Trending In Restructuring And Class Actions - US style 'Indirect Market Based' Causation Now Available To Shareholders In Australia – Where To From Here?

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Asia Pacific Legal Updates

16 June, 2016


In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 


What you need to know


  • There has now been a first instance trial decision to the effect that shareholders can establish causation via 'indirect market based' causation where the share price is artificially inflated by reason of misleading and deceptive conduct.
  • That decision did not consider – although may support - the use of 'indirect market based causation' in shareholder claims based on a failure to disclose price sensitive information in accordance with the continuous disclosure regime and the ASX Listing Rules.
  • The Court considered that quantum of damages on 'indirect market based causation' should be the difference between the price the shares were trading at and the price they would have traded at if the contravening conduct had not occurred (and holding all other factors constant).
  • All companies currently listed or formerly listed on the ASX are exposed to claims based on 'indirect market based causation'.


What you need to do


  • Ensure accuracy in company accounts and all materials provided to the ASX.
  • Strictly adhere to the ASX Listing Rules and continuous disclosure regime to ensure timely and fulsome market disclosure.


HIH Shareholder Proceedings




The Supreme Court of New South Wales in the decision of In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 (20 April 2016) has held that former shareholders of HIH have suffered damage by reason of the misleading and deceptive conduct of HIH Insurance Limited (in liquidation) (HIH). A key question for determination was whether the doctrine of 'indirect market based' causation or 'fraud on the market' allowed shareholders to prove loss or damage as a result of the conduct of HIH that artificially inflated its' share price. Justice Brereton held that the plaintiffs were able to prove their claims relying on 'indirect market based' causation and did not need to prove any direct reliance on the misleading and deceptive conduct of HIH.




In four separate proceedings heard together in the Supreme Court of New South Wales, former shareholders of HIH appealed against the rejection of their proofs of debt by the liquidators of HIH. The plaintiffs alleged that certain representation made in financial reports published by HIH were misleading and deceptive, or likely to mislead or deceive, within the meaning of s 52 of the then Trade Practices Act 1974 (Cth) (TPA), or ss 995 or 999 of the then Corporations Law, and that by causing those financial reports to be lodged with the ASX and published, HIH contravened those statutory provisions. 


The plaintiffs claimed that three of HIH's Australian subsidiaries, FAI General Insurance Company Limited (in liquidation) (subject to schemes of arrangement) (FAI), HIH Casualty & General Insurance Limited (in liquidation) (subject to schemes of arrangement) (HIH C&G) and CIC Insurance Limited (in liquidation) (subject to schemes of arrangement) (CIC) were knowingly involved in, and aided and abetted, these contraventions.


The plaintiffs alleged that they acquired shares in HIH in a market regulated by the ASX and the Corporations Law and in a market affected by the publication of certain transactions in which each of the impugned representations was a cause of the prices at which shares in HIH traded on the ASX being higher than the prices at which the shares would have traded if the impugned conduct had not occurred.


The plaintiffs alleged that the claimed loss should be calculated by reference to the difference between the price paid for their shares and the true value of the shares had HIH not engaged in the impugned conduct (as aided and abetted by FAI, HIH C&G and CIC). They sought to recover their alleged loss under s 82 of the TPA and s 1005 of the Corporations Law.


'Indirect market based' Causation


The relevant sections of the TPA and the Corporations Law require that the loss or damage suffered must arise "by" the contravening conduct. It has previously been held that the word "by" expresses the notion of causation without defining or elucidating it.1 Similarly, the High Court has held that the relevant contravening conduct need not be the sole cause of any relevant loss or damage suffered, it is sufficient if the conduct was a cause of the relevant loss or damage.2


In the current case, the plaintiffs eschewed any need to prove any direct reliance on the material misstatements of HIH and rather contended that the following elements entitled them to satisfy the element of causation: 


  • 'Indirect market based' causation elements
  • The plaintiffs acquired shares on the ASX at the prevailing market price;
  • The market price was artificially inflated by the material misstatements in the financial accounts;
  • The effect of the misstatements was that the shares in HIH were trading at a higher value than would have otherwise been obtained, but for the misstatements; and
  • The plaintiffs suffered loss as they paid a higher price for the shares than they would have otherwise paid.  


In the United States, plaintiffs are able to establish the relevant element of causation through the 'fraud on the market' theory. The claim of the plaintiffs in this case follows a similar, though not identical, formulation. In the context of claims for damages under the TPA for misleading and deceptive conduct, numerous cases have previously held that individual reliance is not necessarily an element of a cause of action for damages.3 Although previous cases have held that the relevant causal connection between the misleading conduct and the relevant loss can be established without a party directly relying on the contravening conduct, previous cases have held that the causal chain includes the individual steps taken by an individual party to enter into a transaction and reliance, in this context, is an indispensable element of a cause of action.4 However, Justice Brereton distinguished this line of authority from the present case on the basis that:


What that case establishes is not that the applicant must necessarily prove that it relied on the contravening conduct, but that the applicant must establish that somewhere in the chain of causation, someone relied on the contravening conduct – in other words, that someone was misled or deceived, and that such deception brought about prejudice to the applicant.


Unless someone in the chain of causation is deceived, it cannot be said that the ultimate loss to the applicant is “by conduct of” the respondent, because the conduct would be immaterial to the ultimate loss unless it impacted somehow on the causative process.


