Prospectus : misleading of prospectus, liabilities and defence in misleading of

prospectus

1|Page
Table of contents
Sr no. Topic Page no.
1. Introduction 5
2. Literature review 6
3. Research Objectives, 7 to 8
Questions, Outcomes,
Methodology and
Chapterisation

4. Research findings 9 to 13
1. Explaining misleading
of prospectus with the
help of case laws.

2. What are the liabilities

which may arise on
the misrepresentation
of a material fact in a
prospectus?

3. What can be used as a

defence in misleading
of a prospectus?

5. Conclusion 14
6. Bibliography 15

2|Page
1.Introduction
A prospectus is a reflection of the company. As per section 2(70) it means any document
prescribed or issued as a prospectus and includes any notice, circular, advertisement or any other
documents which invite offers from the public for the subscription or purchase of any securities
of a body corporate.

This current paper deals with the misleading of prospectus, its liabilities and the defence in
misleading of prospectus.

Prospectus is an extremely important document for investors as they totally rely upon the
information presented in the prospectus before investing in a company and believe that
information to be true and make their decision based on the prospectus.

According to section 34(1) a statement included in a prospectus shall be deemed to be untrue if

the statement is misleading or if there is any inclusion or omission of information which is likely
to mislead.

Misleading prospectus is an untrue prospectus which does not hold validity and cheats the
investors. Care should be taken that while framing the prospectus the information and statements
about the company should be totally true and valid.

On the other hand reading and understanding the prospectus of a company is the primary and
basic responsibility of everyone who authorizes the issue of the company. Everyone should not
only read the prospectus but also judge the prospectus as to whether it is true or not.

3|Page
2.Literature review
Paper title Name of author Propositions Citations
Taxmann’s Dr G.K Kapoor The textbook is very Taxmann’s Company
Company Law and comprehensive and Law and Practice- A
Dr Sanjay Dhamija
Practice – a is dealing with comprehensive text book
comprehensive Companies Act on Companies Act 2013.
textbook on 2013. My paper It is the 22nd edition.
Companies Act talks about the
It is referred on
2013 misleading of
http://www.taxmann.com.
prospectus, the
liabilities and the
defence with regard
to the misleading of
prospectus.

4|Page
3. RESEARCH OBJECTIVES, QUESTIONS, OUTCOME,
METHODOLOGY AND CHAPTERIZATION
3.1 Objectives
1. To understand the provisions of the Companies Act 2013
2. To analyse the meaning of prospectus under Companies act.
3. To understand what misleading of prospectus is and to understand what are the liabilities
for the same.
4. To know what the defences are for the misleading of prospectus.
5. To analyze various case laws and the statutory provisions relating to the Companies Act
2013.

3.2. Outcome
This research paper talks about the prospectus and the misleading of prospectus, its liabilities and
the defence in regard to the misleading of the prospectus.
.There has been various analysis of its provisions. paper will help to understand such scope,
object and interpretations and also highlight some case laws relating to the misleading of
prospectus, its liabilities and the defence for the misleading of the prospectus of the Companies
Act 2013 after carefully examining the provisions of the Act.

3.3 Research methodology

This paper is written according to the Bluebook (20th edition) citation. For research purposes,
analysed data from secondary sources like books, articles and essays have been taken to
understand and comprehend the meaning and provisions of prospectus, the misleading of
prospectus, its liabilities and its defence regarding the misleading of the prospectus. Important
legal authorities like the Companies Act, 2013 and various case laws have also been referred
regarding the same.

3.4. Chapterization
The paper includes five chapters analysing the meaning of prospectus, the misleading of
prospectus, its liabilities and the defence regarding the misleading of the prospectus.

➢ The first chapter introduces the nature and scope of the paper.

➢ The second chapter includes the literature review with the cons and pros of the various
articles referred for the paper.

➢ The third chapter gives the information about the research objective, outcome, question and
methodology.

5|Page
➢ The fourth chapter analyses the research question in details like the principle, requirements
and object of the section, the scope of the term prospectus, the misleading of a prospectus, its
liabilities and the defence available in case of misleading of prospectus.

➢ The fifth chapter provides with conclusion and suggestions.

➢ The sixth chapter includes Bibliography.

3.5 Research questions

The following are the research questions which will be dealt with in my paper:

1. Explaining misleading of prospectus with the help of case laws.

2. What are the liabilities which may arise on the misrepresentation of a material fact in a
prospectus?

3. What can be used as a defence in misleading of a prospectus?

6|Page
4. Research findings

Explaining misleading of prospectus with the help of case laws.

