Misstatement and Liability of Misstatement in a Prospectus
Misstatement and Liability of Misstatement in a Prospectus
1. What is a Prospectus?
A prospectus is a formal document issued by a company inviting the public to subscribe to its shares or debentures.
It contains material information about the company’s financial position, business prospects, management, and risks.
2. Meaning of Misstatement in a Prospectus
A misstatement refers to any untrue or misleading statement, or omission of material facts, in the prospectus.
It can be:
False statement: Incorrect or untrue facts.
Omission: Failure to disclose material information that investors need to make an informed decision.
3. Types of Misstatements
Fraudulent Misstatement: Intentional false statement or concealment of facts to deceive investors.
Negligent Misstatement: Statement made without reasonable care, resulting in misinformation.
Innocent Misstatement: Unintentional error or mistake without negligence or fraud.
4. Liability for Misstatement
Who can be held liable?
Every person who authorizes the issue of the prospectus, including:
Directors
Promoters
Experts (like auditors, solicitors)
Any other person who consented to the inclusion of their name or statement.
Liability under Companies Act, 2013 (Section 34 and 35):
Civil liability:
Investors who suffer loss due to misstatements can sue for compensation.
The company, directors, and others responsible can be held liable.
Criminal liability:
Willful or fraudulent misstatements may lead to criminal prosecution with fines and/or imprisonment.
5. Key Provisions
| Provision | Description |
|---|---|
| Section 34 | Punishment for fraudulently inducing persons to invest |
| Section 35 | Civil and criminal liability for misstatements in prospectus |
| Section 36 | Liability of experts for misstatements |
6. Defenses Available
Due diligence defense: If the accused can prove that they exercised due diligence and had reasonable grounds to believe that the statements were true, they may avoid liability.
7. Important Points
The burden of proof is on the plaintiff (investor) to show loss due to misstatement.
Liability is strict and joint for all responsible parties.
Misstatement in a prospectus affects investor confidence and can lead to heavy penalties.
8. Example Case
R v. Kylsant (1931): Company director held liable for false statements in prospectus.
Rajah of Chelmsford v. General Electric: Experts held liable for negligent statements.
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