Liability for Misstatement in Prospectus and Available Remedies
Mis-statement in prospectus Remedies available on mis-statement in prospectus
LIABILITY
FOR
MISSTATEMENT
IN
THE
PROSPECTUS
•
Those
who
issue prospectus
holding out
to
the public the great
advantages
which
will accrue
to
persons
who
will take shares
in
a proposed
undertaking,
and
inviting
the to
take
shares on the
faith of
the representations therein contained, are
bound to state
everything
with
strict and scrupulous
accuracy and
not only
to
abstain from
stating
as
fact
that
which is
not so,
but to
omit
no
one
fact within their knowledge, the existence
of which
might
in
any degree
affect
the nature
or
extent and quality
of
the
privileges
and
advantages which
the
prospectus
holds as
inducement
to take
shares.
25
LIABILITY
FOR
MISSTATEMENT
IN
THE
PROSPECTUS
1.) CIVIL
LIABILITY
•
AGAINST THE
COMPANY
▫
TO
RESCIND THE
CONTRACT
▫
TO
CLAIM THE
DAMAGES
•
AGAINST THE
DIRECTORS,
PROMOTERS AND
EXPERTS
▫
COMPENSATION
▫
DAMAGES
▫
DAMAGES UNDER GENERAL
LAW
2.) CRIMINAL
LIABILITY
26
WHO
CAN BE
SUED?
•
The
company
•
Every
director
•
Every
person whose name appeared in the prospectus as a proposed
director
•
Every
promoter
•
Every
person who authorised the issue
of
prospectus
•
An
ex
p
ert
(
a
n
en
g
ine
e
r
,
a
charter
e
d
ac
c
o
u
ntan
t
,
a
co
m
pa
n
y
secretary,
a cost accountant,
etc.)
ONUS OF
PROOF
•
An allottee
must
prove
that:
•
The
misrepresentation was
of
fact;
•
It was in respect of material
fact;
•
He acted
on
the misrepresentation;
and
•
He has
suffered
damages in
consequence.
27
CIVIL
L
I
ABILI
T
Y
FOR
M
I
S
S
T
A
TEMENTS
IN
PROSPECTUS
1.Where
a person
has subscribed for securities of
a
company acting on
any
statement included,
or
the inclusion or omission
of
any
matter,
in
the
prospectus which is misleading and has sustained any loss
or
damage as
a
consequence thereof, the company and every person
who—
•
a.
is
a director of the company
at
the
time
of the issue of the
prospectus;
•
b.
has authorised
himself to
be
named and is named
in
the prospectus
as
a
director of the
company,
or
has
agreed to become such
director,
either
immediately
or after
an
interval of
time;
•
c.
is
a
promoter
of the
company;
•
d.
has authorised the issue of the prospectus;
and
•
e.
is an expert referred
to in
sub-section (
5
) of section 26, shall, without
prejudice
to
any punishment
to
which any person
may
be
liable under
section
36, be
liable
to
pay
compensation
to
every person
who
has sustained
such loss or
damage.
28
Contd…..
2.
No
person shall
be
liable under sub-section (
1
), if
he
proves—
•
a.
that, having consented to become a director
of
the
company,
he
withdrew his consent before the issue
of
the prospectus, and that it
was issued without
his
authority
or
consent;
or
•
b.
that the prospectus was issued without his knowledge
or
consent,
and that
on
becoming aware
of
its issue,
he
forthwith gave a
reasonable public notice that it was issued without his knowledge
or
consent.
3.
Notwithstanding anything contained in this section, where it
is
proved that a prospectus
has
been issued with intent to defraud
the
applicants for the securities
of
a company
or
any
other person
or for
any fraudulent purpose,
every
person referred to
in
subsection
(
1
)
shall
be
personally responsible, without any limitation
of
liability,
for
all
or
any
of
the losses
or
damages that
may
have been incurred
by
any person who subscribed to the securities
on
the basis
of
such
prospectus.
29
REMEDIES AGAINST THE
COMPANY
1
.)
Rec
e
ssion
o
f
the
c
o
ntrac
t
:
T
h
e
ri
g
ht
to
res
c
ind
the
co
n
t
ract
is
available if
he
proves the
following:
Prospectus was issued
by or on
behalf
of
the
company.
Statement
must
be
untrue.
Statement
must
be
material
misrepresentation.
The misrepresentation must have induced the shareholders to rely
on
the statement in
applying
for
shares.
Misrepresentation
must
be
of
the
facts
and
not
of
law(
expression
of
opinion).
That
he
has taken action promptly to rescind the
contract.
2.)
Right
of
action for damages for deceit:
This remedy is available
even after
the
company has gone into
liquidation
only if following
conditions are satisfied:
Person who issued the prospectus knew that statement was
false.
That person was authorised to issue the
prospectus.
That the allottee has
suffered
the loss
due
to
misrepresentation.
30
Arun
Verma
(c)
Plai
n
t
i
f
f
has
to
3.)
Damages
under
General
Law:
establish
the
following:
There
was
a fraudulent
misstatement.
False
representation
related to material
facts.
