ShengdaTech, Inc., a publicly-traded manufacturer of nano precipitated calcium carbonate (“NPCC”) particles, filed a series of pleadings with the bankruptcy court in Reno, Nevada disclosing the continuing difficulties that the company is having in gaining access to information regarding the operations and assets of the company’s subsidiaries located in China. ShengdaTech filed for chapter 11 protection in August after a special committee of the company’s board of directors also removed from office each officer of ShengdaTech and its wholly-owned subsidiary Faith Bloom Limited as a result of an on-going investigation “of issues identified by KPMG arising out of its audit for the year ended December 31, 2010.
Shortly after the bankruptcy filing, the company filed a declaration by Sheldon B. Saidman, an independent member of ShengdaTech’s board of directors and a member of its audit committee and the above-referenced special committee, which detailed the findings to date of the investigation and the allegations that led the special committee to remove the company’s officers and authorize the bankruptcy filing. We summarized the contents of that declaration in an earlier post, which you can find here. Among the disclosures in that declaration, Saidman reported that the special committee’s investigation has “been thwarted by former management of the Debtor and obstructed by former management including the Debtor’s former President and Chief Executive Officer and largest shareholder, Xiangzhi Chen, making the Special Committee’s work incomplete.”
On Friday, ShengdaTech filed a declaration by Michael Kang, who is a managing director of Alvarez & Marsal and the chief restructuring officer of ShengdaTech. In his declaration (read the full declaration here), Kang reports that he “recently visited China, with other officers of the Debtor and certain of the Debtor’s professionals, in an attempt to gather more information about the Non-Debtor Affiliates.” During that trip, they visited ShengdaTech’s operating subsidiaries in China and “among other things, requested financial information and asked questions regarding the value, operations and profitability of the PRC Companies.” Those requests were denied, according to Kang. He states that the “plant managers at these locations refused to provide financial information and refused to answer any questions relating to the financial condition of the PRC Operating Subsidiaries” and, further, that ShengdaTech’s subsidiaries in China are “currently acting outside of the control of the Debtor.” Finally, Kang disclosed that the company still has “limited access to its books and records, limited access to Faith Bloom’s books and records and no access to the PRC Subsidiaries’ current books and records.”
The continuing issues in gathering information regarding the company’s subsidiaries, including $180 million in cash which the companies held at the end of 2010 (ShengdaTech currently has only $13 million of the cash under its control), resulted in two motions filed by ShengdaTech on Friday. In the first motion, ShengdaTech asked the bankruptcy court to modify the reporting requirements of Bankruptcy Rule 2015.3 to exempt it from filing periodic reports on the value, operations, and profitability of its subsidiaries (read the motion here). In the second motion, the company requested authority to serve subpoenas upon certain banks and to examine a representative from each of the banks. The motion also asked the bankruptcy court to direct the banks to produce “any and all documents, records, account statements, communications and other information, as set forth in the subpoena, relating to” certain bank accounts (read the motion here). The banks covered by the discovery motion are banks at which ShengdaTech’s PRC subsidiaries and Faith Bloom had accounts as of the bankruptcy filing and include the Bank of China, the Industrial and Commercial Bank of China, the Bank of Communications, China Merchants Bank, and the Agricultural Bank of China. The motion states that ShengdaTech “does not intend to take the cash to the detriment of the operations of the PRC Subsidiaries,” but “is concerned that the legal representatives and/or prior management of the Debtor may have already improperly transferred the cash or may be using the cash in the Bank Accounts for improper purposes.”
Finally, on Friday the Official Committee of Unsecured Creditors appointed in the bankruptcy case filed its own motion with the bankruptcy court. Noting that the bankruptcy will “be about taking control of the stock of the Debtor’s subsidiaries, and then forging a recovery from the Chinese operations,” the Committee asserts that “it is very important that those in China understand that the Committee does in fact speak for the creditors of the estate.” In order to further that goal, the Committee argues that its membership should consist “of as many of the Debtor’s engaged creditors as reasonably possible” and “of many well-known investors in the Asian markets with significant stake-holdings in claims against the estate.” To achieve these goals, the motion asks the bankruptcy court to appoint three additional creditors to the Committee:
- Advent Capital Management LLC
- CQS Asia Master Fund Limited
- Daiwa Capital Markets America, Inc.
You can access copies of all significant court filings from this bankruptcy case by visiting our website: http://www.chapter11cases.com/ShengdaTech-Inc_c_28100.html