In regard to consider a prospectus as fraudulent it is not necessary that there should be an

element of false representation in it. The suppression of material facts even if everything
written in the prospectus is true leads to a misleading prospectus. To judge its effect it
should be read as a whole. It is not necessarily enough if the prospectus refers to the
contracts and puts the intending shareholder upon enquiry as to their contents. It is said
that sometimes half the truth is no better than a fully false statement.
In the case M.K. Sreenivasan, In re [1944] 14 Comp. Cas. 193 (Mad.) 1 the prospectus
gave an estimate of the profits to be earned by the company from acquisition of interest
of the accused in T Ltd and did not disclose that under the agreement with T Ltd the
accused had no interest in T Ltd that could be assigned and also suppressed the fact that
the accused were in arrears in making payment of instalment to T Ltd and for this default
the company could cancel their contract.
The Madras high court held that was a case of suppression of material facts. The
reference to the assignment of the interest in the agreement with T Ltd was on the face of
the prospectus itself a half truth intended to deceive and not better than a downright
falsehood. In the light of the situation the failure to disclose that the accused were in
arrears with their payment and that the agreement might be cancelled for that reason, was
also intended to deceive and amounted to a deliberate suppression of material facts.

In the Sundaram Finance Service Ltd v Grandtrust Finance Ltd. 2 On the basis of
representation of accused that shares of company would be offered for sale to public by
certain date complainant purchased shares of company and an agreement had also been
entered into between complainant and accused with regard to same but three days before

1
Gluckstein v. Barnes [1900] AC 240 (HL).
2
[2003] 42 SCL 89 (Mad).

7|Page
 that date, without knowledge of complainant, accused entered into supplementary
agreement where date as agreed stood altered as date to be decided by sponsor in his sole
discretion it was held that there was an element of cheating at time of representation and
there was sufficient ground for magistrate to take cognizance of offence as against
accused.

In Rex v. Kylsant3 all the statements included in the prospectus issued by the company
were literally true. One of the statements disclosed the rates of dividends paid for a
number of years. But the dividends had been paid out of the realised capital profits and
not the trading profits. The material fact was not disclosed. It was held that the prospectus
is false in concealing material facts and Lord Kylsant, the chairman and the managing
director who was aware that it was false was held guilty of fraud.

In the case Peek v. Gurney4 it was held that withholding of facts should be such that if not
stated it makes that which is stated absolutely false. Mere silence cannot be a mere
foundation for setting aside the allotment of shares.

In Progressive Aluminium ltd v. Registrar of companies 5 claiming experience of the

promoters as the experience of the company was held as not misrepresentation.
The prospectus stated that the company was a large construction company engaged in
construction for over two and half decades.it was a profit and dividend making company.
The fact of the matter was that the promoters of the company were the partners of a firm
called progressive engineering corporation and it was through their experience that the
company claimed had it acquired the experience in a particular field. The Andhra Pradesh
High Court held that the partners of the firm who were the petitioners of the company did
have the necessary experience in the given field over two and half decades and the
statement made in the prospectus could not be held as untrue as it did not have any mala
fide intentions of fraud upon the subscribers. It suffered the most as wanting in
clarification that the experience claimed was that of the persons manning the partnership

3
Rex v. Kylsant [1932] 1 KB, 422.
4
Peek v. Gurney [1873] LR 6 (HL) 377.
5
[1997] 26 CLA 277 A.P.

8|Page
 firm and not the firm itself. Omission of such clarification could not be treated as
rendering nay credibility to the substance of the statement as it was a matter of ordinary
prudence that the experience of a body corporate was always that of the persons manning
the body corporation and not of the body corporate itself.

What are the liabilities which may arise on the misrepresentation of a material fact in a
prospectus?

According to section 35(1) it states that where a person has subscribed for securities of a
company acting on any statement which is included or it refers to the inclusion or omission
of any matter in the prospectus which is misleading and has sustained any loss or damage as
a consequence of that, the company and every person who:

1. Is a director of the company at the time of issue of the prospectus

2. Has authorised his own self to be names and is named in prospectus as the director of a
company or has agreed to become such a director either immediately or after an interval
of time
3. Is a promoter of a company
4. Issue of prospectus is authorised by him
5. Is an expert referred to in 26(5)
In the case Ritika Awasty v. Hassad Netherlands BV 6 the appellant was the promoter of a
company and was a party to the share purchase agreement by which the shares of a
company were sold with an intent of fraud to the respondent. It was held by the Delhi
High Court that the award passes by Arbitral Tribunal imposing liability upon the
appellant and her husband to pay the damages to the respondent were justified.

The points mentioned above relate to civic liability.

There is a criminal liability also for the same.

6
[2016] 73 taxmann.com 204 (Delhi)

9|Page
 According to section 34 when a prospectus which is issued, distributed or circulated
includes any information which is false or misleading in context or the form in which it is
included or where there is any kind of inclusion or omission of any matter which is likely
to mislead. Any person who will authorise the issue of such a misleading prospectus shall
be punished with imprisonment for at least for a term of six months but which may
extend to a term of ten years. There will also be a fine which will not be less than the
amount which is involved in the fraud. It may also extend to thrice the amount which is in
consideration in the fraud.

