Judge Grants China Medical Protection From U.S. Creditors

Marie Beaudette and Rachel Feintzeig (Dow Jones & Company, Inc.)–A judge has granted China Medical Technologies Inc. Chapter 15 protection in the U.S. as liquidators continue winding down the business in the Grand Caymans.

Judge Robert E. Gerber of the U.S. Bankruptcy Court in Manhattan on Wednesday signed an order granting the company’s liquidators the protections of U.S. bankruptcy law. Chapter 15 gives companies and so-called “foreign representatives” the benefits of the Bankruptcy Code, including the automatic stay against lawsuits, and protects a company’s property from seizure in the U.S. by creditors.

Kenneth M. Krys, the medical-device company’s liquidator, sought Chapter 15 protection on the company’s behalf last month. An investigation conducted by the liquidator has found “unauthorized and fraudulent transfers” of the company’s assets by the company’s former chairman and chief executive,
Xiaodong Wu, according to court papers.

China Medical develops, manufactures and markets in-vitro diagnostic products that detect and monitor various diseases and disorders. The company, a holding company for a group of subsidiaries that had ownership of three Chinese operating companies until February 2012, has a capital structure consisting of two series of unsecured convertible senior notes and common stock. A series of 4% senior notes was issued in the aggregate principal amount of $276 million and a series of 6.25% senior notes was issued in
the aggregate principal amount of $150 million. Mr. Krys said he believes the “overwhelming majority” of the holders of the notes are U.S. residents.

China Medical defaulted on the 6.25% notes on Dec. 15, 2011, according to court papers, by failing to make a required $4.7 million interest payment. It defaulted on the 4% notes on Feb. 15 by failing to make a $4.9 million interest payment.

Additional tumult also plagued the company. Mr. Wu forced the resignation of China Medical’s independent directors and chief financial officer, and the company’s board last met in November 2011, according to court papers. By the end of that year, China Medical ceased making required disclosure filings to the Securities and Exchange Commission.

The liquidators’ investigation also indicated that in February 2012, Mr. Wu “caused the transfer of 60% of the equity ownership of each of the [China Medical] operating companies” to two Chinese companies outside of the China Medical group. The consideration received in return for the equity “appears to be grossly inadequate,” Mr. Krys said.

The liquidators are continuing their investigation, but so far, their inquiries into hundreds of banks in the Cayman Islands, U.S., Hong Kong and China have turned up little with regards to the funds missing from China Medical’s coffers.