Crown immunity for PRC state-owned enterprises in Hong Kong

TNB Fuel Service SDN BHD v China National Coal Group Corporation [2017]

In this case, the Hong Kong Court of First Instance (CFI) has ruled that a PRC State-owned enterprise was not entitled to invoke Crown immunity against the execution of a charging order of assets in Hong Kong.

Background

In December 2014, an arbitral award of around US$5.2 million was made against the Respondent, China National Coal Group Corporation (China National Coal) for the breach of its contract with the Applicant, TNB Fuel Service SDN BHD (TNB). The CFI granted leave to TNB to enforce the award and a charging order nisi was obtained in respect of China National Coal’s share in a Hong Kong Company.

China National Coal opposed the application that the order nisi should be made absolute on the basis of Crown immunity. Crown immunity refers to the principle that the Crown has immunity from being sued in its own courts, originating from the maxim “the sovereign can do no wrong”. The key authority Hua Tian Long (No 2) [2010] (HTL) confirmed that the doctrine of Crown immunity continues to be applicable after handover of sovereignty.

It was claimed that as China National Coal was an entity under full and absolute control of the State-owned Assets Supervision and Administration Commission (SASAC), it should be considered as a part of the PRC Central People’s Government (CPG) and entitled to assert Crown immunity and the CFI lacked the jurisdiction to make the charging order absolute.

Moreover, China National Coal invited the Secretary of Justice (SJ) to intervene and provide the necessary assistance to the court as the Crown immunity issue in respect of the relationship of the CPG and the courts in Hong Kong was “of very crucial constitutional importance” and raised substantial public interest.

Ruling

The CFI dismissed the assertion of Crown immunity and granted a charging order absolute against the shares.

First, the court found that the China National Coal’s assertion of Crown immunity had not been validly made on behalf of CPG.

The assertion that China National Coal had been under the full and absolute control of SASAC and should be considered as part of CPG was made by China National Coal’s general legal counsel. There was no assertion that the counsel was authorized by SASAC, CPG or any other authority.

Meanwhile, SJ took instruction from the Hong Kong and Macao Affairs Office of the State Council, which Issued a letter stating: 1. a SOE was an independent legal entity, carrying out activities of production and operation on its own and assuming legal liability independently with no special legal person status or interests superior to other enterprises; 2. SOEs should not be deemed as a part of CPG or as a body performing functions on behalf of CPG when carrying out commercial activities, save for extremely extraordinary circumstances.

Second, the court ruled that China National Coal was entitled to independent autonomy in its business operations.

The court examined the validity of the assertion by reference to the law of the place where the entity was incorporated. Expert evidence had been adduced which referred to a number of articles in PRC Company Law, Constitution, Assets Law and the Provisional Regulations for Supervision and Administrative of State owned Assets in Enterprises (Regulations). It highlighted CPG’s policy of separation of social public administrative functions of the government and functions of the investors of state assets.

The court accepted the expert evidence that the control by CPG through SASAC over China National Coal was no more than a controlling shareholder of a company and the extent of its control could only be seen as properly exercising its power of a contributor in accordance with PRC Assets Law. The court also found that China National Coal had autonomy (expressly protected under Assets Law and Regulations) and extensive independence in carrying out its business.

The position of China National Coal was found by the Court to be different from the position of the defendant in HTL. In HTL, the defendant was the Guangzhou Salvage Bureau, which was not a commercial entity, but a public institution or institutional organisation established by state-owned assets to engage in public functions. Moreover, the latter was subjected to the close and comprehensive control of the state and PRC Company Law was inapplicable to it.

Third, the court held that it had not been established that China National Coal was a part of or controlled by CPG.

In HTL, the court confirmed the “control test”: in assessing whether a corporation can be said to be part of the Crown at common law, the material consideration would be whether the Crown has control over the corporation. The court applied the test accordingly in the present case.

Upon the consideration of the nature and degree of the control which can be exercised by SASAC on behalf of CPG over China National Coal and China National Coal’s ability to exercise independent power of its own, and that its business and operation autonomy was enshrined in and guaranteed under applicable PRC Law, the court considered that the common law control test was not satisfied.

Comment

As a significant case after HTL on issue of Crown immunity, this case provides insights on the issue of whether PRC SOEs with mainly commercial activities would be able to invoke Crown immunity and on the approach of Hong Kong courts in dealing such claims.

Although these SOEs are under the supervision of SASAC, it is unlikely that these enterprises, when participating in commercial activities, would be deemed as a part of CPG. The claim on Crown immunity by these SOEs are unlikely to be endorsed by Hong Kong courts.

Furthermore, this case sets out CPG’s view and reasoning on the claim by PRC SOEs on the basis of Crown immunity with the letter issued by the Hong Kong and Macao Affairs Office of the State Council. It is unlikely that CPG would be supportive if such claims arise in the future.

Subject to any appeals, this case should give comfort to international investors doing business with Chinese SOEs who then litigate or arbitrate such disputes in Hong Kong. This comfort is derived not only from the limited scope of Crown immunity under Hong Kong law, but that the Chinese government has also explicitly recognised the importance of the entities owned by it not being immune from lawsuits in a commercial context.

In what seems to be a rise in economic parochialism in some parts of the world, the Hong Kong court ruling and Chinese government’s position in this case is most welcome.