Vulture Fund May Cause ‘Constitutional Crisis’ in Hong Kong

China must approve a U.S. investment fund’s lawsuit in Hong Kong against the Democratic Republic of the Congo before it can proceed, the central African country’s lawyers said in a challenge to the Chinese region’s independent judiciary.

“This is a matter that self-evidently affects the position of the central people’s government,” Barrie Barlow, a lawyer representing Congo, told Hong Kong’s Court of Final Appeal today.

FG Hemisphere Associates LLC, a New York-based so-called vulture fund which buys distressed debt, has sued Congo in jurisdictions around the world seeking to seize assets to enforce two arbitration awards. In Hong Kong, its attempt to collect payments owed to Congo by state-owned China Railway Group Ltd., places the financial center’s judicial independence at stake.

“The Hong Kong courts are taking the line that it’s one country two systems -- that whatever the views of Beijing, the Congo government can be sued,” said Tony Carty, a public law professor at the University of Hong Kong. “That could cause a constitutional crisis.”

China’s foreign ministry has filed three letters to Hong Kong’s judiciary in this case stating no foreign government can be sued in the city’s courts.

“China considers that the issue of state immunity is an important issue which affects relations between states,” the ministry wrote according to an excerpt from a May 21, 2009 letter published in court documents.

$100 Million

Hong Kong’s Court of Appeal in February 2010 allowed FG Hemisphere’s lawsuit to proceed. Arbitrators in Zurich and Paris had ruled that Congo must repay a total of $34.25 million to Energoinvest d.d., an engineering company based in Sarajevo, Bosnia and Herzegovina, for construction projects in the 1980s. The debts, including interest, now amount to more than $100 million, according to the Hong Kong court judgment.

Apart from deciding whether the case should be referred to the Standing Committee of the National People’s Congress in Beijing, Hong Kong’s Court of Final Appeal could rule directly on whether Congo and other foreign states can be sued in Hong Kong. The five judges could also decide whether governments relinquish any claims to sovereign immunity when they agree to arbitrate a dispute. The hearing is scheduled to take six days.

Basic Law

“Ultimately it’s up to the Court of Final Appeal to decide whether to refer the issue,” said Benjamin Yu, the Justice Department’s lawyer. Yu said he expected the decision would be in accordance with Hong Kong’s Basic Law, the mini-constitution agreed before the city’s return to Communist-run China in 1997.

The National People’s Congress last reinterpreted the city’s constitution in 1999, overturning a Court of Final Appeal ruling that gave almost 2 million mainland people the right to live in Hong Kong. The reinterpretation, supported by Hong Kong’s then Chief Executive Tung Chee-hwa, raised doubts about the city’s judicial independence.

The former British colony was guaranteed an independent judiciary and a separate legal system for at least 50 years under the Basic Law. Hong Kong’s rule of law and freedom of information have supported its status as a financial center.

Congo’s assets in Hong Kong are tied to Hong Kong-listed China Railway Group Ltd. and its related companies, which according to Barlow in 2008 entered into joint-venture agreements with the Congolese state-mining company, Gecamines, as part of a $6 billion minerals-for-infrastructure agreement between China and Congo.

Mining Rights

FG Hemisphere claimed a portion of $350 million in entry fees China Railway units agreed to pay in exchange for mining rights in Congo.

Peter Grossman, managing director at FG Capital Management Ltd. declined to comment during a recess in the hearing.

A copper belt running through Zambia and Congo holds 10 percent of the world’s copper reserves. Congo alone has a third of the world’s cobalt deposits. Mining and rail companies are investing at least $35 billion into rail projects over the next five years to transport commodities out of Africa.

Congo is recovering from more than four decades of dictatorship and war and is one of the world’s most highly indebted countries, according to the International Monetary Fund. The IMF and the World Bank agreed in July to support a debt relief package of $12.3 billion, erasing obligations almost the size of the country’s economy.

South Africa, Australia

In 2008, a South African court ruled FG Hemisphere could seize payments for Congolese electricity sold to South Africa, effectively halting the transactions, according to Jean-Pierre Mukadi Mubenga, an official in Congo’s debt office.

The New South Wales Supreme Court in December ruled FG Hemisphere’s claims could be pursued in Australia. U.S. and Canadian courts have also said the arbitration awards were enforceable in those countries.

In November, the Royal Court in the Jersey Islands ruled FG Hemisphere could recoup its arbitration award by seizing $108.3 million in scheduled payments to Gecamines from a joint venture led by OM Group Inc., the world’s biggest cobalt producer, according to OM Group’s regulatory filings. The judgment is under appeal.

The case is between FG Hemisphere Associates LLC and Democratic Republic of the Congo, China Railway Group (Hong Kong) Ltd., China Railway Resources Development Ltd., China Railway Sino-Congo Mining Ltd., China Railway Group Ltd. and Secretary for Justice, FACV5, 6 & 7/2010, Hong Kong Court of Final Appeal.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE