Directors Duty in

Misrepresentation
of Prospectus
By
Kriti Singh
Vidhu Garg
Ankur Agnihotri
Samrdhi Ramawat
Prathamesh Bobade

CONTENTS
INTRODUCTION .............................................................................................................. 3
Who is a Director? ....................................................................................................... 3
What is a Prospectus? ................................................................................................ 4
Prospectus Laws in different countries ............................................................................... 6
INDIA ............................................................................................................................. 6
LiabiIities for Mis-statements in Prospectus ......................................................... 6
CANADA ....................................................................................................................... 6
Civil Liability for Misrepresentation ........................................................................ 7
AvaiIable Defences .................................................................................................. 9
Precautions ............................................................................................................... 9
UK ................................................................................................................................ 11
Avoidance of provision excluding liability for misrepresentation. ........................ 13
Case Study Approach to deal with misrepresentation ...................................................... 14
Effectiveness of Enforcement mechanism to deal with misrepresentation ....................... 22
Section 56 in The Companies Act, 1956 ................................................................ 22
Matters to be stated and reports to be set out in prospectus .......................... 22
Section 65 in the Companies Act, 1956 ................................................................. 23
Interpretation of provisions relating to prospectuses. ....................................... 23
Section 447 Punishment for fraud: ....................................................................... 24
Section 58 in the Companies Act, 1956 ................................................................. 24
Section 60(3) in the Companies Act, 1956............................................................. 25
Section 68 in the Companies Act, 1956 ................................................................. 25
Action by affected persons ....................................................................................... 25
Current Legal & Regulatory Measures ............................................................................. 26
Misrepresentation & Lawsuits .......................................................................................... 27
Remedies against Misrepresentation in Prospectus ............................................ 28

Civil Liability ................................................................................................................ 28

Right of Directors to Indemnity ........................................................................................ 30
Difference between False representation & Misstatement................................................ 30
Limitations on Right to Rescind for fraud or misrepresentation .......................... 31
Criminal liability for Misrepresentation .................................................................... 31
CONCLUSION ................................................................................................................ 32
Role of Legal Education & Awareness ................................................................... 32
The Golden Rule for Prospectus interpretation ................................................... 32
What constitutes an Offer to public? ..................................................................... 33
References ........................................................................................................................ 33

INTRODUCTION
Human beings have their hands and also possess the mental faculty. They are thus, capable
of taking right decisions and actions. But a company, not being the natural person, is devoid
of these essential elements and hence, it cannot take an action or a judgment itself. Rather
it requires a channel through which it can take actions and decisions.
The directors of the company thus serve as the required channel to accomplish the decisionmaking and action-taking task of the corporation. A company is an artificial being, invisible,
intangible and existing only in contemplation of law.
WHO IS A DIRECTOR?
Section 2(13) of the Companies Act, 1956 defines a director as including any person
occupying the position of a director by whatever name called. Thus, it is not the name b which
a person is called but the position he occupies and the functions and duties which he
discharges that determine whether in fact he is a director or not. The company itself and its
directors or the Board of directors are primary agents of the company to transact its operations.
The company act specifies where the company itself is to act both as principal and the agent
and where the Board of directors is to act on its behalf. In respect of the properties and assets
of the company, the directors or the Board of directors act as Trustees. Therefore, the
directors have different attributes in relation to the company depending upon the facts of each
case.
A private company is prohibited from inviting public to subscribe to its share capital or
debentures. It arranges its share capital primarily from friends and relatives. The shares are,
therefore, subscribed by a small number of persons who are known to the promoters or are
related to them by family connections. A public company may also decide not to invite public
to subscribe to its share capital and arrange its share capital privately like a private company.
However, a public company limited by shares, generally issues shares to the public for which
it has to issue a prospectus. Where it issues a prospectus, it has to follow the procedure as:

After the certificate of incorporation is obtained, the affairs of the company are taken over by
directors appointed in accordance with the provisions of law. They also elect one of their
members as the chairman of the Board of directors, if none is mentioned in the articles of
association. The directors attend to the following matters:1. Appointment of various expert agencies such as bankers, registrars to the issue,
auditors, secretary, etc.
2. Entering into underwriting contract, brokerage contracts, etc.
3. Making arrangements for the listing of shares on stock exchange(s).
4. Drafting a prospectus for the issue to the public.
The appointment of a banker is necessary as it has to receive the share application along
with application money.
WHAT IS A PROSPECTUS?
A prospectus, as per section 2(36), means any document described or issued as prospectus
and includes any notice, circular, advertisement or other document inviting deposits from the
public or inviting offers from the public for the subscription or purchase of any shares 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.
The contents of a prospectus include:

Date of issue of prospectus

Name and register office of the company

Consent of the Central Government for the present issue/compliance with the SEBI
guidelines

Voting rights, dividend, expenses on issue, etc.

Name of the stock exchange

Punishment for fictitious application

Refund of issue if 90% minimum subscription not received

Names and addresses of leading managers

Issue of allotment letter or refund within 10 weeks with interest

Date of opening and closing of issues

Credit rating from CRISIL (Credit Rating Information Services of India Limited)

Terms of Underwriting and Risk factors

Capital structure of the company

Terms and particulars of the issue

Restriction on transfer and transmission of shares

The table below summarizes position of consequences for misrepresentation in a

prospectus.

PROSPECTUS LAWS IN DIFFERENT COUNTRIES

Different countries have different laws related to directors role in misrepresentation in
prospectus. In India, Companies Act is followed. It not only defines directors duty in
passing a prospectus but aIso the liabilities on him/her for any misstatements.
INDIA
LIABIIITIES FOR MIS-STATEMENTS IN PROSPECTUS
Sec. 2(36) of the Companies Act defines a prospectus as, any document described or
issued as a prospectus and incIudes a notice, circular, advertisement or other document
inviting deposits from the pubIic or inviting offers from the pubIic for the subscription or
purchase of any shares in or debentures of a body corporate. Thus any document inviting
the pubIic to buy its shares or debentures comes under the definition of prospectus. It aIso
applies to advertisements inviting deposits from the pubIic.
Under Sec.65 of the Companies Act, a prospectus will be deemed to contain an untrue
statement, if:
1.

The statement included in the prospectus is misleading in the form or in the context in

which it is included; and

2.

There is an omission from the prospectus of any matter which is calculated to misled

[Sec.65(1)].

CANADA

Under Canadian securities laws, a prospectus qualifying securities must contain full, true
and plain disclosure of aII materiaI facts relating to the securities offered by the
prospectus.

Securities legislation in most Canadian jurisdictions provides, in effect, that when a

prospectus contains a misrepresentation, a purchaser has two possibIe remedies:
(i) Rescission: The right to rescind the purchasers purchase of the securities offered by
the prospectus and have the full purchase price returned by the company (or
underwriter); or
(ii) Damages: The right to claim damages from, among others, the CEO, CFO and each of
the directors of the company.
A director or officer of the company may have a defence to such a claim if the person
conducted such reasonable investigation as was necessary to provide reasonable grounds
for a belief that there had been no misrepresentation (i.e. the due diligence defense).
Before approving the prospectus, each director should:
(i) Carefully review the entire prospectus (incIuding documents incorporated by reference
therein) to satisfy him or herself as to its completeness and accuracy and the absence of
any misrepresentations; and
(ii) When relying on information provided by management, a board committee or a
third party, consider whether there are reasonable grounds for doing so and, if not,
conduct any investigations thought necessary in order to be comfortable with the accuracy
of the prospectus.

CIVIL LIABILITY FOR MISREPRESENTATION

MateriaI fact, when used in relation to securities issued or proposed to be issued, means
a fact that would reasonably be expected to have a significant effect on the market price or
value of the securities.
Misrepresentation is defined to mean:
an untrue statement of a materiaI fact, or
an omission to state a materiaI fact that is required to be stated, or

 an omission to state a materiaI fact that is necessary to be stated in order for a statement
not to be misleading.
Securities legislation in most Canadian jurisdictions provides, in effect, that when a
prospectus contains a misrepresentation, a purchaser has two possibIe remedies:
o Rescission: The right to rescind the purchasers purchase of the securities offered by
the prospectus and have the full purchase price returned by the company (or
underwriter); or
o Damages: The right to claim damages from, among others:
the company;
the CEO and CFO of the company that signed the prospectus;
each director of the company at the time the prospectus was filed (regardless of
whether the director signed the prospectus);
each expert who consents to the use of their report or opinion in the prospectus (to
the extent that the misrepresentation is based on the report or opinion of the expert);
any person or company who signed the prospectus as promoter; and
each agent/underwriter who signed the certificate in the prospectus.
Except to the extent that any of the foregoing persons can establish a successful defense
to the action against them, aII of the above persons are jointly liable to the purchaser in an
action for damages. This means that that the purchaser many recover damages fully from
any one defendant found to be jointly liable. Any defendant that is forced to pay such
damages may then make a claim for contribution from the other defendants found to be
jointly and severaIIy liable.
The principal element of damages that presumably would be claimed by a purchaser is the
diminution in value of the securities resulting from the misrepresentation in the

prospectus. GeneraIIy, a defendant is not liable for the portion of the diminution in value of
the securities that the defendant proves did not result from the misrepresentation, but this
may be difficult for a defendant to establish.
AVAIIABLE DEFENCES
If a prospectus contains a misrepresentation, there are no defences avaiIable to the
company unless the company can prove that the purchaser purchased the securities with
prior knowledge of the misrepresentation.
For persons other than the company, the following defences may be avaiIable:
Withdrawal of consent: If, before the purchase of securities by a purchaser, the person
becomes aware of a misrepresentation and withdraws his, her or its consent to the filing
of the prospectus and gives reasonable general notice that he, she or it has done so.
Due diligence: If the person conducted such reasonable investigation as was necessary
to provide reasonable grounds for a belief that there had been no misrepresentation.
Non-reliance: If the purchaser can be shown to have purchased the securities with prior
knowledge of the misrepresentation. [Note: To be successful in any action for rescission
or damages, it is not necessary for a purchaser to establish that the purchaser relied on
the misrepresentation, only that that the misrepresentation occurred; a purchaser is
deemed to have relied on the misrepresentation. However, this reliance is rebuttable if it
can be proven that the purchaser did have knowledge of the misrepresentation prior to
the purchase and purchased in any event.

PRECAUTIONS
The most important defence available to a person (other than the issuer) is the due
diligence defence.
Under corporate and common law:

 Every director and officer of a corporation in exercising their powers and discharging their
duties shaII exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances;
Directors must make informed decisions taking into account aII materiaI information
reasonably avaiIable in the circumstances;
Directors must take the necessary time to review key documents, or summaries thereof,
consider them and, when required, deliberate on them;
Directors must take an active and direct role in key matters and decisions; and
When relying on information provided by management, a board committee or a third
party, directors must consider and then conclude that they have reasonable grounds for
doing so.
In the context of approving a prospectus, at a minimum, each potentiaIIy liable person
should take the following steps before approving the prospectus in order to meet the
required standard of conduct to make the due diligence defense avaiIable to such person:
Carefully review the entire prospectus (incIuding documents incorporated by reference
therein) and consider the document as a whole to satisfy him or herself as to its
completeness and accuracy and the absence of any misrepresentations (note: consider
not only the facts presented but the degree of emphasis of the facts presented to ensure
that an accurate and balanced picture is presented); and
Conduct any investigations thought necessary in order to be comfortable with the
accuracy of the prospectus (i.e. be up to date on aII materiaI risks that the company
faces, ask questions when additional comfort is required, and obtain confirmations of
facts from appropriate persons such as management and outside advisors when
additional comfort is required).