There is a liability under section 36 also. It has been described below.

Section 36 provides that any person who makes a false or a misleading statement
knowingly or in a reckless manner or any person who has concealed the material facts to
make the other person enter into or to offer to enter into a specific agreement.
All this shall be served with a punishment of imprisonment for a time period which will
not be less than six months but it may extend to ten years. There may also be a fine which
shall not be less than the amount involved in the fraud but it may extend to thrice the
amount of the amount involved in the fraud.
There are certain agreements which are covered under section 36. They are as follows:
1. Any agreement done for or with a motive to acquire, dispose, subscribe or underwrite
the securities
2. Any agreement which has taken place for the intent or the pretended aim of securing
a profit to any of the parties from the yield of securities or by referring to the
fluctuations regarding the value of the securities.
3. Any agreement entered into for or with a view to obtain credit facilities from any
bank or any financial institution.

10 | P a g e
What can be used as a defence in misleading of a prospectus?

There are situations where the person who has authorised the prospectus out for subscription may
be innocent and may have unknowingly included misleading information or may have skipped a
portion of information. In these cases they have a defence which they can present in the court.
The following are the defences which can be used:

According to section 250 the defence of due diligence can be used where the person who
authorised the prospectus can show that all the relevant and required inquiries were made for the
formation of the prospectus and there was no material omission during while preparing it.

According to section 251 a person can use the defence of reasonable reliance of statement and
getting the wrong information. In this case the person has to prove that the information which is
misleading was given to that person by some other person and he had reliable grounds to rely
upon the information given to him by the third person.

According to section 252 a person can use the defence of reliance on the information and
statement in the view of misleading or any fraudulent act by any other person. If the first person
can prove that he had relied on the information which was presented to him by the second person
and the second person was a competent source and his words could be relied on.

According to section 253 a person can use the defence of reliance regarding public official
statements in respect of false and misleading statements. A person can speak in in his defence if
he proves that the information was taken from a police officer or a public servant who gave it in
the curse of his duty or from the official public records. Such information provided by the officer
should prove to be false and it can be used in the defence of a person.

According to section 254 the defence of withdrawal of consent can be used by a person. It states
that when a person has withdrawn the information which was false or misleading from the
prospectus after becoming aware of the issue of the misleading information in the prospectus.
This is section 254(1).

Section 254(2) states that where a person can prove that the misleading information was not
included or was not included substantially in the content and form that the person has approved
of.

11 | P a g e
5.Conclusion

Through this paper the meaning of the word prospectus was understood in a better manner which
gives a clarity as to what happens when the prospectus fails to achieve its sole purpose of
communicating true and reliable information to the investors and the interested parties to invest
in the company. When the prospectus delivers false and wrong information or when some
important and relevant facts regarding the information are concealed from the general public it is
called as misleading of the prospectus. The facts are concealed or not told honestly so as to
defraud the general public which is not a honest and just thing to do. There are provisions which
were mentioned in my paper along with the liabilities related to the misleading of prospectus in
case such a case happens.

A prospectus is the mirror of a company. What a company is and how it will work and all the
things that are required for a person to invest in a company is mentioned in the prospectus. If all
that is not written up to the mark and is hidden from the public it is a matter of disgrace.

But there might be some cases wherein the information which is false may be due to a genuine
mistake which does not lie on the issuer of the prospectus but due to some other circumstances
which were unavoidable at the time of issuing. There are defences mentioned in my paper for the
same which protects the accused in such a case.

To conclude their may be various possibilities under which the prospectus fails to serve its
purpose due to lack of relevant information or false information. A rational judge has to consider
all the possibilities and think rationally to derive a conclusion regarding the same. Not every time
the accused purposely misleads, there are defences too but times are there when dishonest people
and cheats dominate and tend to issue such misleading prospectus and they should be punished
accordingly relating to the provisions mentioned in the Companies Act, 2013.

12 | P a g e
 6. Bibliography

Act
Companies act, 2013

Articles
Liability for forward looking statements – discussion of Indian law by Mini Gupta
Journal of the Indian law institute, Vol. 55, No. 2 (April-June 2013), pp. 228-240

Book
Taxmanns company law and practice – a comprehensive text book on companies act
2013.

Case laws
M.K. Sreenivasan, case
Sundaram Finance Service Ltd v Grandtrust Finance Ltd
Rex v. Kylsant
Peek v. Gurney
Progressive Aluminium ltd v. Registrar of companies
Ritika Awasty v. Hassad Netherlands BV

13 | P a g e