In the recent case of TNB Fuel Services Sdn Bhd v China National Coal Group Corporation1, the Hong Kong Court of First Instance (the Court) has rejected an attempt by a PRC state-owned enterprise (SOE) to assert Crown immunity in proceedings brought in Hong Kong.

The court’s decision offers important clarity on the approach that the Hong Kong courts will take to claims of Crown immunity by PRC SOEs. Except in “extremely extraordinary” circumstances, SOEs will not be able to claim Crown immunity in order to escape the jurisdiction of the Hong Kong courts.

Background

The SOE in question was the coal mining conglomerate China National Coal Group Corporation (China Coal). China Coal is wholly owned by the PRC’s ‘State-owned Assets Supervision and Administration Commission’ (SASAC), the entity which supervises and manages the PRC’s state-owned assets. SASAC in turn under the supervision of the PRC’s Central People’s Government (CPG), the sovereign government of the PRC.

In 2014, TNB Fuel Services Sdn Bhd (TNB), a Malaysian company, obtained an arbitration award of just over US$5.2 million against China Coal (the Award). TNB subsequently sought to execute the Award by applying for a charging order over shares in a Hong Kong company owned by China Coal.

In response China Coal asserted Crown immunity on the basis that, via SASAC, it was a part of the CPG, Hong Kong’s sovereign government and, since the handover in 1997, the Crown in Hong Kong.

Crown immunity is the doctrine which provides that the Crown is immune from the processes of its own courts. This immunity also covers those acting as agent of the Crown, but does not apply to arbitrations with a Hong Kong seat.

Therefore, if successful, China Coal’s argument would have prevented the court from granting execution of the Award against it.

As the case concerned issues of considerable constitutional importance, Hong Kong’s Secretary for Justice was added as an intervening party in order to assist the court in its decision.

The decision

All of the parties agreed that the relevant principles were set out in the leading judgment in The Hua Tian Long (No 2)2, a case in which HFW acted for the successful plaintiff, please see our briefing3 on the judgment. In short, a company can only assert Crown immunity if it is part of, or controlled by, the Crown (the Control Test).

The court therefore had to determine whether China Coal was subject to the control of the CPG, and whether it could exercise independent powers of its own.

The starting point in applying the Control Test was to determine whether China Coal was ‘controlled’ by the CPG as a matter of PRC law. The Secretary of Justice sought the opinion of the PRC state body responsible for Hong Kong affairs. Its reply to the Secretary of Justice was fatal to China Coal’s case and, as shown in the extract below, gives an interesting insight into the PRC’s views on the application of Crown immunity to SOEs (emphasis added):

“a state-owned enterprise is an independent legal entity [...] all state-owned enterprises of our country respond to litigation arising from their activities of production and operation in the capacity of independent legal persons. Therefore, save for extremely extraordinary circumstances where the conduct was performed on behalf of the state via appropriate authorization, etc, the state-owned enterprises of our country when carrying out commercial activities shall not be deemed as a part of the Central Government, and shall not be deemed as a body performing functions on behalf of the Central Government”.

Added to this, a review by the court of the PRC legal framework governing state-owned assets concluded that PRC law clearly provides for and ensures the operational independence of SOEs from the CPG/SASAC.

The court found that under PRC law, far from ‘controlling’ SOEs, SASAC in fact performed a role analogous to that of a majority shareholder. This level of ‘control’ did not meet the threshold necessary for the Control Test to apply in China Coal’s favour.

As China Coal was not therefore a part of, or controlled by, the CPG via SASAC it could not escape any execution of the Award ordered in the Hong Kong courts. TNB’s application for the charging order was accordingly granted.

HFW perspective

Following this judgment, it is now clear that PRC SOEs operating under the supervision of SASAC will not be able to claim Crown immunity in Hong Kong, unless there are exceptional circumstances.

Crucially, the facts of the case also indicate that the PRC authorities will generally not support a claim of Crown immunity made by a SOE.

Finally, the court’s decision provides helpful clarity on the circumstances in which Crown immunity will apply in Hong Kong. It confirms the validity of the Control Test established in The Hua Tian Long (No 2) as the means by which the Hong Kong courts will in future examine an entity’s claim of Crown immunity.

Going forward, this decision will provide significant comfort to parties that have commercial relationships with PRC SOEs.

The judgment is available at http://www.hklii.hk/eng/hk/cases/hkcfi/2017/1016.html.