Liability for Misstatement in Prospectus and Available Remedies
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.
