Legal Relations between Hong Kong and China

Anthony Francis Neoh, SC, JP, former Chairman of the Hong Kong Securities and Futures Commission and current Chief Advisor to the China Securities Regulatory Commission, was the Foundation's guest speaker on 21 February 2000. This is a summary of his remarks.

Anthony Francis Neoh

Strictly speaking there was no relationship between Hong Kong and China because Hong Kong is part of China. You could not have a relationship with yourself, said Mr Neoh. However, there were issues concerning the relationship between the SAR and the Central Government. This was a large subject, said Mr Neoh, and he would concentrate today on two aspects: firstly, legal relations deriving from commercial arrangements; and secondly, constitutional relationships.

On the constitutional relationship, there had been considerable controversy over the last year or two, said Mr Neoh. He had been hesitant to share his views on this area since he felt they were not fully formed. He would welcome members' comments.

Commercial aspects

Beginning with the commercial side of SAR:Mainland legal relations, Mr Neoh said that this was a major area that had grown even more important since the handover. The two legal systems interacted via contracts and investments. Much of the documentation used in Hong Kong:Mainland trade derived from standard Hong Kong documentation. And often the parties chose to bind themselves by Hong Kong law as well. For example, when Bank of Credit and Commerce International went into liquidation, it was found to have lots of assets in China. Other Hong Kong banks, too, over the years, had granted loans against assets in China. And some of these assets were contractual rights, not physical assets.

The most dramatic demonstration of the efficacy of these arrangements came when something went disastrously wrong. When the two systems clashed, sparks would fly, and, Mr Neoh felt, the sparks had not yet settled. One of the problems was that security laws supporting the exercise of property rights in an asset were only recently enacted in Mainland China. and since property rights were often not well delineated in business very fully, property rights were hotly disputed and so were sometimes illusory.

For example, take the area of insolvency. In Hong Kong, if you had a floating charge over a company's assets, on crystallisation of the charge you would own everything. But in China this was not necessarily so. The debtor would challenge you; he would say, "I concluded the agreement with Mr X, not with you." And Mr X, given the circumstances of insolvency, would not be in a mood to cooperate. The problems had not really been solved to this day. The concept of a security interest had yet to be implemented. The problem was not the existence of the right in legislation, but the proper delineation of the interest itself as between the business authority and other parties, often the State.

The law was not bad, although it lacked detail necessary for more complex cases. However, the difficulty was trying to apply it. Many enterprises in China, even including listed companies, did not have a proper inventory of assets. Some thought they owned assets when in fact they did not. And as the Mainland interfaced with the SAR, these questions came to the fore. One major issue discussed at the fifteenth Communist Party Congress was precisely the proper delineation of property rights. It was decided to corporatise all state-owned enterprises and make them use corporate accounting standards as a means to encourage the proper definition and recording of property rights.

You could not do business without business rights. Why had the authorities not implemented property rights before? Mr Neoh felt that this was because formerly everything had been owned by the state. In this environment, ownership of assets was not an issue: for the enterprise the issue was production in accordance with the state plan. But now, in a market economy, ownership became a major issue: ownership of assets and also attribution of liabilities, both actual and contingent.

One of the big liabilities was pensions. Previously, China had employed a pay-as-you-go system. This had worked well in the state-owned era, but not now. There was a need for change in today's more commercially-oriented society. Mainland China was becoming more like Hong Kong. The enterprises were becoming separate entities from the state with their own profit and loss accounts. There was a ferment of discussion over SOE reform, how to convert them into separate entities.

Another important area which commercial dealings entered into was that of dispute resolution. This was a problem since the Chinese court system was highly decentralised. The head of the provincial courts was appointed by the provincial government. So there was a tendency for litigants to go forum-shopping, looking for the court most likely to give them a favourable hearing. This was also an issue in the US, given the federal court structure, but it was more severe in China.

So dispute resolution was an issue in commercial dealings between Hong Kong and China-based parties. The solution applied was arbitration. China had developed respected arbitration centres to deal with economic and maritime disputes. The list of arbitrators included respected UK lawyers, for example, although Mr Neoh did not know the frequency with which they were called upon. The arbitration process had international credibility.

However, there remained the issue of enforcing arbitration awards. By their nature, such awards would be enforceable in a court where the party awarded against had its place of residence. And here the process would run up against local political interests. The judges would see the payment of the award money as the paying away of part of their next year's wages, or at least their next year's benefits. So it was difficult to obtain enforcement.

Recognising this problem, last year China's Supreme Court had enacted a rule to the effect that if a local court decided not to enforce an arbitration award, it would have to seek the approval of the Supreme People's Court. But in China, there is a saying, if there is a policy, there is always a way around it. Now the local courts simply do not come to a decision on arbitration awards, and just delay the matter indefinitely. Recently the Supreme Court issued an instruction to the effect that if the judgement were not awarded within three months the case would be passed to the Supreme Court. It remained to be seen how that instruction would work out.

