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Do State-owned Enterprises Enjoy Crown Immunity?

2017-06-01

In our previous article “The Doctrine of Crown Immunity and Its Implications for Dealings with PRC State Enterprises”, we have discussed the Court’s decision in the case of The Hua Tian Long (No. 3) [2010] 3 HKC 557 (“Hua Tian Long”) where it applied the doctrine of Crown immunity in the context of PRC entity.  In this article, we will discuss the recent case of TNB Fuel Services Sdn Bhd v China National Coal Group Corp HCCT 23/2015 where the Court applied Hua Tian Long to decide whether a state-owned enterprise (“SOE”) could enjoy Crown immunity.


Legal Principles

Before turning to discussion of the case, it is useful to recap on the legal principles regarding the doctrine of Crown immunity.

Crown immunity is a common law doctrine which originated from the ancient English maxim that “the sovereign can do no wrong”.  Unlike foreign state immunity which governs the relationship between different states in exercising their jurisdictions, Crown immunity is concerned with the relationship between the Crown and its own courts.

In the context of Hong Kong, as held in Hua Tian Long, the doctrine of Crown immunity survived the handover in 1997 and was transferred from the British Crown to the Central People’s Government (“CPG”) of the PRC, which also extends to bodies and persons acting as servants and agents of CPG.  In deciding whether an entity is part of CPG for the purpose of asserting Crown immunity, the material consideration is the degree of control CPG can exercise over that entity.  This is commonly known as the “control test”.


The Facts

This case arose out of a contractual dispute which was resolved through arbitration.  In around December 2014, an arbitral award was made against China National Coal Group Corporation (“Respondent”) in favour of a Malaysian private company (“Applicant”) in respect of the Respondent’s breach of its contract made with the Applicant.  Subsequently, the Applicant applied to the Hong Kong Court for enforcement of the arbitral award and succeeded in obtaining a charging order nisi in respect of the Respondent’s shares in a Hong Kong company.  In opposing the charging order nisi to be made absolute, the Respondent relied on the ground (which was raised for the first time in the enforcement proceedings) that it was an entity of CPG and was therefore entitled to assert Crown immunity from execution, such that the Hong Kong Court lacked jurisdiction to make the charging order absolute.


Issues

At trial, the parties were in agreement that the issue of whether the Respondent could assert Crown immunity under common law was a question of Hong Kong law, while the issue behind of whether the Respondent was controlled by CPG was a matter of the PRC Law.  Accordingly, expert evidence on the PRC Law was served by the Applicant, the Respondent, as well as the Secretary of Justice (“SJ”) who intervened in the proceedings because of the constitutional importance involved.

The Parties’ experts agreed that the Respondent was an SOE, the sole shareholder/investor of which was the State-owned Assets Supervision and Administration Commission (“SASAC”) of the State Council of the CPG.  They also agreed that as a limited liability company, the Respondent should use its corporate assets to answer its civil liabilities.  However, the experts disagreed on whether (1) the CPG’s control over the Respondent was in the role of an investor only; and (2) the Respondent had business autonomy and independence in its business operations.


Degree of Control

According to the Respondent’s expert, the CPG exercises stringent control over SOEs which are directly under the central government, since these central SOEs engage in business operations pertaining to the lifelines of the national economy and national security.  The Respondent’s expert was of the view that the Respondent was such a central SOE, over which control was exercised by the CPG through the SASAC which in turn exercised all the shareholders’ powers such as appointment of directors, approval of annual reports, designation of the board of supervisors and supervision of the Respondent’s operation.

On the other hand, both the Applicant’s expert and the SJ’s expert opined that all the control exercised by the CPG through the SASAC over the Respondent was no more than that of a controlling shareholder of a company.  The experts referred to the Respondent’s Articles which showed that the board of the Respondent had power and authority thereunder to determine its own investment plans, approve its annual financial budget, exercise management rights and appoint or dismiss its management team.  Although some of these powers were to be exercised in accordance with the SASAC’s authorization or to be reported to the SASAC, the SASAC had to maintain the Respondent’s operational autonomy under the Law of PRC on State-Owned Assets in Enterprises (“PRC Assets Law”) and the Respondent’s Articles, and there is no provision requiring the Respondent to seek approval from the SASAC in carrying out its daily business activities or operations.  Rather, there are provisions under the PRC Assets Law which provide for the separation of “ownership from management”, segregating state ownership of assets/enterprises from state management of the enterprises.

Further, the Applicant’s and the SJ’s experts both highlighted some provisions from the PRC Company Law and PRC Assets Law to show that, notwithstanding being a wholly SOE, the Respondent still had “independent legal person property” and was entitled to “legal person property rights”, such as the rights to possess, use profit from and dispose of its property.

After hearing the opinions from the parties’ experts, the Court preferred the evidence of the Applicant’s and SJ’s experts over that of the Respondent’s expert, for their evidence was more consistent with and supported by the PRC Law.  The Court therefore found that, as a matter of fact, the Respondent was not a part of the CPG, nor of the SASAC, but was a separate corporate entity which rights to possess and operation autonomy were safeguarded by the PRC Law.


Control Test at Common Law

After ascertaining the degree of control exercisable by CPG over the Respondent, the Court applied the control test at common law to decide whether the Respondent was entitled to Crown immunity.  As discussed above, the Court had found that, under the PRC Law and the Respondent’s Articles, the Respondent was able to use, profit from and dispose of its property, to use its annual profits and common reserves to cover its own losses and to expand its business.  This clearly distinguished the Respondent’s position from that of the defendant in Hua Tian Long, which was a public institution or institutional organization having no separate legal entity, no shareholder and no paid-up capital.  Instead, the defendant in Hua Tian Long only had the mere right to possess and to use such assets as were allocated to it, with no right to dispose of such assets, and no ability to assume independent civil liabilities.

Bearing in mind the nature and degree of the control which could be exercised by the SASAC on behalf of the CPG over the Respondent, the Respondent’s ability to exercise independent powers on its own, and that the Respondent’s business and operational autonomy were enshrined in and guaranteed under the applicable PRC Law, the Court held that the Respondent was not entitled to invoke Crown immunity.


Conclusion

This decision demonstrates the Court’s approach in applying Hua Tian Long to decide whether an entity is entitled to Crown immunity.  It also shows the considerations the Court is likely to take into account when ascertaining the degree of control exercisable by CPG over an SOE.  However, the Court has stressed in several occasions that the entitlement to Crown immunity is to be decided on a case-by-case basis, depending on the circumstances and the evidence available.  As such, parties should take legal advice on the issue of Crown immunity early on in the process before entering into contractual arrangements with a PRC entity.




For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017


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