1.

Introduction:

According to section 2(36) of the Companies Act defines prospectus as

“A prospectus means any document described or issued as prospectus and includes any notice
or circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in, or debentures of, a
body corporate”.

Thus a prospectus is not merely an advertisement; it may be a circular or even a notice. A

document shall be called a prospectus if it satisfies two things:

1. It invites subscription to shares or debentures or invites deposits.

2. The aforesaid invitation is made to the public.

2. Mis-statements in a prospectus:

The prospective shareholders are entitled to true and faithful disclosures in the
prospectus. The persons issuing the prospectus are bound to state everything accurately and not
to omit material facts.

According to section 65(1) of the Companies Act, mis-statement in a prospectus means:

A statement included in the prospectus shall be deemed to be untrue, if the

statement is misleading in the form and context in which it is included.
Where the omission from prospectus of any matter is calculated to mislead,
the prospectus shall be deemed in respect of such omission, to be a prospectus
in which an untrue statement is included.

The expression ’included’ with reference to a prospectus means included in the

prospectus itself or contained in any report or memorandum appearing on the face thereof or by
reference incorporated therein or issued therewith. Thus to consider a prospectus as fraudulent, it
should not necessarily contain only false representation in it, but even suppression of material
facts may render it fraudulent. To judge its effect, it should be read as a whole.

A person who has applied for shares in a company, and has been allotted share has
certain remedies against the company and the person issuing the prospectus. But a buyer of
shares in an open market on the basis of the statement made in it has the right of action if the
statements are untrue or there is material omission from the prospectus.

A false statement or omission of material facts gives rise to civil as well as criminal liability.

3. Civil Liability:

As a prospectus invites a person to subscribe for any shares or debentures of a company, the
person liable to pay the compensation to these persons who subscribed for any shares or
debentures on the faith of the prospectus for any loss or damage caused for the untrue statement
under section 62 are:

(a) Every person who is a director of the company at the time of the issue of the
prospectus;

(b) Every person who has authorized himself to be named and is named in the prospectus
either as a director, or as having agreed to become a director, either immediately or after
an interval of time;

(c) Every person who is a promoter of the company; and

(d) Every person who has authorized the issue of the prospectus.

Thus an allottee of shares, who had applied for shareson the faith of a prospectus containing
untrue statement have remedies available against different persons, i.e., the company (under the
Indian Contract Act, 1872), directors, promoters and experts.

The civil liability for mis-statement of prospectus along with its remedies can be
explained with the help of the following chart.

CIVIL LIABILITY (Sec 62)

n
 4. Remedies against the company
a) Rescission: The effect of the rescission of the contract would be that the
shareholders would give up the shares and get back the money with interest.
He must take actions to rescind the contract:
Within a reasonable time;
Before proceedings to wind up the company have commenced;
Before he does anything which is inconsistent with the right to
repudiate.

The allottee can claim relief only when he can show that the mis-statement or omission was:

I. One of fact and not of law, nor an expression or opinion.

II. Material.
III. Acted upon him.

The remedy of rescission is available only to the original allottees.

b) Claim for damages: The second right is to sue for damages. For this the
allottee is to prove the following points along with the above mentioned
points:
Those acting on behalf of the company acted fraudulently.
Those purporting to act on behalf of the company were authorized
to act on its behalf.
That he suffered a loss or damages.

The allottee cannot both retain the shares and get damages from the company. In actual practice
suit for damages is rarely filed and only the rescission of the contract of allotment is claimed.

5. Remedies against the directors or promoters and experts

An allottee of shares may bring an action for deceit. There must be an intention to
defraud and that is to be proved by him. The directors will not be liable for the deceit if they
honestly believe the statements to be true but in case the allottee of the shares who has been
induced to take shares on the faith of an untrue statement of an expert in the prospectus is
entitled to claim from the experts:

Damages in respect of his own untrue statement, wrong report or

valuation made by him and contained in the prospectus.
Compensation u/s 62.
 6. Defences available to avoid civil liability:
There are certain defenses available to avoid civil liability. Under section 62(2) of this
Act says that no person shall be liable for civil action if they proves the following mentioned
points.

For the directors, promoters and other officers.

He withdrew his consent to act as director before the issue of the

prospectus, and it was issued without his authority or consent.
The issue was made without his knowledge or consent, and of
becoming aware of the issue he gave reasonable public notice of
that fact.
He withdrew the consent after the issue of the prospectus but
before allotment and public notice was given.
He had reasonable grounds to believe that the statement were
untrue and believed them to be true.
The statement was a correct and fair summary or copy of an
expert’s report.
The statement represented a fair copy or fair extracts from an
official document or from statement made by an official person.

For the expert

That he having given his consent, he withdrew it in his writing

before delivery of a copy of the prospectus for registration.
That after delivery of prospectus for registration and before
allotment, he became aware of the untrue statement, withdrew his
consent in writing, and gave reasonable public notice of the
withdrawal and his reasons.
That he was competent to make the statement, and believed on
reasonable grounds that it was true.
REFERENCE:

1. Taxmann’s Elements of Company Law, 2003.

2. A Textbook of Company Law, P.P.S. Gogna, 2009.
3. Internet.