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UK
Misrepresentation Act 1967 is an Act of the Parliament of the United Kingdom, which
regulates English contract law and unjust enrichment, so far as relevant for
misrepresentations.
Section 1
1. Removal of certain bars to rescission for innocent misrepresentation.
Where a person has entered into a contract after a misrepresentation has been made to
him, and
(a) the misrepresentation has become a term of the contract; or
(b) the contract has been performed;
or both, then, if otherwise he would be entitled to rescind the contract without aIIeging
fraud, he shaII be so entitled, subject to the provisions of this Act, notwithstanding the
matters mentioned in paragraphs (a) and (b) of this section.
Section 2(1)
2. Damages for misrepresentation.
(1) Where a person has entered into a contract after a misrepresentation has been made to
him by another party thereto and as a result thereof he has suffered loss, then, if the
person making the misrepresentation would be liable to damages in respect thereof had the
misrepresentation been made fraudulently, that person shaII be so liable notwithstanding
that the misrepresentation was not made fraudulently, unless he proves that he had
reasonable ground to believe and did believe up to the time the contract was made the
facts represented were true.
Royscot Trust Ltd v Rogerson [1991] 2 QB 297

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Section 2(2)
(2) Where a person has entered into a contract after a misrepresentation has been made to
him otherwise than fraudulently, and he would be entitled, by reason of the
misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising
out of the contract, that the contract ought to be or has been rescinded, the court or
arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of
opinion that it would be equitable to do so, having regard to the nature of the
misrepresentation and the loss that would be caused by it if the contract were upheld, as
well as to the loss that rescission would cause to the other party.
Section 2(3)
(3) Damages may be awarded against a person under subsection (2) of this section
whether or not he is liable to damages under subsection (1) thereof, but where he is so
liable any award under the said subsection (2) shaII be taken into account in assessing his
liability under the said subsection (1).

Section 2(4)
(4) This section does not entitle a person to be paid damages in respect of a
misrepresentation if the person has a right to redress under Part 4A of the Consumer
Protection from Unfair Trading Regulations 2008 (SI 2008/1277) in respect of the conduct
constituting the misrepresentation. [commencement: October 1, 2014]

Section 2(5)
(5) Subsection (4) does not prevent a debtor from bringing a claim under section 75(1) of
the Consumer Credit Act 1974 against a creditor under a debtor-creditor-supplier
agreement in a case where, but for subsection (4), the debtor would have a claim against
the supplier in respect of a misrepresentation (and, where section 75 of that Act would
otherwise apply, it accordingly applies as if the debtor had a claim against the supplier).
Section 3

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AVOIDANCE OF PROVISION EXCLUDING LIABILITY FOR MISREPRESENTATION.

If a contract contains a term which would exclude or restrict (a) any liability to which a
party to a contract may be subject by reason of any misrepresentation made by him before
the contract was made; or (b) any remedy avaiIable to another party to the contract by
reason of such a misrepresentation, that term shaII be of no effect except in so far as it
satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair
Contract Terms Act 1977; and it is for those claiming that the term satisfies that
requirement to show that it does.

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CASE STUDY APPROACH TO DEAL WITH MISREPRESENTATION

Civil and criminal liabilities follow if the promoters are found guilty of
misrepresentation. Section 34 of the Companies Act, 2013 deals with criminal liability for
misstatement it has the same liability as that of fraud under Section 447 of the Act.
As per Section 447 a person guilty of fraud shall be punishable with imprisonment for a
term ranging from six months to 10 years.
He is also liable to a fine, which can extend to three times the amount involved in the fraud.
In cases where the fraud involves public interest, the term of imprisonment shall not be less
than three years.
Since, in this case, an IPO public interest is involved, any misstatement in the prospectus
will lead to a minimum punishment of three years.
Section 35 of the Companies Act provides for civil liability for misstatement in prospectus.
Under Section 36, those liable to pay compensation include the directors of the company at
the time of the issue of the prospectus and the promoters, among others, to every person
who has sustained loss or damage.
According to Section 37 of the Act, those seeking compensation have to file a law suit.
A corporate law expert said any claim made by an investor or a shareholder will have to be
proved in a court of law. The compensation will be decided by the court bearing in mind the
facts and circumstances of the case, he added.
Though the Companies Act provides for affected shareholders or investors to file class
action law suit against the company, however the provision will not get invoked as this
section in the Act is yet to be notified.
There are following cases related to misrepresentation of a companys prospectus(a) DLF IPO caseThe adequacy of disclosures in the IPO prospectus pertaining to DLF Limited was called
into question in a series of investigations by the Securities and Exchange Board of India
(SEBI). The process culminated in SEBI passing an order on October 10, 2014 finding
that the disclosures were inadequate and thereby restraining DLF, its directors and CFO
from buying or selling securities or otherwise accessing the capital markets for a threeyear period.
The core issue pertains to whether DLF incorrectly failed to disclose certain companies
as its subsidiaries or associate companies in its IPO prospectus, thereby leading to a
violation of the relevant disclosure norms as well as the rules relating to fraudulent and
unfair trading.

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Judgement- In this case, the Securities Appellate Tribunal involving the capital market
regulator placed a ban on DLF Ltd and several of its directors. And they are going to
appeal against this ban in Supreme Court.
(b) Satyam caseSatyam scam has been the greatest scam in the history of corporate world of the India.
Satyam is the fourth largest IT Company in India. The CEO of the company Ramlinga
Raju has made a scam of around $2 billion. There has been a lot of controversy regarding
the misuse of the post by the CEO of the company. The fake number of jobs which was
shown by the CEO was an abuse of power and it was a clear violation of the prevailing
laws in India. This gives the impression that in India the power and position is what
matters and the people in the top position make a clear violation of the rights provided to
them. This scam has seriously affected the corporate bodies in India.
Judgement
a special court trying the SCSL accounting fraud probed by CBI, had sentenced Raju and
others to seven years rigorous imprisonment after it found them guilty of criminal
conspiracy as well as cheating, among other offences in the scam and also imposed a
Rs 5.5-crore fine on Raju and his brother Rama Raju.

