In the Matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and Others; In the Matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and Others; In the Matter of HIH Insurance Limited (In Liquidation); Cuong Ly v HIH Insurance Limited

Solicitors: Thomas Booler & Co (plaintiffs) Ashurst Australia (defendants) File Number(s): 2013/320171; 2013/345623; 2013/358152; 2014/148595

Judgment

1. The issues which have been argued today give rise to some difficult questions of principle, some of which have been the subject of discussion in authorities at least in the United States, and academic writing there and here, and which could well be the subject of a reserved and considered judgment. However taking that course would further delay the progress of this liquidation on the one hand, and further delay the recovery by the plaintiffs of such sums as they might ultimately be entitled to on the other. Accordingly, aided as I am by the comprehensive written arguments and focused oral submissions of Mr Robertson for the plaintiffs and Mr Lockhart of Senior Counsel for the defendants, I propose to proceed to give judgment on the remaining issues now.
2. In the principal judgment given on 20 April 2016, [1] I identified and considered as questions of principle three issues. The first was whether HIH, FAI and C&G were liable to the plaintiffs for loss and damage caused by the admitted contraventions. Save for the question of causation, this not disputed on the part of HIH, but the liability of FAI and C&G as accessories was in issue. That issue I resolved by finding that FAI and C&G were liable as accessories. The second question of principle was whether the plaintiffs were entitled to claim damages on the basis of indirect causation without proving direct reliance on the contravening conduct. I concluded that they were.
3. The third question of principle was the basis for quantification of the plaintiffs' damages. At [128] of the principal judgment I said: Accordingly, in principle - subject to issues affecting particular cases which are reserved for further argument - plaintiffs who acquired their shares during the period 25 August 1999 to 2 March 2000 are entitled to damages equivalent to 6.25% of the price they paid; those who acquired their shares during the period 3 March 2000 to 17 October 2000 to 9.5% of the price paid and those who acquired their shares after 17 October 2000 to 13% of the price paid.
4. The relevance of the period commencing from 25 August 1999 was that was when the misleading and deceptive conduct or contravening conduct first impacted the market.
5. I directed that the parties bring in short minutes to give effect to the judgment - including, if necessary, directions for the resolution of any remaining issues. The parties have since then endeavoured to resolve those remaining issues, including the issues affecting particular cases which were reserved for further argument, which I then mentioned. That course has left for resolution by the Court, in the argument which has taken place today, a number of issues, namely: 1. whether sales of shares by plaintiffs during the period 25 August 1999 to 2 March 2000 should be taken into account and, if so, how. There are three subsidiary questions: 1. first, whether the plaintiffs are precluded by the way in which the case has been conducted to date from propounding a claim on behalf of plaintiffs who sold their shares during that period; 2. secondly, whether in principle sales should be taken into account; and 3. thirdly, if so, how shares sold are to be identified from those held by a plaintiff and in particular whether a first in/first out ("FIFO"), a last in/first out ("LIFO"), or a proportionate approach is to be adopted. 1. what is to be done so far as corporate plaintiffs who are presently deregistered are concerned; and 2. whether plaintiffs whose proofs of debt against HIH were already admitted by the HIH liquidators are to be admitted in the liquidations of its subsidiaries which I have held liable as accessories, for the same amount as they were admitted by the HIH liquidators, or for the amounts calculated in accordance with the principles stated in paragraph 128 of the principal judgment; 3. whether the plaintiffs are entitled to interest; and 4. costs.

Treatment of share sales during the relevant period

Is any claim precluded?

