Hong Kong – Crown Immunity And PRC State-Owned Enterprises.

19 July, 2017

 

In a June 2017 decision, TNB Fuel Services SDN BHD v. China National Coal Group Corporation [2017] HKCFI 1016, Hong Kong’s Court of First Instance (CFI) dismissed an assertion of Crown immunity by a PRC wholly state-owned enterprise and made a charging order absolute against shares owned by it in a Hong Kong company. 

 

Background 

 

An arbitral award was made against China National Coal Group Corporation (CNCGC) whereby it was ordered to pay US$5,274,023.11 to a Malaysian private company, TNB Fuel Services SDN BHD (TNB), as damages for breach of contract.  The Court granted TNB leave to enforce the arbitral award as a judgment in Hong Kong.  TNB enforced the judgment by obtaining a charging order nisi in respect of CNCGC’s shares in a Hong Kong company.  

 

It was not disputed that CNCGC is a wholly state-owned enterprise and its sole shareholder or investor is the State-owned Assets Supervision and Administration Commission of the State Council of the PRC Central People’s Government (CPG).  CNCGC opposed the application to make the charging order absolute on the ground that CNCGC should be considered part of the CPG and was therefore entitled to assert Crown immunity against execution of the shares.  

 

The Secretary for Justice intervened in the proceedings on the basis that the issue of Crown immunity in respect of the relationship of the CPG and the Hong Kong courts is of constitutional importance. 

 

Court’s Ruling 

 

The CFI dismissed CNCGC’s assertion of Crown immunity and granted the charging order absolute against CNCGC’s shares, holding that CNCGC had failed to establish that it had authority to assert crown immunity on behalf of the CPG.  Significantly, a letter obtained by the Secretary for Justice from the Hong Kong and Macao Affairs Office of the State Council (Hong Kong Office), stated that as a state-owned enterprise, CNCGC is an independent legal entity, carrying out activities of production and operation on its own, with no special status or interests superior to any other enterprises. More importantly, it went on to state that a state-owned enterprise carrying on commercial activities shall not be deemed as part of the CPG and shall not be deemed as a body performing functions on behalf of the CPG, save for in extremely extraordinary circumstances where the conduct was performed on behalf of the State via appropriate authorisation. In this case, there was no dispute that the arbitral award related to CNCGC’s liability under a contract for the sale and purchase of coal to TNB and therefore to CNCGC’s performance of commercial activities.  

 

In case it should be wrong in its finding that CNCGC had failed to show that it had authority to assert crown immunity on the CPG’s behalf, the Court went on to consider CNCGC’s claim on the facts and law in more detail. 

 

The control test 

 

The Court said that in considering an assertion of crown immunity, the court has to examine the validity of that assertion by reference to the lex incorporationis of the entity for which immunity is asserted (i.e. law of incorporation, which in this case was PRC law) and by reference to the common law, namely the “control test” laid down in The Hua Tian Long (No.2) case [2010] 3 HKLRD 611. Relevant factors in applying the “control test” include:- 

 

• independent discretion enjoyed by the entity;
• control exercised by the Crown / CPG as investor;
• the separate legal personality of the entity;
• the power of the Crown / CPG to appoint and remove senior officers of the entity; and
• the financial autonomy of the entity. 

 

Conclusion 

 

After considering CNCGC’s articles of association and evidence on PRC law, it was found that CNCGC is entitled to independent autonomy in its business operations and it had not been established that CNCGC is part of or controlled by the CPG.  Hence CNCGC could not assert Crown immunity and the charging order absolute was made. 

 

This judgment usefully clarifies the test to be applied when determining whether a PRC state–owned enterprise will be entitled to crown immunity and that such entities that undertake commercial activities are very unlikely to be granted Crown immunity by the Hong Kong courts, except in extremely extraordinary circumstances where the conduct was performed on behalf of the State via appropriate authorisation.