(c) Madras High courtT.S. Rajagopala Iyer vs The South Indian Rubber Works
Case of changes of circumstances
1. The question of law which arises in this second appeal is whether the plaintiff is entitled to
revoke his application for shares in a company when, before the date of the allotment, the
prospectus of the company is changed in material particulars. The brief facts of the case in
so far as they are necessary are that the plaintiff had applied for shares in. the respondent
company on the basis of the prospectus issued on 20th January, 1937, containing, inter alia,
the names of several persons as directors and specifying the sum of Rs. 40,000 as the
minimum sum upon which the company would proceed to allotment of the shares. Before the
allotment took place, there were changes in the directorate, on which the plaintiff appellant
relied as one ground on which he. could withdraw his offer and decline allotment; the
minimum subscription required before allotment was reduced from Rs. 40,000 to Rs. 10,000
and it was this proceeding which put the appellant upon enquiry. This important change was
made on 9th May, 1937, and two days later an allotment letter was sent, to the plaintiff
appellant. On 26th May. he wrote to the company drawing their attention to this reduction
and asking for certain particulars regarding the meeting at which the change had been
effected. At the same time he drew the company's attention to an announcement made in

15

the press by some of the directors denying responsibility for the special resolution. Some
correspondence ensued and eventually on 1st June the plaintiff appellant repudiated his offer
to take the shares on the ground of the reduction of the minimum subscription. In his letter of
repudiation he made no mention of the change in the directorate. This was mentioned for the
first time in the plaint filed nearly two months later. It is clear, therefore, that the change in
the directorate did not operate on his mind so as to influence him in repudiating his offer. He
eventually brought this suit to recover the money paid with his application for shares, after
the respondent company had refused to make any refund. Both the lower Courts found
against the plaintiff.
2. As already mentioned, the change in the directorate found no place in the correspondence
immediately following the allotment and since it did not affect the plaintiff's mind at the time,
there is no necessity to discuss it. It is only necessary to consider whether the change in the
minimum subscription required was a material change in the prospectus which the plaintiff
could rely on in repudiating his offer to take shares. When one looks at the objects of the
company as disclosed in the prospectus, it is surprising that the directors could have
contemplated commencing business with such a ridiculously low figure as Rs. 10,000. They
proposed to erect a modern factory in which to manufacture motor tubes, cycle tyres and
tubes and other rubber goods required for vacuum brakes, etc., mills, printing presses,
electrical departments, rubber sheetings, toys, battery cases, rubber shoes, clothing and
various other articles. The annual working expenses are shown as nearly Rs. 80,000 while
the capital expenditure required was over one and a half lakhs and it requires very little
knowledge of the cost of modern plant and machinery to realise that Rs. 10,000 was an
absurd figure on which to proceed to the allotment of shares in such a company with such
an ambitious programme.
3. The principle involved is to be found in Anderson's case: In re. Scottish Petroleum Co.
(1881) L.R. 17 Ch.D. 373 which has been referred to by Sundaram Chetti, J., in the case
Venkataramiah v. Indian Industrial Bank, Ltd. (1929) M.W.N. 837. That was a case connected
with a change in the directorate, as was Anderson's case (1881) L.R. 17 Ch.D. 373, but the
principle applies equally to the facts of the present case. In dealing with the change of the
directorate in Anderson's case (1881) L.R. 17 Ch.D. 373, Malins, V.C., made the following
observation:
I do not think there, was dishonesty when the prospectus was Issued, because it was
believed that Mr. Gibson and Mr. Ross would act; but when the company found that these
gentlemen would not act, they were bound to issue a new prospectus containing other
names, and to inform those who had applied for shares that before the allotment was made
other directors had been appointed; and then it would be for the applicants for shares to say,
under those circumstances, whether they would adhere to their offer or would withdraw it.

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Sundaram Chetti, J., quoted the following passage from Lindley on Company Law:
If an application for shares is made on the faith of a statement which is true when made but
which is not true when the shares are allotted, the applicant may refuse to take them.
The learned advocate for the respondent company was anxious to resist any suggestion that
there had been misrepresentation but this is not the essence of the case. All that the plaintiff
appellant need show is that there has been a material change in the prospectus since he
made his offer and he is then entitled to decide that with this material change the prospectus
of the company are not sufficiently attractive to warrant him in subscribing his money.
Misrepresentation or fraud would seem to be of importance only regarding the remedies he
may have against guilty directors. In the present case he has brought this suit against the
company to recover the money paid and it is difficult to see on what satisfactory grounds the
trial Court could hold that the suit was not maintainable. I agree with Mr. T. V. Ramanatha
Aiyar, the learned advocate for the appellant, that there was a material change in the
prospectus and that his client was entitled to a refund.
4. An attempt has been made to show that the appellant was guilty of delay but as he was
acting with his father, with whom he formed a joint family, and his father lived elsewhere, the
obvious explanation is that the intervening time was occupied in consulting his father as to
what ought to be done.
5. In the result the appeal is allowed and the suit is decreed for the plaint amount together
with costs throughout and subsequent interest at six per cent.
6. Leave refused.
(d) Allahabad High CourtShiromani Sugar Mills Ltd. vs Debi Prasad on 20 February, 1950
Equivalent citations: AIR 1950 All 508
This and civil Revisions NOS. 122 to 154 of 1945 are applications in revision under Section
25, Small Cause Courts Act, against judgments passed by the Small Cause Court Judge,
Gorakhpur, in suits filed by the Official Liquidator of the Shiromani Sugar Mills Limited,
Khalilabad against a number of ex share-holders of the Shiromani Sugar Mills Ltd. for
allotment, first call and second-call moneys. There were as many suits as there are revisions;
they were all of similar nature and the same disputes were involved in all. They were
consolidated by the learned Small Cause Court Judge and tried together. He delivered one
judgment dismissing all the suits.

