Hong Kong Court Grants Execution Against PRC State-Owned Enterprise, Rejecting Its Claim of Crown Immunity

In TNB Fuel Services SDN BHD v. China National Coal Group Corporation [2017] HKCFI 1016, the Hong Kong Court of First Instance (the “Court”) has granted a charging order against shares held in Hong Kong by China National Coal Group Corporation (“China Coal”) (a PRC state-owned enterprise (“SOE”)), in so doing rejecting an assertion of Crown immunity by China Coal. The judgment provides valuable guidance on the approach of the Hong Kong courts to any claim of Crown immunity by PRC entities in Hong Kong.

Background

Crown immunity, the common law doctrine arising from the principle that a State may not be sued in its own courts, was, in the case of Hua Tian Long (No. 2) [2010] HKLRD 611 (the “HTL Case”), held to apply in Hong Kong following the 1997 handover of Hong Kong from Britain to China. It entitles the PRC Central People’s Government (“CPG”) to claim immunity from suit and execution in the courts of Hong Kong.

Whilst Crown immunity does not apply to arbitration proceedings in Hong Kong, it will, however, apply to ancillary and enforcement proceedings in the territory, as these will come before the Hong Kong courts.

In the HTL Case, the Court of First Instance determined that the Guangzhou Salvage Bureau (“GSB”) was prima facie entitled to claim Crown immunity, principally because it was controlled by the PRC.

In the current case, the Applicant, (“TNB”), obtained an arbitral award for approximately US$5.3 million against the Respondent, China Coal (“Award”). The Court granted TNB leave to enforce the Award. Subsequently, TNB applied for a charging order over shares held by China Coal in a Hong Kong company, China Coal Hong Kong Limited. TNB successfully obtained an order nisi in respect of the shares. However, China Coal, which is wholly owned by the Chinese government’s State Asset Supervision and Administration Commission (“SASAC”), asserted that, as an entity of the CPG, it was entitled to Crown immunity in Hong Kong. The Hong Kong Secretary for Justice (“SJ”) intervened in the proceedings.

Judgment

Justice Mimmie Chan rejected China Coal’s assertion of Crown immunity, finding that: (a) China Coal was not entitled to claim immunity because it lacked the authority to make a valid claim; (b) as a matter of fact under PRC law, China Coal was not a part of the CPG nor of SASAC; and (c) applying the “control test”, China Coal’s ability to exercise independent powers of its own, its business and operational autonomy meant that it was not entitled to invoke Crown immunity.

In determining that China Coal lacked the authority to assert Crown immunity, Justice Chan gave particular consideration to a letter obtained by the SJ from the Hong Kong and Macao Affairs Office of the State Council of the CPG (the “Letter”). Among other assertions, the Letter confirmed, that save for in “extremely extraordinary circumstances where the conduct was performed on behalf of the state via appropriate authorisation etc” SOEs carrying out commercial activities shall not normally be deemed to be acting “on behalf of the Central Government”.

The Court determined that the relevant PRC law and regulations, demonstrated that China Coal “has autonomy and extensive independence in carrying out its business which autonomy is in fact expressly provided for and protected…”. The status of China Coal was readily distinguishable from the GSB under the earlier HTL Case. In that case, the entity was a public institution which had no shareholder, no paid-up capital, no right to independently acquire or dispose of assets, and no ability to assume independent civil liabilities.

Accordingly, the Court dismissed China Coal’s assertion of Crown immunity and granted the charging order absolute against the shares. China Coal was ordered to pay TNB’s and SJ’s costs of the application.

Comment

The TNB Fuel Services judgment provides helpful guidance on the application of Crown immunity in Hong Kong, in particular when it comes to Chinese SOEs. The reasoning employed by the Court suggests that absent the “extremely extraordinary circumstances” referred to in the Letter, SOEs will face difficulties in successfully claiming Crown immunity in Hong Kong.

Jurisdictions: 

Fangda Partners in association with Peter Yuen & Associates, Partner

Damien McDonald specialises in international arbitration with a particular focus and expertise in China-related disputes. He also has extensive experience in dealing with commercial disputes in Hong Kong, the United Kingdom and Australia. He has practiced with leading local and international dispute resolution teams in Hong Kong, Beijing, Shanghai, London and Australia.

Fangda Partners in Association with Peter Yuen & Associates, Legal Manager

Matthew Townsend has represented clients in arbitration proceedings in a number of jurisdictions under a variety of different arbitration rules, principally in the energy, infrastructure, construction and technology sectors. He also has experience appearing as advocate in arbitration hearings.