Australia: Indirect Causation Accepted By Australian Court In Shareholder Claim

Last Updated: 11 July 2016
Article by John Emmerig and Michael Legg

Key Points

  • Traditionally, Australian courts have held that shareholders alleging corporate contraventions of prohibitions on misleading conduct must demonstrate that they were aware of, and directly relied on, the corporate misconduct.
  • However, in recent cases the concept of indirect or market-based causation has been held as arguable, without being authoritatively adopted. Shareholders have argued that they rely on the share price as an accurate reflection of share value. Therefore, when corporate misconduct inflates the share price, the company indirectly causes shareholders to suffer loss. Direct reliance is not required.
  • In the decision of In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482,the Supreme Court of New South Wales recognised and applied indirect causation in a shareholder claim.
  • Indirect causation is likely to make shareholder class actions easier to commence and prove. This may place listed corporations and their directors at greater risk of class action litigation.


The plaintiffs acquired HIH shares between 26 October 1998 and 15 March 2001. The plaintiffs contended, and the defendants admitted, that HIH had released misleading and deceptive financial results during this period.

In releasing these results, HIH acted in contravention of s 52 of the Trade Practices Act 1974 (Cth) and ss 995 and/or 999 of the Corporations Law (Cth). Section 52 and s 995 both state that a person must not engage in misleading or deceptive conduct, while s 999 states a person must not make a false or misleading statement in relation to securities. Today's equivalent sections are s 1041H of the Corporations Act 2001 (Cth), s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and s 18 of the Australian Consumer Law.

The financial results overstated HIH's operating profit and net assets. Consequently, the plaintiffs claimed that at the time they purchased HIH shares, the price at which the shares were trading was inflated due to the misleading financial results.

Importantly, the plaintiffs did not contend that they had read, or directly relied upon, the financial results reports. Rather, they argued that they acquired these shares in a market that had been distorted by the misrepresentations, so that HIH shares traded at inflated prices. The plaintiffs claimed they suffered loss and damage by reason of having paid more for the shares than they would otherwise have paid had the market price not been inflated.

When HIH went into liquidation, the plaintiffs lodged proofs of debt to this effect. The liquidators and scheme administrators did not admit these proofs. Consequently, the plaintiffs appealed to the New South Wales Supreme Court seeking that their proofs be admitted.

The Decision

Brereton J identified two key questions with regards to whether the plaintiffs could claim damages without establishing direct reliance on the misleading financial results:

  1. Whether the plaintiffs were entitled to claim damages on the basis of "indirect causation"; and
  2. If so, how to establish if the contravening conduct had indirectly caused damages and how to quantify those damages.

Indirect Causation: Sufficient to Satisfy a Cause of Action

Brereton J found that indirect causation is available to shareholder plaintiffs claiming misleading and deceptive corporate conduct, and that direct reliance need not be established.

The ultimate question posed by the relevant statutory causes of action is one of causation, not reliance. This is because s 82(1) of the Trade Practices Act and s 1005(1) of the Corporations Law simply required that a plaintiff suffers loss or damage "by" the contravening corporate conduct. The term "by" expresses a need for causation without defining this concept further,1 essentially signifying that the concept has a broad ambit, requiring no more than that the contravening conduct materially contributed to the loss or damage. Brereton J stated, "If causation—"by conduct of"—can otherwise be established, it cannot matter that reliance is not established".2

The judgment supports this position by examining three groups of case law. First, Brereton J drew attention to cases that stand as authority for the principle that direct reliance is not the only means of satisfying causation. In the High Court case of Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, Gummow, Hayne, Heydon and Kiefel JJ stated that reliance is not a substitute for causation.3

In addition, particular emphasis was placed upon Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526, where the Federal Court held that under s 82 of the Trade Practices Act, plaintiffs may claim compensation where the contravener's conduct caused other persons to act in a way that led to loss or damage to the plaintiff. In this case the plaintiff and defendant were rival pharmaceutical companies competing for the same customer base. Causation was established by proving that the defendant misled the customer base which caused the customers to purchase more of the defendant's product and less of the plaintiff's product. The plaintiff was not misled, but suffered loss as a result of the defendant's misleading conduct. It is important to note that in Janssen-Cilag the Court found that the contravening conduct had misled customers, rather than a market as a whole.