1. The first question is whether the plaintiffs are precluded from advancing a claim in respect of shares which, having been acquired during the inflationary period, were also sold during that period. The defendants submit that by reason of the manner in which the plaintiffs opened and conducted their case up to and at the time of the principal hearing they are now precluded from doing so.
2. In particular, the defendants rely on the plaintiffs' written opening in February 2015, which included the following: [45] The plaintiffs' loss arises because HIH's misleading or deceptive conduct distorted the market on which HIH's shares were traded. As a result, the shares of HIH traded at prices higher than the price would have been if the ASX had not been distorted. In these circumstances a plaintiff who acquired interests in shares in that inflated market and who still held the shares at the date that HIH went into liquidation suffered loss. Using the language of Lockhart J in Janssen-Cilag at 17: 'The conduct of HIH caused the market on which the shares traded to be distorted which caused loss to investors who acquired the shares at the distorted price.' [46] The shareholders simply paid too much to acquire the shares and they never recovered that overpayment.
3. I do not accept that those paragraphs go so far as to preclude the plaintiffs from advancing a case on behalf of those who purchased their shares in the distorted market but thereafter did not necessarily hold them until the company went into liquidation but rather sold them in the meantime, such that they arguably recovered some, but not all, of the overpayment. The opening submissions took and articulated perhaps the paradigm case, but I do not read it as abandoning any case that might have been advanced on behalf of plaintiffs who sold during the relevant period before liquidation. The principal judgment did not specifically address that category of plaintiff, because it focused on the three questions of principle to which I have referred; but the fact that it did not proceed to deal with the particular position of plaintiffs who had sold in the meantime simply reflected the situation that the Court was then concerned with the three questions of principle. Permitting the plaintiffs to pursue a case in respect of such plaintiffs now does not, as I think the argument today has illustrated, pose any insuperable or practical difficulty for the defendants in meeting it, nor create any injustice in expecting them to do so.
4. Accordingly, I hold that the plaintiffs are not precluded from advancing a case on behalf of those who, having acquired their shares during the relevant period, also sold those shares or some of them, during that period before liquidation.

Should sales be taken into account?

1. The next aspect of the sales issue is whether in principle the sales should be taken into account. In my view it is plain that they must be taken into account in the quantification of the plaintiffs' loss.
2. To the extent it is necessary to rely on authority in that respect, the circumstances fall well within the terms of Mustill LJ's judgment in Hussey v Eels [1990] 2 QB 227 at 241, where his Lordship posed as the critical question in a case of negligent misrepresentation "did the negligence which caused the damage also cause the profit - if profit there was". In that case what was in issue was the resale of a defective property, the original purchase of which had been induced by negligent misrepresentation. His Lordship observed that while there was in one sense a causal link between the inducement of the purchase by misrepresentation and the sale of the property two and a half years later, the reality of the situation was that the plaintiffs bought the house to live in, and in fact did live in it for a substantial period. It was only years later that the possibility of selling the land and moving elsewhere was explored and came to fruition, which meant that the transaction was not part of a continuous transaction of which the purchase was the inception.
3. In my view this case is quite the other side of that coin. One must focus on the question that the loss which was identified in the principal judgment was not the purchase of the shares, but the payment of an excessive price for the shares due to the distorted market. The same misleading and deceptive conduct that distorted the market adversely to the plaintiffs as purchasers when they purchased their shares, distorted the market in favour of each plaintiff as a vendor when and if that plaintiff sold its shares during the relevant period. As it seems to me, the on-market buying and selling for capital gain of shares in a listed company is radically different from the purchase of a home to be held indefinitely as a residence.
4. If it were not so, the result would be that there would be multiple recovery, by succeeding shareholders of the same share, in respect of the same component of loss, notwithstanding that one had effectively passed on his or her loss to his or her successor. That would be contrary to the cardinal principle that a plaintiff cannot recover more than she or he has actually lost. A plaintiff who sells shares in an inflated market effectively passes on all or part of its loss to the purchasing plaintiff, who is be entitled to recover in respect of the inflated amount.
5. I would not follow the approach adopted by the Supreme Court of the United States in Dura Pharmaceuticals Inc v Broudo 544 US 336 (2005), which would completely exclude from eligibility for damages shares that were sold in the inflated market, having been purchased in that market. It seems to me that a plaintiff who, having purchased in the inflated market, then on-sells in the inflated market but at a time when the inflated component is less than at the time of purchase, has still suffered loss and ought not be excluded entirely from eligibility. That is because the prima facie loss incurred by the plaintiff is the amount overpaid for the relevant share, and if that share is on-sold but at a lower price, including the same proportionate but therefore a lesser absolute inflationary component, the plaintiff's loss will be offset but not completely extinguished by that component.
6. Nonetheless the authority of Dura plainly supports the appropriateness of taking into account sales of shares acquired during the inflationary period. Accordingly, in my judgment sales are to be taken into account in that a plaintiff who, having acquired shares during the inflationary period, sold those shares during the inflationary period, must give credit against the damages to which it is entitled for that percentage of the selling price which reflects the inflationary factor applicable at the time of the sale. In other words, where shares were sold during the period 25 August 1999 to 2 March 2000, the plaintiff must give credit for 6.25% of the selling price; where shares were sold during the period 3 March 2000 to 17 October 2000, the plaintiff must give credit for 9.5% of the selling price; and where shares were sold during the period after 17 October 2000, the plaintiff must give credit for 13% of the selling price.