In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [56]. 


Similarly, in distinguishing the case of Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd5 (Ingot Capital), from the present case, his Honour held that:


Distinguishing factors of Ingot Capital


●  The case did not concern any question of market based causation;

●  The case was one in which the only effect of the contravening conduct was to contribute to the opportunity for

the relevant transactions to take place;

●  The case recognised that the position of a plaintiff who enters into a transaction simply because the opportunity

to do so is available, when it would not have been available but for the misleading conduct, may be regarded as

analogous to a passive victim of another’s act; and

●  The avoidance of the potential for recovery by persons who knew or were indifferent to the true position was an

important consideration.


His Honour in the current case held that there were currently no binding authorities that had held that 'indirect market based' causation was unavailable under Australian law. To the contrary, cases such as Digi-Tech and Ingot Capital did not provide a "bright-line principle" that disavowed the availability of 'indirect market based' causation in Australia. Rather, interlocutory judgments of appellate Courts6 and obiter remarks in various first instance judgments7 have left open the door to 'indirect market based' causation. In finding that the plaintiffs could prove loss indirectly based on market based causation, the Court held:


a)  while the contravening conduct did not directly mislead the plaintiffs, it deceived the market;


b)  the plaintiffs were induced to enter the transaction to purchase shares on an incorrect basis;


c)  the plaintiffs could assume that the market in which they acquired shares was informed and reflected an informed

appreciation of the company's position, based on proper disclosure; and


d)  if it could be shown, by evidence, the shares were trading at a higher price than they otherwise would have, the plaintiffs have satisfied the relevant causation element and direct reliance is not a relevant consideration.

Damages based on 'indirect market based' causation


The current case was not a 'no transaction' case, that is, the plaintiffs did not argue that they would not have acquired shares in HIH had they known of the misleading material. Rather, the amount of damages suffered by the plaintiffs was alleged to be the amount by which they overpaid for the shares as a result of the share price inflation caused by the contravening conduct.


The Court, in determining the amount that could be recovered, held that there was to be a comparison between the price paid and the price the shares would have traded at absent the impact of the contravening conduct and holding all other factors constant.


The plaintiffs, via expert evidence, advanced a loss model based on a regression analysis of other comparable insurance companies of HIH at the relevant times of the contravening conduct. The Court rejected this approach and proceeded on the basis of doing the best it can with the evidence available to it.8 Given the particular industry in which HIH operated and the effect of the contravening conduct on the net assets and balance sheet of HIH, the Court was able to estimate loss, doing the best it can, in this particular case.


Where to from here?


The judgment of Justice Brereton is the first decision in Australia which has squarely considered 'indirect market based' causation following the trial of a shareholder claim.


It had been thought the issue of 'indirect market based' causation may have also been considered by the Full Court of the Federal Court of Australia in its decision handed down today in the appeal of Perram J's decision in Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149. However, despite Justice Perram's obiter remarks at first instance in relation to 'indirect market based' causation in the context of a breach of the ASX Listing Rules and the continuous disclosure regime, the Full Federal Court did not consider the "important question of causation in connection with a posited failure by a listed company to disclose market sensitive information."9


Ultimately, until there are appellate decisions that grapple with how 'indirect market causation' fits within the Ingot Capital line of authority, this area of law will continue in its current state of flux.


Ashurst advised the liquidators of HIH Insurance (in liquidation) and Babcock & Brown (in liquidation) in their defence of these proceedings. 


1 Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525.

2 Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 at [14] (Gleeson CJ), [59]-[61] (Gaudron J), [106]-[109] (McHugh and Hayne JJ), [163] (Gummow J, agreeing with McHugh and Hayne JJ); I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited [2002] HCA 41; (2002) 210 CLR 109 at [27]-[33] (Gleeson CJ), [57], [62] (Gaudron, Gummow and Hayne JJ).

3 See for instance: Janssen-Cilag Pty Limited v Pfizer Pty Ltd (1992) 37 FCR 526; Hampic Pty Ltd v Adams [1999] NSWCA 455; (2000) ATPR 41-737; Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488.

4 Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58; (2004) 62 IPR 184 (Digi-Tech); Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653; Ford Motor Company of Australia Limited v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522, [105]-[128] (Lander J, Hill and Jacobson JJ agreeing). 

5 [2008] NSWCA 206; (2008) 73 NSWLR 653. Ingot was a case that concerned a claim for damages under Corporations Law, s 1005, in respect of a contravention of s 995, for loss sustained by investors who had participated in a converting note issue, the plaintiffs contended that but for the contravening conduct, the note issue would not have taken place, in which event they would not have acquired any of the notes and would not have suffered loss.

6 Caason Investments Pty Ltd v Cao [2015] FACFC 94, decision of the Full Federal Court of Australia in relation to an application for leave to appeal for the refusal to grant leave to amend a statement of claim.

7 McBride v Christie Australia Pty Ltd [2014] NSWSC 1729 (Bergin CJ); Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149; (2015) 322 ALR 723; (2015) 104 ACSR 195 (Perram J).

8 See Commonwealth v Amann (19991) 174 CLR 64 at [31]. 

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For further information please contact:


Joseph Scarcella, Partner, Ashurst

[email protected]