Australia: Victory for shareholders as principle of market-based causation upheld in HIH Insurance Ltd

Last Updated: 9 May 2016
Article by Damian Clancy and Paul Bannon

In brief - HIH's conduct misled the market and inflated the share price

By releasing overstated operating profit in its financial results, HIH led the market to believe that it was trading more profitably and had greater net assets than was the case. This artificially inflated the price of HIH shares. Investors who bought shares suffered a loss because they paid the inflated price for the shares they would have acquired in any event.

Court finds that plaintiffs purchased shares at an inflated price

On 20 April 2016, Justice Brereton of the Supreme Court of NSW handed down judgment in four actions against the liquidators of HIH Insurance Ltd (Smith & Ors v McGrath (in his capacity as Liquidator of HIH Insurance Ltd); Baldock & Ors v McGrath (in his capacity as Liquidator of HIH Insurance Ltd); De Bortoli Wines (Superannuation) Pty Ltd & Ors v McGrath (in his capacity as Liquidator of HIH Insurance Ltd); and Cuong Ly [2016] NSWSC 428).

His Honour found that the plaintiffs in each of those actions had purchased shares in HIH at an overvalue, as certain financial results documents released by HIH between 1999 and 2000 misleadingly overvalued HIH's pre-tax profit and inflated its share price during the relevant period.

His Honour assessed the plaintiffs' loss and damage as the amount equal to the difference between the (inflated) price actually paid by the plaintiffs for their shares in HIH, and the amount that they would have paid if HIH had not included the misleading statements in its financial results.

Decision sets precedent in accepting principle of indirect market-based causation

Whilst the case was brought by investors (ie shareholders) whose proofs of debt were rejected by liquidators, the decision is significant for shareholder class actions because it represents the first time that an Australian court in a final decision after trial has accepted the principle of indirect market-based causation.

So long as a shareholder can prove that a corporation's misleading or deceptive conduct (or material omission) artificially inflated the price of that corporation's securities, the shareholder may be entitled to recover the loss and damage suffered by reason of that fact, even if the shareholder did not rely upon the relevant conduct.

Prior to Justice Brereton's decision in HIH, several courts accepted that a misleading and deceptive conduct claim based on market-based causation had at least some prospect of success. (See for example Caason Investments Pty Limited v Cao [2015] FCAFC 94; and Camping Warehouse Australia Pty Ltd v Downer EDI Limited [2014] VSC 357.)

Australian law moves closer to US position on share market fraud

HIH now brings Australia's law concerning shareholders' ability to recover from corporations that cause the price of their shares to be artificially inflated one step closer to the US, which has recognised the doctrine of "fraud-on-the-market" since 1988.

Under that doctrine, reliance can be presumed if certain facts are established. Direct reliance is not required, although defendants can lead evidence to rebut the presumption.

Australian law does not authorise any rebuttable presumption and the decision in HIH analyses causation as the ultimate issue posed by the statutory causes of action for misleading and deceptive conduct.

His Honour found that direct reliance need not be established and that indirect causation was available on the facts of the case. Even so, the plaintiff still had to establish by evidence or inference that the contravening conduct did inflate the market (HIH at [123]).

This article will examine Justice Brereton's decision and identify some of the questions that will need to be addressed by future courts if His Honour's decision is not subsequently overturned on appeal. This article will not consider the accessorial liability aspect of His Honour's decision or His Honour's approach to the expert evidence and quantification of the plaintiffs' respective claims.

Results documents released by HIH found to be misleading or deceptive

Between 26 August 1999 and 15 March 2001, HIH released the following documents to the market:

  • final results for 1998/1999;
  • interim results for the six months ended 31 December 1999; and
  • final results for 1999/2000

(collectively, "the Results Documents").

Each of the shareholders acquired shares in HIH after the publication of at least one of the above documents. None of them alleged reliance upon any of the Results Documents.

HIH found to have misrepresented its reinsurance arrangements

His Honour found that each of the Results Documents was misleading or deceptive within the meaning of section 52 of the Trade Practices Act 1974 (Cth) ("TPA") and section 1005 of the Corporations Act (Cth) ("CA") (which section was in force at the time HIH shares ceased trading on the Australian Stock Exchange) because:

  • HIH purchased whole account insurance through Hannover Re;
  • HIH had separately but contemporaneously entered into a Letter of Credit Agreement and Letter of Credit Authority Agreement, which had the effect of transferring a substantial part of the risk back to HIH; and
  • In the Results Documents, HIH accounted for its arrangements with Hannover Re as if they were conventional reinsurance arrangements, when they were in fact financial reinsurance arrangements.

Profit representations made by HIH found to be overstated

Accordingly, the Results Documents represented that HIH's operating profit before abnormal items and income tax was substantially higher than what it would have been had HIH correctly accounted for its arrangements with Hannover Re ("the Profit Representations").

