Company Law - Liability for a mis-statement in a Prospectus

by KOMAL DAVE on MAY 25, 2008 When any prospectus is issued by the company, then it is basically to invite people to purchase their share.

Now, it is the duty of the company to see that the statements mentioned in the prospectus are of true nature. As, prospectus is a soul of the company, it is the duty of the co. to prepare such prospectus with complete due care. Also, when any prospectus is made the co. is bound to mention every detail regarding the co. in its prospectus. Omission of single fact also may mislead the investors. Preparing a prospectus is of a great responsibility. Thus, the company, director or a promoter is liable if any of the statement mentioned in the prospectus is of untrue nature. This paper work basically deals with the civil liability of a company, director and the promoter with respect to the prospectus issued, if there is any misleading statement is drawn in it. By various judgments and authorities I have tried to prove that the civil liability is very strict and if any of the investors is aggrieved by such prospectus, Court is ready to provide them protection under this section. So, this project deals with the Remedies against the co., Director, Experts and Promoters Liability. So, this is what my project deals with.

MIS-STATEMENTS IN THE PROSPECTUS (S. 62) [CIVIL LIABILITY]

Every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public.Section 62 was first enacted in England in the Directors Liability Act, 1890, which was subsequently replaced by section 43 of Companies Act, 1948. The section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every person who subscribes for any shares of debentures on the faith of the prospectus for any loss or damage he may have suffered

by reason of any untrue statement made in the prospectus. These would include Directors of the company, Promoters, or even the company. Thus, this section deals with the cases of misstatements of facts in a prospectus. It is immaterial for the purpose of this section whether the Director sees the prospectus or not; it is enough that he authorizes its issue. The effect of Section 62 is not to alter the tortuous nature of the acts in respect of which there is to be liability but, to render it easier to establish liability against the Directors in a common law action of deceit by raising certain legal presumptions against them. Thus, this provision is an effective remedy to the deceived shareholders. This section is meant to tighten up the duties of directors and others who are in connection with the prospectus. So, this section provides statutory civil liability for untrue statement. Misstatement means a falsehood or concealment or an ambiguity or an exaggeration all of these have the potential to mislead a prospective investor in the company. The term untrue statement or misstatement is used in the broader sense. So, an untrue statement means a statement in fact untrue, not a statement in the belief of the Directors untrue. It includes not only false statements but also statements which produce a wrong impression of actual facts. Conditions for invoking Section. 62: 1) 2) 3) 4) 5) The company had issued a prospectus inviting persons to subscribe for its shares An untrue statement was included in the prospectus. The person who is claiming for the compensation had subscribed for the shares Such person has subscribed for the shares or debentures relying upon the untrue Such person has sustained a loss or damage after having subscribed for the

or debentures.

or debentures offered by the prospectus. statement contained in the prospectus. shares or debentures.

Persons liable under Section.62: 1) Every director holding the office at the time of the issue of the prospectus.

2) 3) 4)

Every person named in the prospectus as a director or a proposed director, if he Every promoter of the company as defined in sub-section (6) (a) of this section. Every other person who has authorized the issue of prospectus.

has consented to include his name in the prospectus as such.

Defenses to escape from liability: 1) Withdrawal of consent: The director will not be liable if he had withdrawn his consent to become a director before the issue of the prospectus and it was issued without his authority or consent. Reasonable public notice must be given of withdrawal of consent. 2) Issue without knowledge: The director can escape from his liability if he proves that the prospectus was issued without his knowledge and when he became aware about it, and then he gave a public notice for it. Some of the principal newspapers is not enough, it should be all newspapers in which the prospectus was advertised and with same frequency too. But, I dont agree with this statement as it is very difficult to advertise in all the newspapers, and it may cause huge expenses too. 3) Withdrawal of the consent after the issue of the prospectus but before allotment: When the director becomes aware about such misstatement in the prospectus, after the issue of the prospectus but before the allotment, then he can withdraw his consent and can give a public notice for it. 4) Reasonable ground for belief: The director shall be protected if he can show that he had such reasonable ground to believe, which he did up to the time of allotment. Here, showing honesty is not enough, as one has to go beyond the principle of honesty. 5) Statement of expert: If any statement is made by the expert, then director can always contended the fact that he had a reasonable ground to believe that such statements made were made under competent authority, and he did believe such statement to be true till the time of allotment. Even for public official document, the same rule shall apply.

REMEDIES AGAINST THE DIRECTOR:

1)

Damages for Fraudulent Misrepresentation:

In Contract Law, Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing the party into the contract. The misrepresentation should relate to a material fact. Where it is represented that something will happen or be done in future, this does not amount to a representation of fact. The person who has been allotted the share may bring an action for fraudulent misrepresentation. Now, a director who was aware that a prospectus was being issued to the public, and if that person did not read the prospectus and did not withdraw his consent, is very much responsible for the contents of the prospectus. In certain cases, where the representation which are true at the time of issue of prospectus become false before the allotment is made. In such cases, the applicant should be informed about the changed circumstances. Lord Hewart C.J. in one of his judgments pointed out that, As a normal business seeking development when money is really being asked to feed and supply an ambitious gamble, is merely deceit. The argument is not that in this or that particular this prospectus was untrue; the argument is that its whole purpose and effect were to deceive. P.P.S. Gogna states that It may be noted that the liability of these persons (it includes promoters, directors or other persons) is for a mere untrue statement in the prospectus, and it is not necessary that such a statement should be made with an intention to deceive the investors. Thus, the investor can claim compensation for any untrue statement in the prospectus without proving any fraud or intention to deceive. However, in Taxmann its stated, There must be an intention to defraud and that is to be proved by him.

When those who have made a misrepresentation wish to resist the claim, the onus is upon them to show that notice of the misrepresentation was given to and received by the person whose claim they are residing