17

2. The Company which was a public limited Company was formed with a large number of
objects, the first and most important object being:
"To manufacture in India or abroad all kinds of sugar by up-to-date and latest scientific
method and machinery, and for this purpose to erect and construct a factory or factories at
one or several places in or outside India."
The defendants-opposite parties were all share-holders of the Company. Some of them did
not pay even the allotment money and others did not pay the first and second call moneys.
Consequently their shares were forfeited through resolutions passed by the Directors in three
meetings held on 14th June 1939, 23rd July 1939 and 16th October 1939. An order for the
winding up of the company was passed on 7th December 1941. The official liquidator then
instituted the suits to recover the balance of the allotment and first and second-call moneys.
The suits were contested by the opposite parties. The grounds with which we are
concerned in these applications were (1) that the original contract for the purchase of the
shares was procured by the promoters of the Company by fraudulent misrepresentation, (2)
that the promises held out to the opposite parties at the time of the purchase were not carried
out by the Company and consequently the opposite parties were justified in not making
further payment, (3) that the resolutions passed by the Directors allotting the shares to the
opposite parties were invalid because the Directors voting for the resolutions had ceased to
be Directors and (4) that the resolutions forfeiting the shares also were invalid for the same
reason. The learned Judge upheld all these contentions of the opposite parties and
dismissed the suits. In these applications the official liquidator challenges the learned Judge's
findings on these four points.
(e) Misrepresentation related to factEdgington vs FitzmauriceBrief Fact Summary. Defendants sought funding for a property and Plaintiff advanced
Defendants 1500 pounds. Defendants made several misstatements to Plaintiff. Plaintiff
sued defendant for deceit.
Synopsis of Rule of Law. In order to sustain an action for deceit, Plaintiff must first prove
that there was a statement as to facts where was false; and secondly, that it was false to
the knowledge of Defendants, or that they made it not caring whether it was true or false.
Lastly, when you have proved that the statement was false, you must further show that the
statement was wither the sole cause of Plaintiffs act, or materially contributed to his so
acting.

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Facts. Plaintiff advanced 1500 pounds for debentures of a society of which Defendants
were the directors and officers. To raise the funds, Defendants circulated a prospectus that
announced that they had acquired a valuable property subject to a half yearly payment of
500 pounds in redemption of a mortgage of 21,500 pounds. They also stated that they
would use to the money to complete alterations and additions to the buildings and purchase
their own horses and vans and to further develop the arrangements for the direct supply of
cheap fish. Those statements were impeached because: (1) they were framed to lead a
person to believe that the debentures would be a charge on the property of the company;
(2) it failed to mention a second mortgage on the property; (3) it failed to state that the
entire 21,500 pound mortgage was due in full on April 5, 1884; and, (4) that the real object
of the debentures was to pay off present company liabilities and that the company could not
complete its planned purchases of equipment as advertised. The trial court found for
Plaintiffs. Defendants appealed.
Issue. Are Defendants liable to Plaintiff for deceit?
Held. Yes. Judgment affirmed.
* In order to sustain an action for deceit, Plaintiff must first prove that there was a statement
as to facts where was false; and secondly, that it was false to the knowledge of
Defendants, or that they made it not caring whether it was true or false. Lastly, when you
have proved that the statement was false, you must further show that the statement was
wither the sole cause of Plaintiffs act, or materially contributed to his so acting.
* In this case Plaintiff alleged three misrepresentations. First, it was said that prospectus
contained an implied allegation that the mortgage for 21,500 pounds would not be called in
at once, but was payable by instalments. It does not appear to be clear that the statement
fraudulently made by Defendants. Secondly, it is said that the prospectus contained an
implied allegation that there was no other mortgage affecting the property except the
mortgage stated. The Court found that although there was an implied obligation, it was not
made dishonestly. If Plaintiffs case had rested on these two allegations, it would be too
uncertain for Plaintiff to succeed. However, Plaintiffs case is made out in the third
allegation. Defendant falsely stated how the money was to be spent. Defendant stated that
the money was to be used to complete the alterations and additions to the buildings, to
purchases horses and vans, and to develop the supply of fish. Defendants misstated the
objects for which the loan was wanted, the Court did not say knowing, but so recklessly as
to be fraudulent in the eye of the law.

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(f) Compensation under section 62Derry v PeekBrief Fact Summary. Plaintiff brought suit after it bought shares in Defendants company,
under the belief that Defendant would have the right to use steam power, as opposed to
other companies, which would not.
Synopsis of Rule of Law. Misrepresentation, alone, is not sufficient to prove deceit.
Facts. Plaintiff received a prospectus regarding the incorporation of Defendants company,
which highlighted that the company would have the right to use steam or mechanical
power. After receiving the prospectus, Plaintiff bought shares of the company, relying on
the allegations of the prospectus, and believing that the company had the absolute right to
use steam or mechanical power. The board of trade refused to allow steam or mechanical
power, and the company was wound up, unable to complete its work. Thereafter, Plaintiff
brought suit against Defendant for fraudulent misrepresentations. The trial judge dismissed
the action, after coming to the conclusion that the directors knew that the use of steam or
mechanical power was contingent on the board of trade and it was not unreasonable or
deceitful for them to rely on the board. On appeal, the dismissal was reversed, because the
court found that the Defendants may have reasonably believed the prospectus and,
because they did not have reasonable grounds for what they wrote in the prospectus, they
should be held liable for Plaintiffs reliance. Defendant appealed.
Issue. Whether it is deceit when a company forms a prospectus to solicit investors, which
later proves to be wrong?
Held. Reversed.
* The House of Lords reversed the judgment of the court of appeals, and reinstated the
judgment of the lower court. The court found this to be an action of deceit, under which the
establishment of misrepresentation alone is not enough to prove liability. In this case,
Plaintiff relied on the prospectus, which may have been misrepresentation, but Defendants
reasonably believed they could glean approval of the board of trade and should not be held
liable for their later failure to do so.
(g) Peek v GurneyA prospectus for an intended company was issued by promoters who were aware of the
disastrous liabilities of the business of Overend & Gurney which the company was to
purchase. The prospectus made no mention of a deed of arrangement under which those
liabilities were, in effect, to be transferred to the company. The appellant bought shares in