Each of the plaintiffs lodged proofs of debt in the winding up of HIH on the basis that HIH had breached the above provisions of the TPA and CA. HIH's liquidator did not admit the plaintiffs' proofs. The plaintiffs appealed the liquidator's non-admission to the Supreme Court of NSW pursuant to section 1321 of the CA.

At trial, there was no dispute that the Profit Representations were made and were overstated.

Contravening conduct by HIH found to have deceived the market

Justice Brereton regarded the key question to be determined as whether the publication of the Results Documents, which included the Profit Representations, materially contributed to the plaintiffs incurring loss.

His Honour analysed a long line of authority concerning section 82(1) of the TPA (the operative language of which is substantially identical to section 1005 and section 1041I of the CA) to the effect that the provision was concerned with causation and not reliance. Propositions that emerged are:

A [plaintiff] does not have to prove that it relied on the contravening conduct - only that somewhere in the chain of causation someone relied on the contravening conduct - that someone was misled or deceived and such a deception brought about prejudice to the [plaintiff] (HIH at [56]).

The entitlement to recover loss or damage in a case of misleading and deceptive conduct was not confined to persons who relied on the conduct, and a plaintiff need not establish that the plaintiff directly received and relied upon the misrepresentation made by a defendant (HIH at [65]).


Here, whilst "the contravening conduct did not directly mislead the applicants, 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" (HIH at [73]).

Laws of market inevitably led to investors paying inflated price

In particular, His Honour cited the judgment of McHugh J in Henville v Walker to the effect that for the purposes of section 82(1) of the TPA, courts have recognised two scenarios of causation: the first is where the defendant engages in certain conduct that sets in motion (or in the case of an omission, fails to set in motion) a chain of events such that "the laws of nature dictated the result".

The second scenario was where damage was suffered not because of the laws of nature, but because the person acted to their own detriment following the conduct of the defendant.

His Honour stated that the HIH case is analogous to the first scenario described by McHugh J: "...though it is the laws of the market rather than those of nature which dictated that the inevitable consequence of the contravening conduct would be that the share purchasers would pay an inflated price" (HIH at [74]).

His Honour also cited the first instance decision in Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149, where Perram J accepted that a party which acquires shares on a stock exchange could recover compensation for price inflation arising from a failure to disclose material required to be disclosed, so long as they were not aware of the non-disclosed material.

That finding was obiter and the Full Court of the Federal Court in delivering its decision on the appeal on 21 April 2016, said that given its reasons for dismissing the appeal, it was "unnecessary in this case to deal with the important question of causation in connection with a posited failure by a listed company to disclose market sensitive information" (see Grant-Taylor v Babcock & Brown Limited (in liquidation) [2016] FCAFC 60).

Investors did not have to prove direct reliance on misleading representations

In finding that "indirect causation" is available and direct reliance need not be established, Justice Brereton held that the chain of causation was -

  1. HIH released overstated financial results to the market;
  2. the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater net assets than it really had;
  3. HIH shares traded on the market at an inflated price; and
  4. investors paid that inflated price to acquire shares, and thereby suffered loss. Thus the contravening conduct materially contributed to that outcome (HIH at [75]).

In trying to defeat indirect market-based causation, the evidentiary burden falls upon the defendant to prove that a plaintiff knew the truth about or was indifferent to the contravening conduct but proceeded to buy the shares nevertheless. Absent that, Justice Brereton has held that direct reliance need not be established.

Court establishes chain of causation leading to investors suffering loss

His Honour cited Perram J's reasoning in Grant-Taylor:

...while on the authority of Digi-Tech and Ingot, a plaintiff may not recover where it knows of the misleading nature of the alleged conduct, those authorities did not mean that C was necessarily precluded from recovering from A where A misled B, and B in consequence misled C (as ABN AMRO established), and a case in which A misled the market (comprised of many Bs) which then bid up the price and thus caused loss to C, was not relevantly different (HIH at [67]).

Applying that reasoning to the facts of this case, His Honour held that HIH (A) misled the market (B) by making the Profit Representations. Those representations caused the market to react in a way that increased the price of HIH's shares. Consequently, the plaintiffs (C) suffered loss and damage when they purchased HIH's shares after those representations were made.

Justice Brereton has found that market-based causation is entirely consistent with a substantial line of authority concerning causation under section 82(1) of the TPA.

High Court to have the final word on market-based causation in Australia

It will be interesting to see how courts develop this principle in future cases, including in any appeal from this decision.

Clearly each case must turn upon its facts and it is likely to fall to the courts to articulate carefully the circumstances in which market-based causation will apply.

The formal recognition of indirect market-based causation is likely to be welcomed by funders and plaintiffs' lawyers in the shareholder class action space - but it is still for the High Court ultimately to resolve the position in this country.

Paul Bannon Damian Clancy
Commercial litigation
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Damian Clancy
Paul Bannon
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.