Hong Kong court upholds execution against PRC State Owned Enterprise, rejecting claim of crown immunity

In TNB Fuel Services SDN BHD v. China National Coal Group Corporation HKCFI 1016, the Hong Kong Court of First Instance ("HKCFI") rejected a claim of crown immunity by a PRC State Owned Enterprise ("SOE") and upheld an order for execution against assets located in Hong Kong.

Whilst crown immunity does not apply to arbitrations seated in Hong Kong, it may become relevant where an Award creditor applies to enforce or execute an Award (whether obtained in Hong Kong or elsewhere) against a PRC State entity in Hong Kong.

The judgment provides important clarity on the approach the Hong Kong courts will take in such cases, in particular where SOEs controlled by the State Asset Supervision and Administration Commission ("SASAC") of the PRC Central People's Government ("CPG") are concerned.  Claims by such entities of crown immunity from the jurisdiction of the Hong Kong courts or from enforcement and execution in Hong Kong are unlikely to be supported by the CPG or upheld by the Hong Kong courts, other than in exceptional circumstances.

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Background

TNB Fuel Services SDN BHD ("TNB"), a Malaysian private company, obtained an arbitral Award for approximately US$5.2 million against China National Coal Group Corporation ("China Coal"), a PRC coal conglomerate wholly owned by the SASAC.  The HKCFI granted an order for enforcement of the Award.  By way of execution, TNB then applied for a charging order in respect of shares held by China Coal in a Hong Kong company.

China Coal resisted execution on the basis of crown immunity, which may be invoked by the CPG as a bar to the jurisdiction of the Hong Kong courts, as confirmed by the HKCFI in 2010 in the leading case of The Hua Tian Long (No. 2) [2010] HKLRD 611 (the concept of crown immunity is similar to but different from sovereign immunity, which may be invoked in the Hong Kong courts by foreign States rather than the PRC).  Because it was wholly owned by SASAC, China Coal argued that it should be considered part of the CPG and therefore entitled to assert crown immunity, such that the HKCFI lacked jurisdiction to order execution against its assets.

On the basis that the case raised issues of constitutional importance and public interest, the Hong Kong Secretary for Justice ("SJ") intervened in the proceedings at the invitation of China Coal.

Judgment of the Court of First Instance

Justice Mimmie Chan rejected China Coal's plea of crown immunity and granted execution pursuant to the share charge.

First, as a threshold point, the HKCFI found that China Coal had failed to show that it had authority to assert crown immunity on behalf of the CPG and that no such claim had validly been made on behalf of the CPG.  Of crucial importance in this decision was a letter obtained by the SJ from the Hong Kong and Macao Affairs Office of the State Council of the CPG, which stated that an SOE was an independent legal entity carrying out activities on its own with no special status or interests superior to other enterprises, and that SOEs should not be considered to be part of the CPG save for in "extremely extraordinary circumstances" where they were acting on behalf of the State.  The HKCFI considered that the letter "signally defeat[ed]" the crown immunity claim.

Second, the HKCFI found that China Coal was entitled to independent autonomy in its business operations pursuant to its lex incorporationis (law of incorporation), PRC law.  The HKCFI reached this decision based upon a review of numerous provisions of PRC law, the Articles of China Coal, and the evidence of expert witnesses on PRC law, concluding that China Coal had operational autonomy and extensive independence in carrying out its business, and that the powers of SASAC were akin to those of a normal shareholder.  The case was therefore "totally distinguishable" from Hua Tian Long (No. 2), in which the HKCFI had upheld the entitlement in principle to crown immunity of a public salvage board which was not a separate legal entity and was under the direct control of the Ministry of Communications (albeit the entity was held to have waived the immunity on the facts of the case).

Third, the HKCFI applied the "control test" which Hua Tian Long (No. 2) had confirmed was the material consideration in assessing the entitlement of a corporation to crown immunity, taking into account the position under PRC law described above.  Bearing in mind the nature and degree of control which could be exercised by SASAC on behalf of the CPG over China Coal, China Coal's ability to exercise independent powers, and that its business and operational autonomy was enshrined in and guaranteed under PRC law, the HKCFI concluded that China Coal was not entitled to invoke crown immunity.

Comment

This is the first judgment of the Hong Kong courts to address the concept of crown immunity since the leading case of Hua Tian Long (No. 2) in 2010.  It provides valuable guidance on the application of the "control test" to assess when a PRC State entity will be entitled to crown immunity before the Hong Kong courts (this is particularly important because, where crown immunity is available, it will be "absolute" in nature, with no exception for given activities simply because they are commercial in nature).  In particular, whilst this case related to a specific entity, the reasoning provides a strong indication that PRC commercial SOEs under SASAC supervision are very unlikely to be entitled to crown immunity before the Hong Kong courts, and the CPG is unlikely to support claims of immunity by such entities, unless exceptional circumstances apply.