Second, Brereton J considered recent cases which endorsed the concept of indirect causation in obiter dicta. In 2015, the Full Federal Court considered that indirect causation was arguable in shareholder actions, in the context of an interlocutory application in Caason Investments Pty Ltd v Cao [2015] FCAFC 94.4 In the same year, Perram J commented in obiter in Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149 that an investor could recover damages against a company that had failed to comply with its continuous disclosure obligations without proving a direct causal link between the non-disclosure and their loss.5 This decision was recently considered by the Full Federal Court on appeal, but the Court declined to comment on the issue of indirect causation as it was not necessary to resolve the appeal.6

Finally, Brereton J distinguished two New South Wales Court of Appeal cases that held that direct reliance is necessary to prove causation, namely Digi-Tech (Australia) v Brand (2004) [2004] NSWCA 58 and Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653. His Honour noted that these cases involved different factual scenarios to HIH Insurance. Neither considered "market-based causation", and neither was concerned with a situation where the alternatives were transactions at a lower or higher price in which the contravening conduct had the necessary consequence of prompting the higher price.

Rather, both Digi-tech and Ingot were concerned with a scenario in which the alternatives were transaction or no transaction. In Digi-tech, the defendant produced misleading forecasts which provided a sufficiently high valuation of the products to allow the investment scheme to go ahead, and investors suffered loss.7 Likewise, the plaintiffs in Ingot argued that but for the defendant's misleading conduct, the defendant would not have issued a converting note, and the plaintiffs would not have invested in this note to their detriment.8 In addition, the policy of Digi-Tech and Ingot is to deny damages where the contravening conduct did not mislead anyone. This is distinct from the indirect causation argument in the present case that HIH's conduct misled the market.

On this basis, Brereton J held:

If the contravening conduct deceived the market to produce a market price which reflected a misapprehension of HIH's financial position (which is a factual question to be resolved in conjunction with the quantification of damages), then it had the effect of setting the market at a higher level—and the price the plaintiffs paid greater—than would otherwise have been the case. In such circumstances, plaintiffs who decided—entirely oblivious to the contravening conduct—to acquire shares in HIH, were inevitably exposed to loss. Moreover, they were members of the class who would obviously be affected by the contravening conduct.9

His Honour concluded that shareholders are able to recover losses they have suffered if four conditions are met:

  1. A company releases misleading results to the market;
  2. The market is deceived into a misapprehension that the company is trading more profitably than it really is;
  3. The shares of the company trade at an inflated price; and
  4. Investors pay the inflated price for the shares and thereby suffer loss.

Establishing Indirect Causation and Quantifying the Plaintiffs' Damages

The Court found that the quantum of damages resulting from the plaintiffs' claim 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 but all other factors had remained constant.

This case was not a simple "no transaction" case, in which the contravening conduct was said to have caused the plaintiffs to have acquired shares which they otherwise would not have acquired. Rather, the measure of the plaintiffs' damages must reflect the plaintiffs' claim that the contravening conduct caused them to pay an inflated price for shares which they would have acquired in any event.

The plaintiffs' expert sought to quantify the impact of the contravening conduct on the HIH share price by providing the Court with a conditional relative valuation model. This model involved a regression analysis of the market price of shares in comparable insurance companies and applied this to derive a value for HIH shares. By the conclusion of submissions, the defendants largely agreed with the plaintiffs' methodology.

However, Brereton J rejected this model, noting it had a number of problems. First, the methodology produced a constant "flat line" price, whereas in fact the market price fluctuated on a daily basis. Second, the model sought to infer a hypothetical value for an HIH share, using other insurance companies as comparators, and disregarding the actual performance of HIH shares. In addition, the model produced a hypothetical price that was in fact higher than the actual HIH market price during one of the relevant time periods.

Instead of employing the plaintiff's proposed loss methodology, his Honour provided his own method of quantifying the plaintiffs' damages:

[T]he better approach to evaluating the impact of the contravening conduct on the share price is to identify the difference between the price at which HIH shares actually traded on the market, and the hypothetical price achieved by applying the price to book value at which they actually traded to an adjusted book.10

As a result, the plaintiffs who acquired their HIH shares during, and after, the release of the misleading financial results were awarded damages equivalent to this difference.

