In a decision of the Federal Court handed down on 18 October 2019 in Masters v Lombe (Liquidator); In the Matter of Babcock & Brown Limited (In Liquidation) [2019] FCA 1720, Foster J held that Babcock & Brown Limited (BBL) did not breach the continuous disclosure obligations in the Corporations Act 2001 and the ASX Listing Rules. In an extensive judgment, His Honour provides some useful guidance on the jurisprudence in relation to the review of liquidator’s decisions in relation to proofs of debt, continuous disclosure obligations and the indirect or market-based causation theory.

Joseph Scarcella acted for the liquidator of Babcock & Brown in successfully defending this long running set of proceedings.


BBL was a global investment and advisory firm which, at its height had a market capitalisation of $9.1 billion, 28 offices and 1,500 employees worldwide. It was placed into voluntary administration in March 2009 and liquidation in August 2009. David Lombe of Deloitte is acting as Liquidator of BBL.

BBL was listed on the ASX in April 2004. It was a non-trading holding entity of various companies in its group.

This matter concerned the claims of shareholders who had their proofs of debt in the liquidation of BBL rejected by Mr Lombe.

The Allegations

The present case concerns the claims of over 1,200 shareholders who purchased shares in BBL on the ASX in the period 12 August 2008 and 12 March 2009 (the latter being the date that BBL was placed into administration). Constituted over three separate proceedings that were heard together, the shareholders alleged that BBL breached its continuous disclosure obligations to revise downwards its earnings forecast and as a result the price of BBL shares during the relevant period was inflated above the true value of those shares. The shareholders alleged that by leaving earlier forecasts uncorrected, BBL continued to convey an optimistic impression of the financial position of BBL.

The shareholders’ case was based on market-based causation, the theory that a person who acquires shares on the ASX can recover compensation for price inflation caused by a breach of the continuous disclosure obligations so long as that person was not aware of the material that was not disclosed. They did not assert a case of individual reliance. Further, notwithstanding the number of plaintiffs, the proceedings were not constituted as a class action but rather as over 1,200 individual cases heard together.

Proofs of Debt

Given the shareholder plaintiffs had their proofs of debt rejected, they brought proceedings against Mr Lombe (in his capacity as Liquidator) seeking the acceptance of their claims and compensation.

In relation to hearings concerning appeals from a rejection of a proof of debt the Court stated:

  • A plaintiff cannot bring an appeal unless that plaintiff has first lodged a proof of debt and that proof of debt has been rejected in whole or in part. It does not matter that a plaintiff is in the identical position of other plaintiffs who have had their proofs of debt rejected. His Honour dismissed the cases of those plaintiffs outright without the need to consider the merits of their claim.
  • An appeal against a rejection of a proof of debt by a liquidator is a hearing de novo which means no party is confined to the materials that were before the liquidator when he rejected the relevant proofs of debt but may add further evidence.

Continuous Disclosure

The shareholders alleged that:

  • BBL became “aware” that its business had made large losses in the second half of the 2008 financial year;
  • from 8 November 2009, BBL was “aware” that non-cash impairments charges incurred during the 2008 financial years would be approximately $1.8 billion and that the group would sustain a loss of $2.1 billion; and
  • as a result of the above, the actual earnings would differ “materially” from the earnings guidance issued to the ASX in August 2008 that disclosed earnings forecast in the order of $643 million.

The Court accepted the liquidator’s submissions (aided by expert evidence) that BBL was not obliged to make any of the disclosures alleged on that the grounds that:

  • The information that the shareholders allege ought to have been disclosed was not “material” in that it was known or the market had already “priced in” that information – at the time that the shareholders made their acquisitions in BBL, the share price had substantially fallen from the heights of $34.63 in June 2007 to $6.80 then to no more than $2.50.
  • Any update guidance as to the forecast earnings of BBL was, due to the nature of the market at the time, too uncertain to be appropriate to be disclosed.
  • BBL was not obliged to make disclosures to the ASX where its management forecasts embodied a potential for low, as well as high, returns – such information was within the “indefinite information exception” to the continuous disclosure obligations.
  • By reason of the GFC, BBL’s restructure and analyst coverage of BBL during the purchasing period, by no later than mid-September 2008 (when Lehman Brothers collapsed), any person looking to purchase shares in BBL would have been speculating as to BBL’s continued success in view of those matters.

Market Based Causation

The Court examined all recent authority in relation to market-based causation and found there are conflicting authorities. The Court observed the emergence of a more recent line of authority which supports market-based causation, however, stated that market-based causation would need extensive economic expert evidence to be established but if that theory can be invoked will depend on the facts of the case, with a particular focus on movements in price following an announcement as evidence of a “inflation” being incorporated into the share price. Foster J stated:

It is not a self-evident proposition that, in all circumstances and in respect of all listed companies, the downgrading of earnings forecasts, even to a substantial degree, necessarily leads to a reduction in the price of the shares in the entity. Whether that is the result of such a downgrade will depend upon all of the circumstances of the case. This is so notwithstanding the fact that financial professionals generally agree that such a consequence can generally be accepted.

Foster J also opined generally that the market-based causation theory “does not comfortably accommodate subsequent sales of the share made at a price which was no less than the price paid for the shares. That is to say, the theory allows compensation to persons who actually suffered no loss.”

Importantly, Foster J was at odds with the concept expressed by Brereton J in HIH that the defendant bears the onus to prove that the plaintiff knew, or were indifferent, to the information that was alleged not to have been disclosed on the ASX.

Ultimately Justice Foster did not have to decide on the applicability of market-based causation as his Honour was of the view that the shareholders’ case failed on the grounds that BBL was not obliged to make any disclosures as alleged by the shareholders and even if those disclosures were made, that the shares of BBL would have traded at a lower price on the ASX. Given there is disparate commentary on the acceptance of the market-based causation theory within the context of the continuous disclosure provisions, his comments provide helpful insight around what needs to be established to demonstrate compensable loss, particularly in relation to expert evidence that is required to support an inflation following positive guidance being issued.