China – PRC State-Owned Entities May Not Invoke Crown Immunity When Carrying Out Commercial Activities.

 

26 June, 2017

 

 

In its 8 June 2017 judgment, TNB Fuel Services Sdn Bhd v China National Coal Group Corporation HCCT 23/2015, the Hong Kong Court of First Instance ruled that a PRC state-owned entity could not invoke crown immunity when undertaking commercial activities.

 

Before the Court was a letter from the Hong Kong and Macao Affairs Office of the State Council, which stated that a state-owned enterprise, China National Coal Group Corporation (“CNCGC”) was an independent legal entity carrying out activities of production and operation on its own, with no special legal person status or legal interests superior to other enterprises. It stated that CNCGC was not deemed part of the Central People’s Government of the PRC (“CPG”), nor deemed as a body performing functions on behalf of the Central Government.

 

As a result, the court held that CNCGC could not claim crown immunity to prevent enforcement of an arbitral award against its shares in a Hong Kong company. This is a helpful, albeit fact specific, decision following on from the Court of Final Appeal’s decision in FG Hemisphere Associates LLC v Democratic Republic of the Congo & Ors1 and the first instance decision in Intraline Resources Sdn Bhd v The Owners of the Ship or Vessel “Hua Tian Long”2, which held that sovereign states and the PRC government both enjoy absolute state and crown immunity from suit in Hong Kong respectively.

 

Key issues

 

The key question in this case was whether CNCGC could make a claim for crown immunity by reason of being subject to the control of the CPG. The “control test” was determined as a question of PRC law, as the place of CNCGC’s incorporation. The Court accepted that the concept of crown immunity was available at common law in Hong Kong to instrumentalities of the CPG. In doing so it followed the decision in Intraline, where a claim of crown immunity was recognised for an entity that effectively formed part of the Ministry of Communications of the CPG and was held to be a public institution, but the claim was not upheld as crown immunity had been waived. 

 

Background

 

TNB Fuel Services Sdn Bdh (“TNB”) won an arbitral award in 2014 (the “Award”) against CNCGC, a wholly state-owned enterprise, the sole shareholder of which is the State-owned Assets Supervision and Administration Commission (“SASAC”) of the State Council of the CPG. Under the Award, CNCGC was to pay to TNB US$5,274,023 as damages for breach of a contract for the supply of coal made between CNCGC as supplier and TNB as purchaser.

 

In 2015, the Hong Kong court granted leave to TNB to recognise and enforce the Award. To enforce the Award, TNB successfully obtained a charging order nisi against CNCGC’s two million shares in China Coal Hong Kong Limited, a wholly owned subsidiary holding shares in its listed subsidiary, in April 2016.

 

CNCGC opposed the charging absolute on the ground that as an entity of the CPG it was entitled to crown immunity against execution of its shares.

 

The court’s decision

 

The court held that CNCGC had no basis to assert crown immunity on behalf of CPG.

 

• In evidence before the Court was a letter from the Hong Kong and Macao Affairs Office of the State Council, which stated:

 

“…a state-owned enterprise is an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities, and there is no special legal person status or legal interests superior to other enterprises…save for extremely extraordinary circumstances where the conduct was performed on behalf of the state…the state-owned enterprises of our country when carrying out commercial activities shall not be deemed as part of the Central Government, and shall not be deemed as a body performing functions on behalf of the Central Government”.

 

• This letter formed the basis of the Judge’s decision, although she in any event went on to consider the relevant facts and law to determine whether CNCGC was controlled by the CPG.
• Upon examining the expert reports on PRC law produced in evidence, the court concluded that CNCGC had autonomy and extensive independence in its business, without the need for approval from the SASAC for carrying out its daily business. It enjoyed the rights to possess, use, profit from and dispose of its property, and was able to exercise independent powers of its own. These rights were expressly provided for and protected under the PRC Constitution, Company Law, Assets Law, the Provisional Regulations for Supervision and Administration of State owned Assets in Enterprises and CNCGC’s Articles, with their emphases on the separation of government bodies and enterprises, separation of the State’s administrative and  contributor’s functions, and the separation of ownership and management.
• PRC Company Law applies to CNCGC such that it has “independent legal person property” and is entitled to “legal person property rights”, and is to bear liabilities for its debts with its assets.
• According to the Constitution of the PRC, the CPG adopts the policy of separation of the social public administrative functions of the government, and the functions of the investor of state assets.
• Whilst SASAC exercises control over the setting up of a wholly state-owned enterprise, the extent of its control could only be seen as proper exercise of its powers as a contributor. SASAC shall “enjoy the return of assets, participation in major decision-making, selection of managers and other contributor’s rights” in accordance with the Assets Law.
• Reference was made to the Articles of CNCGC, which demonstrated that despite state ownership and control by the CPG, CNCGC had independent business operations and autonomy, and was to assume and settle any liability with its own assets. It had the right to possess, use, profit from and dispose of its property. It enjoyed property rights, assumes civil liability and covered its liability with its assets. The control by CPG over CNCGC was not much different from that normally exercised by a controlling shareholder of a company.

 

These were powerful indicators that CNCGC operated independently, unlike the entity involved in the Intraline case, and was not an agent or instrumentality of the crown, and is not entitled to invoke crown immunity when undertaking commercial activities.

 

Commentary

 

This judgment is a helpful decision to clarify the legal positon that PRC state owned entities that undertake commercial activities may not invoke crown immunity before the Hong Kong courts. The effect of the decision may be to limit the range of state owned entities of the CPG that can claim crown immunity. Although the decision does not alter the law on absolute immunity in Hong Kong, the result of the case is not dissimilar from application of a restrictive immunity theory. It is possible that the case may be appealed given the importance of these principles. 

 

1  FACV 5, 6 and 7 of 2010

2  [2010] 3 HKLRD 611

DR Newsletter June 2017 

 

 

For further information, please contact:

 

Melvin Sng , Partner, Linklaters

melvin.sng@linklaters.com