Identification of shares

1. The next question is how one identifies the shares sold from those held by the relevant plaintiff, some of which may have been acquired before the contravening conduct and thus before the inflationary period at all. As I have foreshadowed, there are at least three potential approaches: the FIFO approach, the LIFO approach and the proportionate approach.
2. It is true that shares are nowadays effectively fungibles, and it is practically impossible to identify particular shares by reference to share certificate numbers and the like, as once might have been possible. But it seems to me that a FIFO approach would have the effect of compensating a plaintiff, at least in part, for loss associated with shares purchased at a time when the purchase was unaffected by the contravening conduct. The FIFO approach would attribute to shares acquired before the contravening conduct took place or had any impact the benefit of the inflated market in which they were sold. A proportionate approach would also have that effect, albeit to a lesser extent.
3. As it seems to me, the best way of segregating and identifying the loss ultimately caused to any plaintiff by the impact of the contravening conduct is the LIFO approach, which focuses attention on the shares acquired and sold (if they were sold) during the period while the misleading conduct was operative. In that respect I am comforted by the circumstance that in the article by S Francis, 'Meet Two-Face: The Dualistic Rule 10b-5 and the Quandary of Offsetting Losses by Gains' (2009) 77 Fordham Law Review 3045 at 3076 it is said that the main advantage of LIFO is that it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price, whereas FIFO ignores many or all sales occurring during the class period and hence may exaggerate losses. The author also observes that LIFO is becoming widely accepted as the appropriate method of assessment in these circumstances in the United States, an observation echoed in this country by D Grave, L Watterson and H Mould in 'Causation loss and damage: Challenges for the new shareholder class action' (2009) 27 Companies and Securities Law Journal 483 at 504.

Deregistered plaintiffs

1. It is common ground that a number of the corporate plaintiffs have been deregistered; whether before or after the institution of these proceedings is not presently clear, but does not presently need to be resolved.
2. It is clear enough that proceedings cannot be maintained by a deregistered corporation, which legally has no further existence, and that proceedings brought in the name of such a corporation are to that extent a nullity and lapse or abate. [2]
3. Although the plaintiffs, at least initially, sought to argue that they had judgments as a result of the judgment handed down on 20 April 2016, which judgment had pursuant to the provisions of the (CTH) Corporations Act 2001 vested, at least in the case of corporations which were then in existence, in ASIC and/or in the Commonwealth (according to whether the corporation was a trustee or not), it is clear that no order was pronounced and no judgment in the sense of one that creates an enforceable right was given on that date - or has been given since. Directions were made for short minutes to be brought in, and final orders could not be made until at least the issues being addressed today, and potentially other issues are resolved. Accordingly, it seems to me that there is nothing that could have vested in ASIC or in the Commonwealth, except arguably a cause of action which those parties have not pursued.
4. On the other hand it is not impossible that the corporations in question could be reinstated, and it will not be possible to make final orders disposing of the proceedings today. It seems to me that the preferable course is that I indicate that if no application for reinstatement has been made by the time to which I adjourn these proceedings for final orders, it would be my intention then to dismiss as abuses of process the proceedings in so far as they purport to be maintained on behalf of deregistered plaintiffs. If an application for reinstatement has been made by that time, then there is no reason why that could not be considered in the context of the present proceedings.