20

the company and, when it was wound up, he was declared liable as a contributory and had
to pay almost 100,000. He sought an indemnity against the directors, alleging
misrepresentation and concealment of facts by the directors in the prospectus.
Held: The action failed because he had not in fact relied on the prospectus but had
purchased the shares in the market. Lord Cairns expressed his agreement with the
observations of Lord Chelmsford and Lord Colonsay that mere silence could not be a
sufficient foundation for the proceedings: Mere non-disclosure of material facts, however
morally censurable, however that non-disclosure might be a ground in a proper proceeding
at a proper time for setting aside an allotment or a purchase of share, would in my opinion
form no ground for an action in the nature of an action for misrepresentation. There must, in
my opinion, be some active misstatement of fact, or, at all events, such a partial and
fragmentary statement of fact, as that the withholding of that which is not stated makes that
which is stated absolutely false.
(h) MISLEADING PROSPECTUS
Andrews v. Mock Ford
The plaintiff alleged that the defendant sent him a prospectus inviting him to buy shares in
the company, which the defendants knew would be a sham. The plaintiff did not subscribe
for the shares.
The prospectus eventually produced very scant subscription and the defendant caused a
telegram to be published in the local newspaper to the effect that they had struck a vein of
gold. This, they alleged, confirmed the statistics in the prospectus.
The plaintiff bought shares on this basis and eventually the company wound up.
The question here is had the prospectus misled the plaintiff?
It was held that the prospectus intended to induce the plaintiff both to subscribe for shares
initially and also to buy them in the market thereafter. The telegram was part of the
prospectus.
In this case, the function of the prospectus wasnt exhausted and the false telegram was
brought into play by the defendant to reflect back upon and countenance the false
statement in the prospectus
The purchaser of shares induced to buy shares by the mis-statement in the prospectus has
an action for damages in negligence. He has also an action for negligent mis-statement.

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EFFECTIVENESS OF ENFORCEMENT MECHANISM TO DEAL WITH MISREPRESENTATION

Companies Act defines a prospectus as, Any document described or issued as a prospectus
and includes a notice, 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 any document inviting the public to buy its shares or
debentures comes under the definition of prospectus.
SECTION 56 IN THE COMPANIES ACT, 1956
MATTERS TO BE STATED AND REPORTS TO BE SET OUT IN PROSPECTUS.
Every prospectus issued-by or on behalf of a company, or by or on behalf of any person
who is or has been engaged or interested in the formation of a company, shall state the
matters specified in Part I of Schedule II and set out the reports specified in Part II of that
Schedule; and the said Parts I and II shall have effect subject to the provisions contained in
Part III of that Schedule.
A condition requiring or binding an applicant for shares in or debentures of a company to
waive compliance with any of the requirements of this section, or purporting to affect him
with notice of any contract, document or matter not specifically referred to in the
prospectus, shall be void.
No one shall issue any form of application for shares in or debentures of a company, unless
the form is accompanied by memorandum containing such salient features or a prospectus
as may be prescribed which complies with the requirements of this section:
I.
Provided that a copy of the prospectus shall, on a request being made by any
person before the closing of the subscription list, be furnished to him:
II. Provided further that this sub- section shall not apply if it is shown that the form of
application was issued either-in connection with a bona fide invitation to a person to
enter into an underwriting agreement with respect to the shares or debentures; or in
relation to shares or debentures which were not offered to the public. If any person
acts in contravention of the provisions of this sub- section, he shall be punishable
with fine which may extend to five thousand rupees.
A director or other person responsible for the prospectus shall not incur any liability by
reason of any non- compliance with, or contravention of, any of the requirements of this
section, if As regards any matter not disclosed, he proves that he had no knowledge thereof; or
he proves that the non- compliance or contravention arose from an honest mistake
of fact on his part; or the non- compliance or contravention was in respect of matters

22

which, in the opinion of the Court dealing with the case 1 were immaterial], or was
otherwise such as ought, in the opinion of that Court, having regard to all the
circumstances of the case, reasonably to be excused: Provided that no director or
other person shall incur any liability in respect of the failure to include in a prospectus a statement with respect to the matters specified in clause 18 of Schedule II,
unless it is proved that he had knowledge of the matters not disclosed.
This section shall not apply to the issue to existing members or debenture holders of a company of a prospectus
or form of application relating to shares in or debentures of the company, whether an
applicant for shares or debentures will or will not have the right to renounce in favour
of other persons; or
to the issue of a prospectus or form of application relating to shares or debentures
which are, or are to be, in all respects uniform with shares or debentures previously
issued and for the time being dealt in or quoted on a recognised stock exchange;
but, subject as aforesaid, this section shall apply to a prospectus or a form of
application, whether issued on or with reference to the formation of a company or
subsequently.
Nothing in this section shall limit or diminish any liability which any person may incur
under the general law or under this Act apart from this section.

SECTION 65 IN THE COMPANIES ACT, 1956

INTERPRETATION OF PROVISIONS RELATING TO PROSPECTUSES.
1) For the purposes of the foregoing provisions of this PartI.
a statement included in a prospectus shall be deemed to be untrue, if the statement
is misleading in the form be untrue and context in which it is included; and
II. Where the omission from a 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.
2) For the purposes of sections 61, 62 and 63 and clause (a) of sub- section (1) of this
section, the expression" included" when used 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

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SECTION 447 PUNISHMENT FOR FRAUD:

The term fraud is a commonly used one, but the new law for company has a clear explanation
for the term fraud, which is explained below:
fraud in relation to affairs of a company or anybody corporate, includes any act, omission,
concealment of any fact or abuse of position committed by any person or any other person
with the connivance in any manner, with intent to deceive, to gain undue advantage from, or
to injure the interests of, the company or its shareholders or its creditors or any other person,
whether or not there is any wrongful gain or wrongful loss.
Interestingly the law also explains the terms any wrongful gain or wrongful loss, which runs
as under:
Wrongful gain means the gain by unlawful means of property to which the person gaining
is not legally entitled;
Wrongful loss means the loss by unlawful means of property to which the person losing is
legally entitled.
Thus, as per Section 447, any person who is found to be guilty of fraud, shall be punishable
with imprisonment for a term which shall not be less than six months but which may extend
to ten years and shall also be liable to fine which shall not be less than the amount involved
in the fraud, but which may extend to three times the amount involved in the fraud. Where
the fraud in question involves public interest, the term of imprisonment shall not be less than
three years

SECTION 58 IN THE COMPANIES ACT, 1956

Expert's consent to issue of prospectus containing statement by him. A prospectus inviting
persons to subscribe for shares in or debentures of a company and including a statement
purporting to be made by an expert shall not be issued, unless he has given his written consent to the issue thereof with the statement included in
the form and context in which it is included, and has not withdrawn such consent
before the delivery of a copy of the prospectus for registration; and
A statement that he has given and has not withdrawn his consent as aforesaid
appears in the prospectus.

