The Hong Kong Court of First Instance, in TNB Fuel Services Sdn Bhd v. China National Coal Group Corporation (08/06/2017, HCCT23/2015) (TNB Case), has rejected a claim for Crown immunity by a PRC state-owned enterprise (SOE) and allowed an arbitration award to be enforced against the SOE's holdings in its subsidiary in Hong Kong. This is the first case since the important decision of The Hua Tian Long (No 2) [2010] 3 HKLRD 611 (HTL Case) where "Crown immunity" is addressed and this is also the first time that an SOE is involved. In the HTL Case, the principle of Crown immunity was confirmed as remaining applicable in Hong Kong post-1997 and would extend to cover the PRC Central People's Government (CPG) (substituting CPG for the "Crown").

The TNB Case provides important clarity and guidance on the approach that the courts will take in deciding whether, and when, a claim of Crown immunity against execution will succeed in Hong Kong.

Background

In late 2014, a Malaysian private company, TNB Fuel Services Sdn Bhd (Applicant), successfully obtained an arbitral award against an SOE, China National Coal Group Corporation (Respondent). When the Applicant brought enforcement proceedings before the courts in Hong Kong, seeking a charging order against the shares of the Respondent's subsidiary in Hong Kong, the Respondent asserted that it was an entity of the CPG and that it was hence entitled to rely on Crown immunity against execution. As there were matters of substantial public interest involved, leave was granted and the Hong Kong Secretary of Justice was joined as Intervenor in the proceedings.

The court started off by indicating that the assertion of Crown immunity should come from the Crown or with proper authority of the Crown. In this case, it held that the Respondent failed to show it has authority to assert Crown immunity on behalf of the CPG. It went on to discuss, on a substantive level, whether the "control test" that had been laid down in the HTL Case was satisfied or not in this case. In this regard, the relevant factors that the Court took into account were:

  1. Whether the SOE enjoys autonomy in operations de jure and de facto;
  2. The nature and degree of the CPG’s control over the SOE;
  3. Whether the SOE has a separate legal personality;
  4. Whether the SOE enjoys financial independence de jure and de facto.

Detailed evidence on PRC law was adduced by both parties for the court's consideration. On the facts, the court found that the CPG did not control the Respondent in the sense of the “control test” because the nature and degree of control that could be exercised by the State-Owned Assets Supervision and Administration Commission (SASAC) on behalf of the CPG over the Respondent was limited, the Respondent had the ability to exercise independent powers of its own, and the Respondent's business and operational autonomy were enshrined in and guaranteed under the applicable PRC law. Among other things, the Hong Kong and Macao Affairs Office of the State Council issued a letter confirming that, under PRC law, an SOE is an independent legal entity carrying out its own activities of production and operation, independently assuming legal liabilities, and with no special legal personality status or legal interests superior to that of other enterprises. The court found that this was one of the key considerations in the case. The Respondent's claim for Crown immunity was accordingly rejected.

Respondent was limited, the Respondent had the ability to exercise independent powers of its own, and the Respondent's business and operational autonomy were enshrined in and guaranteed under the applicable PRC law. Among other things, the Hong Kong and Macao Affairs Office of the State Council issued a letter confirming that, under PRC law, an SOE is an independent legal entity carrying out its own activities of production and operation, independently assuming legal liabilities, and with no special legal personality status or legal interests superior to that of other enterprises. The court found that this was one of the key considerations in the case. The Respondent's claim for Crown immunity was accordingly rejected.

What this means for you

Whether you are an SOE or an international party, you should note that:

  1. Crown immunity (or state immunity) is a potential defence available under Hong Kong law when faced with enforcement (or other) proceedings before the courts in Hong Kong.
  2. In order to assert Crown immunity, the entity in question must be able to show it has authority from the Crown and satisfy the "control test" as laid down in the HTL Case. This is something that would have to be decided on the facts on a case-by-case basis.
  3. An SOE might be able to assert Crown immunity in Hong Kong only in relatively narrow and exceptional circumstances such as when it performs governmental functions under proper authority from the CPG. Before seeking to rely on the claim, it should consider whether it would be able to get endorsement from the CPG.
  4. There are practical measures that you can and should consider taking, especially when embarking on a new deal. These include exploring or dealing with requests for 'pre-waivers' of the right to assert or claim Crown immunity (and/or state immunity) against suit and execution. You should consult your lawyers to explore how such steps can best be taken in your case.

Conclusion

The TNB Case provides clarity and guidance in an important area of the law that provides greater certainty and assurance to the business community in Hong Kong and internationally, that it is only in narrow and exceptional circumstances that an SOE may be able to rely on a claim of Crown immunity in Hong Kong.