Quantification against subsidiaries of claims admitted by HIH

1. The next question is that of the claims by plaintiffs whose proofs of debt against HIH were admitted by the HIH liquidators, but whose proofs in respect of the subsidiaries were not. To take the De Bortoli case as an example, the HIH liquidators have apparently admitted the De Bortoli proof of debt against HIH for $50,000, but the liquidators of the two subsidiary companies rejected their proofs of debt. The question is whether in these proceedings De Bortoli and the Bracken plaintiffs, who were in a similar position, should be admitted for $50,000 (or the amount for which the Bracken plaintiffs' proofs were admitted by the HIH liquidators), or for an amount calculated in accordance with [128] of the principal judgment.
2. In my view it is very clear that the latter is the correct approach. Where one of several tortfeasors settles with the plaintiff, that does not bind as to quantum the other joint tortfeasors. In this case, the fact that the HIH liquidators admitted the relevant plaintiffs for a particular amount has no effect on the amount for which the subsidiaries are liable if the plaintiffs are put to proof against them, as they were. Accordingly, the amount for which the Bracken plaintiffs and the De Bortoli plaintiffs are to be admitted is the amount calculated in accordance with [128] of the principal judgment - subject, of course, to the impact of sales, if any.

Brokerage

1. A further minor, and I think non-controversial, issue is that of brokerage. The defendants accept that where plaintiffs have paid brokerage on the purchase in respect of which they are entitled to damages, then they would be entitled to a pro rata amount of the brokerage in that respect. What is not agreed is how that should be established. The defendants have proposed some directions to resolve that, and nothing has been said against the appropriateness of those directions, which I propose shortly to make.

Interest

1. The plaintiffs accept that they cannot claim interest under s 563B of the (CTH) Corporations Act 2001, but propound a claim for interest under (NSW) Civil Procedure Act 2005, s 100, as pre-judgment interest, on the basis that they have been held out of their money from the time when they say that their claims could have been admitted by the liquidators and other creditors were paid dividends, until the time when they will ultimately be admitted and be paid a dividend.
2. It seems to me, however, that s 100 is simply not available in the present circumstances. This is an appeal from a liquidator's rejection of a proof of debt. The outcome of the proceeding will be an order modifying or reversing the liquidator's decision and requiring that the proofs of debt be, at least to some extent, admitted. I will not be giving a judgment for money against the defendants. Civil Procedure Act, s 100, authorises the Court to "include interest in the amount for which judgment is given" at a certain rate. There will be no money judgment in which interest can be included. In those circumstances, s 100 is simply not available. That conclusion is supported by authority, in particular the judgment of the Court of Appeal in McGrath v Sturesteps [2011] 81 NSWLR 690 at [80]-[81]; see also my judgment at first instance in the same case Sturesteps v AV McGrath & Ors [2010] NSWSC 896 at [44]-[45], and the judgment of Besanko J in White v Norman; Re Forest Enterprises Australia Ltd (No 2) (2012) 202 FCR 38; (2012) 86 ACSR 727; [2012] FCA 163 at [10] and [16].

