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

Legal Directions


The issue of ‘indirect market based’ causation has been an evolving one, particularly in the context of shareholder class actions. While the issue has bubbled to the surface for some time in Australia, it has remained unclear whether each plaintiff is required to prove actual reliance on the contravening conduct, or whether causation can be satisfied by the conduct affecting the market price at which each claimant purchased and/or sold their shares. Last week, the New South Wales Supreme Court gave the clearest indication yet as to how that Court will approach this issue. It held that plaintiffs could establish causation where they prove that the price paid by them for their shares was inflated by misleading conduct.

The Court also gave guidance as to the calculation of damages in market-based causation cases. The relevant calculation is the difference between the price paid for the shares and the price they would have been trading at, had the misleading conduct not occurred (and all other factors remained the same).

This is a first instance decision and was made in an insolvency context rather than in a shareholder class action. As a result, there is likely to be further evolution and refinement, particularly at appellate level.


The plaintiffs were investors who acquired shares in HIH Insurance Limited (‘HIH’) between 26 October 1998 and 15 March 2001 (the last day that HIH traded on the ASX).

The plaintiffs alleged that, during 1999 and 2000, HIH published misleading or deceptive financial results in breach of s52 of the Trade Practices Act 1974 (Cth) (‘TPA’) and ss 995 and 999 of the Corporations Law. The plaintiffs alleged that, as a result of the misleading financial results, when they purchased their HIH shares, they were trading at an artificial and inflated level.

When HIH went into liquidation, the plaintiffs lodged proofs of debt on the basis that they had suffered loss and damage by paying more for their HIH shares than they would otherwise have paid had the market price not been inflated.

The liquidators rejected the proofs of debt. The plaintiffs appealed to the NSW Supreme Court seeking that their proofs be admitted.


The relevant provisions of the TPA and Corporations Law allow recovery by a plaintiff that has suffered loss and damage ‘by’ the contravening conduct.

The traditional approach adopted by Australian courts has been that a plaintiff must establish that he or she relied on the contravening conduct when entering into a transaction (including a share transaction) in order to establish causation. In certain specific circumstances, the courts have accepted that causation could be established indirectly where the defendant’s misleading conduct caused a third party to act in a way which caused loss or damage to a plaintiff. Where the reliance of the plaintiff did not form a link in the chain of causation, there is no need to establish reliance by the plaintiff on the misleading conduct (Janssen-Cilag Pty Limited v Pfizer Pty Ltd (1992) 37 FCR 526). However, where there is a decision by a plaintiff to enter into a transaction, that decision does form a link in the chain of causation and reliance is seen as critical (Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58).

In this case, the plaintiffs did not seek to establish that they had read or been misled by the misleading financial results. Instead, they asserted that they suffered loss because the release of the overstated financial results distorted the market on which HIH shares were traded, and the causation requirement was satisfied by the facts that:

  1. The contravening conduct misled the market into attributing an inflated value to HIH shares
  2. The plaintiffs acquired their shares in that inflated market
  3. The plaintiffs paid more than they would otherwise have paid for the same shares.

In accepting the plaintiffs’ position, Brereton J distinguished this case to the Ingot and Digi-Tech authorities (which required reliance), noting that neither involved ‘market-based causation‘ and both were ‘no transaction’ cases in which the sole causative role of the contravening conduct was in the barest ‘but for’ sense said to contribute to the creation of the opportunity for the relevant transaction to take place, not an alternative transaction at a lower price.

Brereton J concluded:

[W]hile the contravening conduct did not directly mislead the plaintiffs, it deceived the market (constituted by investors, informed by analysts and advisors) in which the shares traded and in which the plaintiffs acquired their shares. Investors who acquire shares on the share market do so at the market price. In that way, they are induced to enter the transaction…on the terms on which they do by the state of the market. Investors who acquire shares on the ASX may reasonably assume that the market reflects an informed appreciation of a company’s positon and prospects, based on proper disclosure.

I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in the market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless, I conclude that “indirect causation” is available and direct reliance need not be established.


In considering the methodology for calculating quantum, Brereton J rejected a number of possible methodologies, including a ‘true value’ methodology (which seeks to calculate loss as the difference between the price paid for the shares and the ‘true value’ of the shares) and a ‘value left in hand’ methodology (which calculates loss as the difference between the price paid and the value of the shares currently held).

Instead, Brereton J held that there was to be a comparison between the price paid and the price at which the shares would have traded but for the contravening conduct and holding all other factors constant. 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 by reference to notional market prices at various dates.


There has been growing momentum for acceptance of market-based causation over recent years, particularly from the plaintiff firms and litigation funders.

It is unclear, given the insolvency context, whether the appellate courts will have the opportunity to consider this matter further. The issue will undoubtedly reach the High Court at some stage, if not in this case.

If the decision is affirmed, this represents a significant lowering of a hurdle previously faced by the promoters of shareholder and similar class actions. This case, if it becomes accepted principle, confirms that every publication, or non-disclosure, by a public company which has the ability to affect its share price is now pregnant with the potential for a shareholder class action without regard to actual reliance on the relevant conduct.  This is particularly important for anyone broking, underwriting or handling claims under Side C Securities Cover and also other policies where insured professionals can be the target in capital raisings.

Authored by Jeremy Peck, Partner, Melbourne.

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