed a report by its own independent committee earlier this year into the allegations by Muddy Waters, but fell short of bringing investors any closer to seeing a return on their investment in the company.

The report left several key questions unanswered including the value of its forestry assets and questions about certain relationships between the company and its suppliers.

Independent investigation met 'numerous challenges'

The company said at the time, though some issues remain, the work of the committee was "at the point of diminishing returns."

The independent committee's report said its investigation encountered "numerous challenges in its attempts to implement a robust independent process which would yield reliable results."

The committee pointed to several challenges including China's legal regime for forestry, obtaining information from third parties, Sino-Forest's small management team and cultural and geographic issues.

Though the report confirmed the company's ownership and rights to its timberland holdings, just how much they are worth was another question.

Sino-Forest faces shareholder lawsuits in Canada and the U.S. alleging a fraud at the company. Sino-Forest has said it "intends to vigorously defend the action."