31
Arun
Verma
(c)
REMEDIES AGAINST
THE
DIRECTORS,
PROMOTERS
AND
EXPERTS
1.)
Compensation:
The liability consists
in
paying
damages by
way
of
compensation to the aggrieved
party.
The compensation payable will
be the
difference
between
the
price
paid for
shares and their value
at
the
date they are allotted to
the
subscriber.
2.)
Damages for non compliance
with
section 26:
The
remedy is to recover damages and
not of
recession.
Defences of
Directors, Promoters
and
Experts:
•
They can escape the
liability for
damages if
they
prove
the
following:
They withdrew
the
consent before the prospectus
was
issued.
Issued without
the
knowledge.
Reasonable ground
for
belief.
32
C
RIMI
NAL
L
I
A
B
I
L
ITY
PROSPECTUS
•
Where
a
prospectus,
issued,
circulated
or
distributed under this
Chapter,
includes
any
statement which
is
untrue or misleading
in form or
context
in which
it
is
included
or where
any
inclusion
or
omission
of any
matter
is
likely
to
mislead, every
person who
authorizes
the issue of such
prospectus shall
be
liable under section
447.
Imprisonment
for
a
term
which
may
not
be
less
than
six
months but which
may extend to 10 years; or
Amount
not
less than the
amount
involved
in
fraud
but
it
may extend to
three
times
the
amount of
fraud;
or
both
imprisonment
and
fine.
•
Provided
that nothing in
this
section
shall
apply
to a
person
if
he proves
that
such
statement
or
omission was immaterial
or
that
he
had
reasonable
grounds to
believe,
and did up to
the
time
of issue of the
prospectus believe,
that
the statement was
true or the inclusion or
omission was
necessary.
33
FOR
MISS
T
A
T
E
MENTS
IN
Those who issue prospectuses to the public must provide accurate information, and if there are misstatements, there are legal remedies available such as civil liability against the company, directors, promoters, and experts. Any person who has suffered damages due to misleading information in a prospectus can claim compensation from those responsible. The liability extends to directors, promoters, and experts mentioned in the prospectus.
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Mis-statement in prospectus Remedies available on mis-statement in prospectus
25 LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting the to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature or extent and quality of the privileges and advantages which the prospectus holds as inducement to take shares.
26 LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS 1.) CIVILLIABILITY AGAINST THECOMPANY TO RESCIND THECONTRACT TO CLAIM THEDAMAGES AGAINST THE DIRECTORS, PROMOTERS ANDEXPERTS COMPENSATION DAMAGES DAMAGES UNDER GENERALLAW 2.) CRIMINALLIABILITY
27 WHO CAN BE SUED? The company Every director Every person whose name appeared in the prospectus as a proposed director Every promoter Every person who authorised the issue of prospectus An expert ( an engineer, a chartered accountant, a company secretary, a cost accountant, etc.) ONUS OFPROOF An allottee must prove that: The misrepresentation was of fact; It was in respect of material fact; He acted on the misrepresentation; and He has suffered damages in consequence.
28 CIVIL LIABILITY FOR MISSTATEMENTS PROSPECTUS 1.Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every personwho a. is a director of the company at the time of the issue of theprospectus; b. has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval oftime; c. is a promoter of the company; d. has authorised the issue of the prospectus;and e. is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage. IN
29 Contd .. 2. No person shall be liable under sub-section (1), if he proves a. that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or b. that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. 3. Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in subsection (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
30 Arun Verma (c) REMEDIES AGAINST THECOMPANY 1.) Recession of the contract: The right to rescind the contract is available if he proves the following: Prospectus was issued by or on behalf of the company. Statement must be untrue. Statement must be material misrepresentation. The misrepresentation must have induced the shareholders to rely on the statement in applying for shares. Misrepresentation must be of the facts and not of law( expression of opinion). That he has taken action promptly to rescind the contract. 2.) Right of action for damages for deceit: This remedy is available even after the company has gone into liquidation only if following conditions are satisfied: Person who issued the prospectus knew that statement was false. That person was authorised to issue the prospectus. That the allottee has suffered the loss due to misrepresentation.
31 Arun Verma (c) REMEDIES AGAINST THE DIRECTORS, PROMOTERS AND EXPERTS 1.) Compensation: The liability consists in paying damages by way of compensation to the aggrieved party. The compensation payable will be the difference between the price paid for shares and their value at the date they are allotted to the subscriber. 2.) Damages for non compliance with section 26: The remedy is to recover damages and not of recession. 3.) Damages under General Law: establish the following: There was a fraudulent misstatement. False representation related to material facts. Plaintiff has to
32 Defences of Directors, Promoters and Experts: They can escape the liability for damages if they prove the following: They withdrew the consent before the prospectus was issued. Issued without the knowledge. Reasonable ground for belief.
33 FOR MISSTATEMENTS IN CRIMINAL LIABILITY PROSPECTUS Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447. Imprisonment for a term which may not be less than six months but which may extend to 10 years; or Amount not less than the amount involved in fraud but it may extend to three times the amount of fraud; or both imprisonment and fine. Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.
