China's Sino-Forest, a forestry firm publicly traded in Toronto and suspected of fraud, on Friday filed for bankruptcy protection and put itself up for sale.

Sino-Forest saw its shares plummet last year when short seller Carson Block and his firm, Muddy Waters, issued a report stating that the forestry company's income and the value of its plantations in China have been vastly exaggerated.

Sino-Forest vigorously denied the claims, and on Friday filed a $4 billion lawsuit in damages against Muddy Waters, alleging that the report was "defamatory."

The controversial Chinese-Canadian firm sought protection from its creditors and the ability to continue operating while it searches for a third party for a possible takeover.

"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," said Judson Martin, Vice-Chairman and Chief Executive Officer of Sino-Forest.

If Sino-Forest does not get an "acceptable offer" at the end of this sale process, it will restructure its operations by establishing a new entity controlled by its shareholders, the company said.

Sino-Forest had been once one of Canada's most successful forestry companies, but its market value plunged after the devastating Muddy Waters report.

Commenting on the Sino-Forest bankruptcy protection filing, Muddy Waters said: "This is yet another indication of what we have said all along, that Sino-Forest's management has committed a massive fraud and has deceived its shareholders and creditors."