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SECTION 60(3) IN THE COMPANIES ACT, 1956

The Registrar shall not register a prospectus unless the requirements of sections 55,
56, 57 and 58 and sub- sections (1) and (2) of this section have been complied with
and the prospectus is accompanied by the consent in writing of the person, if any,
named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of
the company or intended company, to act in that capacity.]

SECTION 68 IN THE COMPANIES ACT, 1956

Penalty for fraudulently inducing persons to invest money. Any person who, either by
knowingly or recklessly making any statement, promise or forecast which is false, deceptive
or misleading, or by any dishonest concealment of material facts, induces or attempts to
induce another person to enter into, or to offer to enter into any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting shares or debentures; or
any agreement the purpose or pretended purpose of which is to secure a profit to
any of the parties from the yield of shares or debentures, or by reference to
fluctuations in the value of shares or debentures; shall be punishable with
imprisonment for a term which may extend to five years, or with fine which may
extend to ten thousand rupees, or with both.

ACTION BY AFFECTED PERSONS

A suit may be filed or any other action may be taken under section 34 or section 35 or section
36 by any person, group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus.

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CURRENT LEGAL & REGULATORY MEASURES

As has already been made clear, that a company at any time shall not vary the terms of a
contract referred to in the prospectus or statement in lieu of prospectus except with the
approval arrived at during the general body meeting.
Any such omission from a prospectus which is instead required to be mentioned explicitly
according to the Section 56 and Schedule II shall imply that the director or any other
responsible for issuing the prospectus is liable to face the flak. The remedial measure
against the director may include:
1. A monetary fine not exceeding the amount of INR Fifty Thousand
2. In addition to this, the director or the official concerned may also incur a civil or
criminal liability for non-disclosure
However, in the event of omission to disclose the nature and extent of a directors or
promoters interest in the promotion of or property acquired for to be acquired by the
company, no director or other person shall incur liability unless it is proved that he had
knowledge of the matters which were left undisclosed.
It must be brought to notice of the interested readers that for mere omission, not being
deliberate falsity, the subscriber for shares or debentures has no right to rescind the
allotment nor any other remedy against the company. He can, however, claim damages for
loss suffered against the directors or other persons responsible for omission. In order to
succeed it has to be proved that he applied for shares or debentures on the faith of the
prospectus and would not have done so if the prospectus had complied with the provisions
of Section 56 of the Act.
Any person who has been induced to invest money in a company relying on a fraudulent
statement in the prospectus can sue the director or the person responsible for issuing it &
claim damages. In order to prove that the action committed by the company qualified as
fraud the aggrieved investor has to prove that the false representation was made by the
company:
1. In spite of having the knowledge of the original facts
2. Without belief in its truth
3. Recklessly whether it be false or true
Thus an action of reckless behavior without bothering to inquire the truth or false of it
qualifies as an action of fraud. The Companies Act, 1956 provides that a statement
included in the prospectus shall be deemed as untrue/fraudulent if the statement is
misleading in the form and content in which it is included. It also provides that where the

26

omission from a 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. Thus it would appear that the law ascribes a wider meaning to term fraud or
untrue statement.
Regarding liability for fraudulent misstatements in the prospectus four generalizations may
provide sufficient guidelines to proceed in an action for fraud or deceit, which are listed
below:
1. The aggrieved party has to prove that the person making the suggestion knew that
what was being stated in the prospectus was not true or did not believe that what
was being stated was true or is an active and straight forward concealment of some
pertinent fact. However, if a person making the statement honestly believes it to be
true he is not guilty of fraud even if the statement is not true.
2. The false representation must relate to some existing facts which are material to the
contract of purchasing shares
3. In order to succeed in an action for fraud in prospectus it is necessary that the
plaintiff should have taken the shares or debentures directly from the company by
allotment and not from any intermediary agency or open market. The implication of
this rule is that only the allottees can have remedy against the directors
4. In the absence of a contractual relationship a person who makes a statement owes
a duty of care to anyone whom he knows or has reasonable grounds for expecting
will rely on his statement, if he fails in that duty of care and the party which is misled
suffers loss, he shall be liable for negligence
MISREPRESENTATION & LAWSUITS
It ought to be reiterated that section 56 imposes liability for omissions which are required to
be disclosed in the prospectus whereas section 62 imposes liability for misstatements or
untrue statements.
The persons liable for misstatements are enumerated in Section 62(1) of the Act. Thus a
person who has subscribed for any shares or debentures on the faith of an untrue
statement in the prospectus and sustained any loss or damages may sue for compensation
all or any of the following:

27

The directors at the time of the issue

Persons named in the prospectus as present or future directors
The promoters
Persons who have authorized the issue of the prospectus

The burden of proof however lies on the allottee to show that he has been misled by the
misstatement in the prospectus and incurred loss. The misrepresentation should be in
respect of some material fact. What is a material statement of fact shall, however, depend
upon the circumstances of each case.
It should be stated that Section 62 provides no remedy against the company. Therefore,
action must be taken against persons falling within one of the categories stated above. But
where a person has subscribed for shares or debentures of a company relying on the
prospectus which contained an untrue or misleading but not fraudulent statement; he may
repudiate the contract and sue the company for the return of money paid to it. This remedy
is merely an ordinary contractual remedy available to any person who has been induced by
a misrepresentation to make a contract.
REMEDIES AGAINST MISREPRESENTATION IN PROSPECTUS
Besides damages for deceit & fraud the company may also be sued for damages provided
it is shown that the fraud was committed by the directors within the scope their authority i.e.
with the authority of the company. The company is also liable if the prospectus is issued by
the promoters and ratified by the Board which adopts the issue, for the prospectus is the
basis of the contract for share.
Thus the first remedy against the company is to rescind a contract and claim the money
back. The allottee, however must act within a reasonable time. He shall lose his right to
rescind if he attempts to sell the shares or attends a general meeting of the company or
received dividends from the company.
CIVIL LIABILITY
The inadequacy of action for damages for deceit came to light when in the House of Lords
decision in Derry vs. Peek case, and this remedy was found to be inadequate to protect the
interests of investors. It was realized that a common investor is hardly concerned whether
the misstatement in the prospectus was a deliberate falsehood or made by the directors in
good faith innocently. What he is concerned with is that he should be compensated for the
decision in Derry vs. Peek an Act called the Directors Liability Act, 1890 was passed in
England whereby the directors were made liable for misstatements in the prospectus
although they might have believed that the statement was substantially true. Subsequently,
this provision was incorporated in Section 43 of the English Companies Act, 1948 and a
corresponding provision to this effect is to be found in Section 62 of the Companies Act,
1956 in India.

