Introduction

In TNB Fuel Services Sdn Bhd v China National Coal Group Corporation(1) the Hong Kong Court of First Instance ruled that a Chinese state-owned enterprise (SOE) was not entitled to invoke crown immunity against the execution of a charging order of assets in Hong Kong.

This is the first time that the Hong Kong courts have addressed the issue of crown immunity since The Hua Tian Long (No 2),(2) providing welcome clarity on the approach that the courts will take in deciding whether, and when, a claim of crown immunity against enforcement of a judgment or an arbitral award might succeed in Hong Kong.

Crown immunity in Hong Kong

'Crown immunity' refers to the principle by which the crown is immune from civil suit or prosecution in its own courts. The concept is different from state immunity, which relates to civil claims against foreign states. Insofar as Hong Kong is concerned, China is not a foreign country. Hong Kong is a part of China, although it is a separate jurisdiction under the 'one country, two systems' constitutional framework.

The leading authority on crown immunity is The Hua Tian Long, in which it was held that, after reunification in 1997, the Central People's Government of the People's Republic of China became entitled to absolute crown immunity in Hong Kong (replacing the British crown, as the former sovereign power).

Facts

In 2014 TNB Fuel Services Sdn Bhd, a Malaysian private company, won an arbitral award for around US$5.2 million against China National Coal Group Corporation (China Coal), a coal conglomerate wholly owned by the State Assets Supervision and Administration Commission (SASAC) of the Central People's Government. The court subsequently granted an order for enforcement of the award and, by way of execution, TNB successfully obtained a provisional charging order in respect of shares held by China Coal in a Hong Kong company.

China Coal opposed TNB's application that the order be made absolute on grounds of crown immunity. China Coal argued that, as a SOE, which was under the full and absolute control of the SASAC, it should be considered part of the Central People's Government and was entitled to assert crown immunity, such that the court lacked jurisdiction to order execution against its assets.

China Coal further invited the Hong Kong secretary for justice to intervene in the proceedings and assist the court on the basis that the case raised issues of "very crucial constitutional importance" and was a matter of substantial public interest.(3)

Decision

The court dismissed the assertion of crown immunity and granted a charging order absolute against the shares.

Assertion of crown immunity As a threshold point, the court found that China Coal had failed to show its authority to assert crown immunity on behalf of the Central People's Government, and that no such claim had been validly made on behalf of the Central People's Government. The basis for this finding was a letter obtained by the Hong Kong secretary for justice from the Hong Kong and Macao Affairs Office of the State Council of the People's Republic of China, which stated that:

  • an SOE is an independent legal entity which carries out activities of production and operation on its own, independently assumes legal liabilities and carries no special legal person status or legal interests superior to other enterprises; and
  • SOEs carrying out commercial activities should not be considered part of the Central People's Government or deemed as performing a function on its behalf, save in "extremely extraordinary circumstances" where the conduct is performed on behalf of the state with appropriate authorisation.(4)

This court found that the letter "signally defeats" China Coal's assertion of crown immunity.(5) Nevertheless, the court went on to consider the claim to crown immunity on the facts.

Control by the Central People's Government The court further found that, as a matter of Chinese company law, China Coal was entitled to independence and autonomy in its business operations. This finding involved extensive examination of expert reports on various aspects of Chinese law and legislation, and China Coal's articles of association – all of which confirmed that China Coal appeared to enjoy extensive independence and autonomy in the running of its business operations, which were enshrined in and guaranteed by Chinese law. There was no evidence of either legal or practical control by the SASAC, whose powers were akin to that of a normal shareholder.

The case was therefore "totally distinguishable" from The Hua Tian Long, in which the relevant entity, a public salvage board under the direct control of the Ministry of Communications (which served a public function), was not deemed a separate legal entity and was therefore entitled in principle to crown immunity.(6)

Additionally, the court found that China Coal had not met the "control test" laid down in The Hua Tian Long: in assessing whether a corporation can be said to be part of the crown at common law, the material consideration is whether the crown has control over the corporation. The court concluded that the test had not been satisfied with reference to:

  • the nature and degree of control which could be exercised by the SASAC on behalf of the Central People's Government over China Coal;
  • China Coal's ability to exercise independent powers of its own; and
  • the position under Chinese law.

Comment

This decision provides clarity in an important area of the law, confirming the limited scope of crown immunity under Hong Kong law – namely, other than in exceptional circumstances, Chinese SOEs engaging in commercial activities will not qualify for crown immunity in Hong Kong, even if the enterprise is supervised by a government body. The case (in particular, the letter produced to the court from the Hong Kong and Macao Affairs Office of the State Council) also provides valuable insight into the practical difficulties that a SOE will encounter in seeking to assert crown immunity in Hong Kong.

This judgment will be welcomed by international investors, who can take comfort in the fact that a Chinese SOE with which they do business is likely to be subject to the jurisdiction of the Hong Kong courts and, as such, its assets in Hong Kong are liable to enforcement.

However, the question of whether a SOE qualifies for crown immunity will continue to be assessed on a case-by-case basis. Businesses should consider whether their contractual counterparties – especially those that are SOEs – are likely to be able to assert crown immunity. In such cases, it is worthwhile giving early consideration to what type of dispute resolution process is most suitable, having regard to the possibility of the counterparty being able to assert immunity successfully and the jurisdictions in which its assets are located.

Where appropriate, it may also be worth exploring whether it is possible to incorporate into the contract a waiver of the right to assert crown immunity (a matter that requires careful consideration).(7) In any event, it is important not to underestimate the doctrines of state and crown immunity, which remain the law in Hong Kong and, if successfully asserted, will confer immunity from the jurisdiction of the Hong Kong courts.(8)

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Carmel Green or David Smyth at RPC by telephone (+852 2216 7000) or email (carmel.green@rpc.com.hk or david.smyth@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) HCCT 23/2015, June 8 2017. At the time of writing there is no indication of an appeal. An appeal of a first-instance decision arising out of the enforcement of an arbitral award would have limited prospects of success.

(2) [2010] 3 HKLRD 611.

(3) Supra note 1, at paragraph 7.

(4) Supra note 1, at paragraph 14.

(5) Supra note 1, at paragraph 23.

(6) Supra note 1, at paragraphs 5 and 74.

(7) See, for example, The Conflict of Laws in Hong Kong (Johnston and Harris, third edition, paragraph 4.066).

(8) On the issue of state immunity, see Democratic Republic of the Congo v FG Hemisphere Associates LLC (No 1) (2011) 14 HKCFAR 95 and (No 2) (2011) 14 HKCFAR 395 (two landmark decisions of the Court of Final Appeal).