On 20 April 2016, the first judgment in Australia to accept what is known as the 'indirect market based theory of causation' was handed down by a single judge of the NSW Supreme Court. The case has important implications for numerous ASX-listed companies, particularly those involved in shareholder class actions, where the issue of how to prove causation has been the subject of significant debate.

Market based causation

The theory of market-based causation holds that where misleading or improperly withheld information causes the market to inflate the price of securities beyond the true value which would have prevailed but for the contraventions, the act of purchasing shares in such a market is sufficient to make out the causal nexus between the misleading information and investors' losses. This means that investors do not need to prove that they purchased securities with express knowledge of and reliance upon the misleading information. 

The decision In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 (HIH) held that plaintiff shareholders who bought shares in a publicly listed company at an inflated price could recover their loss without the need to establish a direct link between the company's misleading and deceptive conduct and their decision to purchase the shares.

Impact on shareholder class actions

A shareholder class action is usually brought on behalf of investors who purchased shares in a company at an allegedly inflated price in circumstances where the company is said to have breached the Corporations Act 2001 (Cth), ASX Listing Rules or the ASIC Act2001 (Cth) in its statements to the market. One of the unresolved issues in shareholder class actions is whether investors are required to prove that they relied on the company's alleged misleading statements prior to purchasing the shares. 

Although the HIH decision is not a shareholder class action, it will certainly encourage plaintiff shareholders to take legal action against downgraded ASX-listed companies, and may have immediate implications for several existing shareholder class actions. We review the case in detail below.

Case facts

In the HIH case, the plaintiffs were shareholders who bought shares in HIH during the period between 26 October 1999 and 15 March 2001. The plaintiffs argued that certain representations contained in the HIH's financial results released to the market on 25 August 1999 and 2 March 2000 (Financial Results) were misleading and deceptive in contravention of section 52 of the then Trade Practices Act 1974 (Cth) (TPA) and sections 995 or 999 of the then Corporations Law. In short, the plaintiffs argued that the HIH wrongly accounted for certain reinsurance contracts creating a misleading and deceptive appearance of its operating profit. 

The plaintiffs argued that they purchased shares at prices which were inflated by the misrepresentations contained in the Financial Results, and consequently suffered loss and damage by reason of having paid more for the shares they purchased than they would otherwise have paid. Importantly, the plaintiffs did not contend that they had read, or directly relied upon reports of, the Financial Results prior to purchasing shares. 

When HIH was placed into liquidation, the plaintiffs lodged proofs of debt in respect of their losses, but the Liquidators and scheme administrators, the defendants in the proceedings, did not admit their proofs. The plaintiffs then sought orders from the Supreme Court of NSW that their proofs of debt be admitted.


The critical issue in this case was whether indirect causation was available to the plaintiffs. 

The relevant sections of the TPA and the Corporations Law (now, effectively, section 1041H of the Corporations Act) required a plaintiff to establish that the loss or damage they suffered by the plaintiffs was caused 'by' the contravening conduct. As discussed in HIH, previous decisions have established that it is not necessary that the plaintiffs establish that the contravening conduct was the sole cause of any relevant loss; it suffices if the conduct was a cause of the relevant loss, in the sense that it materially contributed to that loss or damage. 

The plaintiffs put to the Court that:

  • the contravening conduct regarding the company's operating profit misled the market into attributing an inflated value to HIH shares
  • the plaintiffs acquired their shares in that inflated market, and
  • the plaintiffs thus paid more than they would otherwise have paid for the same shares.

The defendants relied on longstanding authorities supporting the need for direct reliance, (see Digi-Tech (Australia) Ltd v Brand[2004] NSWCA 58 (2004) 62 IPR 184 and Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206). They argued a person such as a shareholder who claims to have suffered loss by entering into a transaction (such as purchasing a share) must establish that they had regard to the allegedly misleading information available (direct reliance). 

In finding in favour of the plaintiffs, Justice Brereton distinguished the facts from previous authorities, concluding that:

  • Digi-Tech and Ingot did not involve 'market-based causation'; Digi-Tech involved a decision to invest in a scheme and Ingot involved a decision to participate in a converting note issue.
  • Digi-Tech and Ingot concerned situations where the effect of the contravening conduct was to contribute to the opportunity for the investor to enter into a transaction. Arguably, but for the contravening conduct, the investors would not have entered into a transaction.
  • Digi-Tech and Ingot concerned scenarios in which the alternatives were 'transaction' or 'no transaction', but HIH was different: the alternatives were not 'transaction' or no 'transaction', but rather a transaction at a lower or higher price, in which the contravening conduct had the necessary consequence that a higher price would exist.

Justice Brereton established the chain of causation as follows:

  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 their shares, and suffered loss.

Justice Brereton then concluded at [77] that:

'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 that 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.'


The contravening conduct caused the HIH shares to be inflated. In assessing the damages, his Honour admitted at that the assessment of damages, particularly where hypothetical scenarios are involved, is a difficult task and it involves a degree of speculation. 

In calculating the loss suffered by the plaintiffs, Justice Brereton concluded that the appropriate measure is represented by the difference between the price at which HIH shares actually traded on the market, and the hypothetical price achieved had the contravening conduct not occurred.

Next Steps

Justice Brereton's decision in HIH is subject to appeal. Ultimately, the debate of whether indirect causation is available under Australian law is likely to be resolved by an appellate court. 

Read the full judgment is available here.