The Missing Step: Assuming an Efficient Market

In setting the test for determining whether the contravening conduct in fact influenced the market price, Brereton J states:

[I]f the price at which the shares actually traded exceeds that at which, absent the contravening conduct, they would have traded, then indirect causation in fact will be established.11

It seems implicit in this statement that his Honour is assuming the contravening conduct was able to influence the HIH share price. This begs the question, how exactly does the contravening conduct do so?

Essentially, to satisfy this Court's indirect causation test, the conduct must be proven to have misled the market. Indeed, as Brereton J noted, this is what distinguishes the present case from Digi-tech and Ingot. To determine if the market was misled, it is necessary to determine if the shares were subject to an efficient market, which is shorthand for a market that immediately incorporates publicly available information into the share price so that the price is reflective of that information. This is because the indirect causation principle relies on "assumptions of an efficient market and rational investors making decisions based on the integrity of the share price" as links in the causal chain.12

The Court appears to recognize that an efficient market is a necessary precondition for a successful indirect causation claim. His Honour notes that a well-developed market reflects all publicly available information, including any misrepresentations, which is in turn reflected in the price of shares traded on that market.13 Yet Brereton J never directly addresses whether HIH shares were subject to such a market, simply stating:

Intuitively, it is a reasonable and logical hypothesis that the ordinary and natural consequence of an overstatement to the market of a listed company's financial performance would be to inflate its share price.14

Ramifications of this Decision

HIH Insurance is the first Australian case to determine that indirect causation is sufficient to satisfy the causative element required in shareholder claims of corporate misleading and deceptive conduct. As a result, its ramifications are significant and manifold.

Firstly, this decision will provide plaintiffs with more opportunities to make a successful claim in securities cases involving alleged corporate contraventions. With the advent of HIH Insurance, shareholder plaintiffs are now required to satisfy a lower threshold, that of demonstrating that the relevant conduct was misleading and that it caused an inflated share price to the detriment of the plaintiff.

In addition, this decision's endorsement of indirect causation may well apply equally to the continuous disclosure regime of the Corporations Act which requires causation through the words "resulted from". However, the appropriate causation test under this regime will be determined by reference to the specific wording, context and purpose of the relevant legislation. Consequently it cannot be said definitively whether courts will apply indirect causation to the regime.

Further, whilst HIH Insurance is not a class action proceeding, the Court's application of indirect causation will most likely be transferred to that context. Brereton J's reasoning seems to suggest this when his Honour comments that the plaintiffs "were members of a class who would obviously be affected by the contravening conduct".15 In previous securities class actions, it was necessary to prove individual reliance by each member of the class. This did not prevent a plaintiff from bringing a class action claim in Australian courts. However, the application of indirect causation in these cases would make causation a common issue and easier to prove, provided it can be shown that the contravening conduct misled the market, causing inflated share prices. As a result, securities class actions that would otherwise not be financially viable or marketable due to concerns about demonstrating reliance may become so in the wake of HIH Insurance.

Conversely, the key ramification of this decision for corporate defendants is the increased risk that share price declines will lead to claims by shareholder plaintiffs. Corporations that are listed on the Australian Securities Exchange are now exposed to potentially successful indirect causation claims of both individuals, and class actions. As most shareholder class actions settle, the recognition of indirect causation may also impact the dynamics of settlement negotiations.

Before concluding, it is important to note that HIH Insurance is a first instance New South Wales Supreme Court decision. This authority remains to be tested at an appellate level. Indeed, given the wide-ranging ramifications for shareholders, securities class actions and corporations, not to mention the Court of Appeal decisions against indirect causation in Digi-Tech and Ingot, commercial certainty may not be established until the High Court reviews this issue.


1 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525.

2 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [42].

3 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 351.

4 See Jones Day, "Market-Based Causation Arguable in Australian Shareholder Class Actions" (September 2015).

5 See Jones Day, "Class Actions in Australia: 2015 in Review" (March 2016).

6 Grant-Taylor v Babcock & Brown Limited (in liquidation) [2016] FCAFC 60.

7 Digi-Tech (Australia) v Brand (2004) [2004] NSWCA 58 at [158].

8 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 at [601].

9 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [74].

10 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [126].

11 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [80].

12 Michael Legg, John Emmerig and Georgina Westgarth, "US Supreme Court revises fraud on the market presumption: Ramifications for Australian shareholder class actions" (2015) 43 Australian Business Law Review 448 at 461.

13 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [41].

14 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [105].

15 In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 at [74].

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.

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.