No Immunity for Chinese SOEs in the Hong Kong Courts

Complex Litigation & Dispute Resolution Alert | June.13.2017

The Court of First Instance has confirmed that Mainland entities controlled by the PRC Central People’s Government benefit from “crown” immunity from suit and execution, whilst simultaneously ruling that state owned enterprises will not ordinarily be entitled to such immunity when carrying out commercial activities.

In TNB Fuel Services SDN BHD v. China National Coal Group Corporation (8 June 2017) the judge rejected a Chinese SOE’s argument that its assets are immune from the execution of an arbitral award.

A letter from the Hong Kong and Macau Affairs Office of the State Council – the highest organ of state power - provided no support to the SOE’s claim that it is controlled by the CPG, and an exhaustive review of PRC law and regulations revealed that both legally and practically the SOE has extensive autonomy and independence in carrying on its business and that its relationship with the state is little different from that between a company and its shareholders.

Key takeaways:

  • Establishing crown immunity requires the entity to demonstrate that it is controlled by the CPG, such that it is unable to exercise independent powers of its own.
  • A claim to immunity must generally be made by the CPG itself, and not merely by a representative of the entity.
  • If the CPG does not support the claim, that will generally be decisive.
  • According to the HKMAO:
    • SOEs are independent legal entities which assume legal liabilities and have no special status or legal interests superior to other enterprises.
    • Other than in extremely extraordinary circumstances “where the conduct was performed on behalf of the state via appropriate authorization” SOEs carrying out commercial activities are not deemed to be part of the CPG or to be performing functions on its behalf.
  • Whether there is the required degree of control by the CPG is to be determined as a matter of PRC law taking account of factors including the degree of independent discretion enjoyed by the entity, the control exercised by the CPG as investor, the separate legal personality of the entity, the CPG’s power to appoint and remove senior officers, and the financial autonomy of the entity.