A further issue between the SAR and the Mainland, said Mr Neoh, concerned mutual recognition of one another's judgements. In 1984, China signed the 1958 New York convention on recognition of international awards, from which Hong Kong benefited. But when Hong Kong became part of China, the New York Convention ceased to provide a basis for mutual recognition. What was to be done? The issue was solved in the middle of 1999 by the SAR and Central Governments agreeing to enact parallel legislation to permit mutual recognition of cross-border arbitration awards.

The GITIC crisis exemplified another area of cross-border dispute. Many Hong Kong creditors had thought that they had guarantees or letters of comfort from various government authorities on which they could rely. However, these were to be dealt with in a Chinese court which was far from certain in its procedures. There were the questions of how the rights would crystallise and how the chain of seniority of debt would be interpreted. So the Guangdong court authorities set up a special court to handle the case and employed a Hong Kong legal firm to advise. The experience might have its benefit in that it would enable a better bankruptcy code to be written. At present, the regulations were embodied in three separate legislative instruments (the state bankruptcy law, the civil procedure code and the Company Law), and even the three together did not give you all that you needed for more complex cases.

Another area of difficulty was the enforcement in Hong Kong of judgements of the Mainland Chinese courts. Would the Hong Kong courts recognise these? And how? This had not been worked out, notwithstanding that Article 95 of the Basic Law allowed arrangements to be made on this matter. At present, the only way was in accordance with the principle of comity, applied as in the case of a court of any other jurisdiction. The Hong Kong court would, prima facie, recognise the judgement of the foreign court, unless it appeared that the process had been corrupted or was in some way not proper, for example the parties had not been given their say. There were exceptions and procedural hurdles. The Hong Kong courts would not enforce the judgements of Mainland Chinese courts. Thus enforcement would have to come through a Hong Kong action on the judgement. In the case of other jurisdictions there were agreements in place for the Hong Kong courts simply to enforce the respective foreign court's judgement.

There were widespread concerns within China itself as to the integrity of the legal process. These doubts were epitomised in a popular limerick to the effect that for a judge in a Chinese court to be fair, he should dine with both the plaintiff and the defendant, rather than with just one of them. However, improvements were continuing.

Constitutional aspects

Turning to the constitutional side, Mr Neoh referred to the two documents on which Hong Kong's status rested: the Chinese constitution and the Basic Law. Hong Kong as an SAR enjoyed a high degree of autonomy in all matters except those concerning foreign affairs, defence and Central Government-SAR relations.

Controversy had arisen over the right of abode case where the Hong Kong Government had sought the assistance of Beijing. In his capacity as a member of the Basic Law Drafting Committee Mr Neoh had given advice to the Standing Committee of the National People's Congress. The initial view of the Court of Final Appeal (CFA) was that once a case had been brought to the Hong Kong courts, the power of final adjudication would rest with the Hong Kong courts if the primary question fell outside the three exceptions. In such a case, the NPC could not interpret the case. However, subsequently, the CFA took the view that the power of the NPC was unlimited - an unabridged power, after the NPC interpreted the Basic Law.

The matter would not rest there. There was the further question of how the CFA would decide to refer a matter to the NPC Standing Committee for interpretation of the Basic Law in the future. Section 158 of the Basic Law set out the categories of case which would require referral. So it would be for the CFA to decide whether the question before it fell into the respective categories. And if there were a number of questions, what was the priority among them? If the main question did not fall into the respective categories requiring referral, although subsidiary questions did, then would the CFA follow its own decision given before the NPC interpretation?

The Hong Kong Government had been asked to promise not to refer matters to the Standing Committee. However, the Government had declined to commit itself. This was reasonable: constitutional principle held that a government cannot bind itself. The question would then arise, what would the Hong Kong Government do if the CFA decided not to refer a matter to the Standing Committee. Would the Hong Kong Government then itself seek a referral? And in what circumstances? The Hong Kong Government had given no answer on this point.

Mr Neoh stressed that the Hong Kong Government did not have a constitutional role to make a referral to the NPC Standing Committee. The Basic Law gave the executive no such powers. However, what the Hong Kong Government had done in the immigration case was to write a report to the NPC Standing Committee saying effectively, "Help!!!!", and quoting the very large numbers, 1.6 million potential immigrants, that had caused such controversy. The request to interpret the Basic Law was made by the State Council citing difficulties both within the Mainland and in the SAR. Taking the report at its face value, it was not unreasonable for the NPC Standing Committee to act, indeed they could be said to have had a duty to do so. And so in this roundabout way, the Hong Kong Government was able to obtain the interpretation that it wanted.

Mr Neoh concluded by saying that there was further to go before Hong Kong and the Mainland would have a stable constitutional relationship. Many issues were still unresolved. A constitutional convention had no place in Chinese governmental culture, but efforts in that vein might be needed to resolve the issues.

The above does not necessarily represent the views of the Foundation.

 by Anthony Francis Neoh