Do State-owned Enterprises Enjoy Crown Immunity?
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.
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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 |