Costs

1. In a case of this kind, particularly one which has been conducted in substance though not in form as a class action, and one which raised novel questions and in which - particularly on the question of valuation of the shares - the approach of neither side prevailed, it is necessary to take a somewhat broad brush approach to the question of costs. It is not in dispute that the plaintiffs have substantially succeeded and are prima facie entitled to an order for costs. But the defendants submit, first, that there should be excluded from the plaintiffs' costs a number of matters and, secondly, that the plaintiffs should be ordered to pay the defendants' costs of those matters.
2. The broad brush approach, which as I have said is appropriate in these circumstances, includes recognising that there are swings and roundabouts in this field and that not every precise adjustment to reflect the successes and failures of each party will be appropriate. Essentially, the defendants submitted that the plaintiffs should be deprived of their costs and ordered to pay the defendants' costs on a number of specified issues or matters. The first of those was the expert reports of Dr Coulton. It is true that Dr Coulton's early reports were in large part superceded by their later re-formulations and the oral evidence, and it is also true that ultimately I did not accept even Dr Coulton's modified final report. Nor, for that matter, did I accept the position of the defendants' expert, Mr Gower. Nonetheless the evolution of Dr Coulton's thinking in the course of a novel matter was part of the development of the approach which ultimately culminated in such success as the plaintiffs achieved. Dr Coulton's earlier reports were each steps along the way to the position that was finally presented to the Court and influenced the outcome, albeit that they required considerable modification along the way. In this respect, it is to be remembered that it was not as if the plaintiffs could accept any competing valuation put forward by the defendants, because Mr Gower did not proffer a valuation, but merely criticism of Dr Coulton's approach.
3. While there were undoubtedly problems with some of Dr Coulton's material, and while the costs might have been mitigated had he been able to adopt at the outset the approach that he finally adopted, the fact is that in a case as novel as this was, it is unsurprising that some considerable refinement and articulation of his thinking was required along the way, as a result of the debate between the experts. I am therefore not disposed to disallow the costs of and associated with Dr Coulton's reports.
4. The defendants did not press their next objection, which was in respect of certain specific evidence that was rejected by the Court.
5. The plaintiffs conceded that they should not be entitled to the costs of those claims that were abandoned at the trial, being the claims against CIC Insurance Limited, the claims in relation to the GCRA contracts, the claims in relation to the prospectus contravention, and the claims in relation to an alleged failure to notify the market that were not pressed at the trial. Nor did the plaintiffs oppose the exclusion, from the costs to which they would be entitled, of the costs of preparation of share schedules and quantifying provable or claimable amounts for claims in relation to the period 26 November 1998 to 24 August 1999, which were ultimately abandoned.
6. The next area in which the defendants submitted that the plaintiffs should not be entitled to their costs is the costs of the plaintiffs' tender bundle of 15 volumes which were delivered but not referred to during the trial. On the one hand, the plaintiffs legitimately point out that an agreed statement of facts was resolved only very shortly before the hearing and that that rendered it unnecessary to refer to the underlying evidence; on the other hand, however, as the defendants legitimately point out, most of the thirteen volumes comprised the Royal Commission report which it had been foreshadowed months before was not admissible or would be objected to as inadmissible - which suggestion, as I confirmed at an early stage of the hearing, was entirely correct and should have been recognised.
7. Thus, though it is true that the statement of agreed facts relieved the plaintiffs of the need to refer to underlying evidence, the underlying evidence in the tender bundle, save except for perhaps volume 1 and volume 15, was never going to be admissible in any event. I do not see why the defendants should have to bear the cost of the tender bundle, other than volumes 1 and 15 which were at least to some extent used.
8. It is effectively common ground that such costs order as I make will not affect the special costs order made in respect of the cross-vesting application on 6 May 2014, the strike out application on 29 July 2014, and the reopening application in or about July 2015.
9. The remaining matter which requires attention is related to what I have said about the tender bundle and Dr Coulton's reports, and that is the late service of Dr Coulton's fourth report, which had the consequence of necessitating the adjournment of the hearing for two days while the defendants considered and prepared a response to it. As it seems to me, it can fairly be said that at least one day of the hearing was wasted due to the late service of Dr Coulton's fourth report, in circumstances where it was foreseeable for months that a revised position relying on different information would be required. Accordingly, it seems to me that the plaintiffs should be deprived of the costs of one day of the hearing.
10. It is one thing to deprive a successful plaintiff of costs of particular issues; but it is another to order the plaintiffs to pay the defendants' costs of those issues. In my view, the plaintiffs' delinquency in the respects to which I have referred does not reach the level required to justify ordering the plaintiff to pay the defendants' costs of those issues.

ORDERS

1. I will make directions as proposed by the defendants as follows. The Court directs that: 1. the plaintiffs within 14 days provide to the defendants a schedule setting out: 1. the names of those plaintiffs who claim damages in respect of the overpayment of ad valorem brokerage on share purchases during the inflationary period and attaching evidence supporting such claims such as contract notes; 2. the calculation of the plaintiff's claim for overpayment of ad valorem brokerage; and 3. the total amount claimed in respect of overpayment of ad valorem brokerage for each of the plaintiffs in the schedule; 1. the defendants serve on the plaintiffs within 21 days after receipt of such schedule, draft short minutes of final orders in the proceedings; and 2. the proceedings be adjourned to 28 April 2017 at 9.45am before me for short minutes.

Endnotes

1. In the matter of HIH Insurance Ltd [2016] NSWSC 482.
2. See Amcus Pty Limited v Hurst Rentals Pty Limited (No 2) [2010] NSWSC 239 at [14]-[22].

Amendments 10 April 2017 - Typographic errors [6] and [26] and reformatted. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 April 2017