28

The section provides that the directors, promoters and every other person who is
authorized to issue the prospectus of a company shall be liable to pay compensation to the
investor for any loss sustained by him due to untrue statement in the prospectus. The
liability of the directors or promoters is joint and several and they may recover contribution
from others who are guilty of misrepresentation.
However, Section 62 of the Companies Act provides that a person shall not be liable to pay
compensation for any misrepresentation in the prospectus in the following circumstances:
1. Withdrawal of consent: if he proves that having consented to become a director or
promoter he withdrew his consent before the issue of the prospectus and that it was
issued without his consent or authority
2. Without knowledge: A director may also escape liability if he proves that the
prospectus was issued without his knowledge or consent, and on becoming aware of
its issue, he promptly gave a public notice to that effect
3. Ignorance of untrue statement: A director may initially be ignorant about the
untrue statements made in the prospectus. But if after the issue of prospectus and
before allotment thereunder, he becomes aware of the untrue statement and
withdraws his consent by a reasonable public notice he shall not be liable
4. Has reasonable ground for belief: A director can also escape liability if he proves
that as regards every untrue statement not purporting to be made on the authority of
an expert or of a public official document or statement, he had reasonable ground to
believe and did up to the time of allocation of shares & debentures believe that the
statement was true. In order to claim exemption from liability on this ground, it is not
enough for the director to show that he acted honestly but he must go further and
prove that his honest belief was based on reasonable grounds.
5. Reliance on experts opinion: The director shall also be protected if he proves that
as regards the untrue statement purporting to be made by an expert: it was a correct
and fair representation of the statement therefore he had reasonable ground to
believe that the said expert was competent and that the expert had complied with
the provisions of Section 58 of the Act.
6. Statement based on public official document: The director shall not be liable if he
proves that as regards every untrue statement purporting to be a statement made by
an official person or from public official document, it was correct and fair extract from
the document

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RIGHT OF DIRECTORS TO INDEMNITY

Section 62(4) of the Companies Act provides that the directors and experts have a right to
indemnity and contribution where:
1. The prospectus names any person as director, or as having agreed to become a
director and he has not consented to become the director or has withdrawn his
consent before the issue of the prospectus and has not authorized or consented to
its issue
2. The consent of a person is required under Section 58 to the issue of the prospectus
and he either has not given that consent or has withdrawn it before the issue of the
prospectus
The directors of the company excluding those without whose knowledge or consent the
prospectus was issued and every other person who authorized the issue thereof shall be
liable to indemnify the person referred to in clause 1 or 2, as the case may be made liable
by reason of his name having been inserted in the prospectus or of the inclusion therein of
a statement purporting to be made by him as an expert as the case may be or in defending
himself against any suit or legal proceedings brought against him in respect thereof.
Section 62(5) further provides that every person who becomes liable to make any payment
by way of compensation for loss or damages through untrue statements in a prospectus
may recover contribution as in cases of contract from any other person who is sued
separately would have been liable in respect of the same loss unless the former person
was and the latter was not, guilty of fraudulent misrepresentation.
DIFFERENCE BETWEEN FALSE REPRESENTATION & MISSTATEMENT

From the foregoing discussion it is clear that false representation is something different
from mere misrepresentation. The former includes active assertion of facts which are
specifically known to be false and have been made deliberately to deceive. It also includes
within it active concealment of material facts. Generally speaking a mere non-disclosure
does not amount to false misrepresentation. Again mere silence is not fraud unless there is
duty to speak or silence is in itself equivalent to speech.
At times the prospectus may include an ambiguous statement capable of bearing two
meanings one of which is true while the other is untrue. In such a situation the subscriber
can recover if he entered into the contract relying on untrue part of the statement and the
company cannot take the plea that he ought to have put reliance on the true part of the
statement.

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LIMITATIONS ON RIGHT TO RESCIND FOR FRAUD OR MISREPRESENTATION

A contract induced by misrepresentation can be rescinded by the aggrieved subscribers.
However, such a contract shall be valid until it is rescinded. But the right to rescind is not
unlimited. It shall be lost in the following situations:
1. By Affirmation: if the allottee having the knowledge of misrepresentation affirms the
contract and does not rescind it, he would lose the right to rescind. The affirmation
may either be express or implied. Thus where on discovering the misrepresentation
the subscriber instead of rescinding the contract sells his shares or attends meetings
of the company or receives dividend or pays call, he shall be deemed to have
affirmed the contract thereby losing his right to rescind
2. Undue delay: Unreasonable delay in exercising the right to rescind the contract on
the basis of misstatement shall adversely affect the right of the subscriber
3. On commencement of winding up: The right to rescission is lost on
commencement of winding up of the company and shareholders shall not be
permitted to escape liability
CRIMINAL LIABILITY FOR MISREPRESENTATION
Apart from civil liability for misstatements in the prospectus, the company law also provides
for criminal liability under Section 63 of the Act. The section says that where prospectus
includes any untrue statement every person who has authorized the issue of the
prospectus shall be punishable with:
1. Imprisonment for a term which may exceed to two years
2. Fine which may extend to INR 50,000
3. Both imprisonment and fine
He shall however not be criminally liable if he proves that the statement was immaterial or
that he had a reasonable ground to believe that it was true. An expert who has given the
consent as required by Section 58, shall not be criminally liable for the purpose of Section
63.

31

CONCLUSION
ROLE OF LEGAL EDUCATION & AWARENESS
The current level of awareness amongst general public, managers and managers to be
happens to be alarmingly low as a major chunk of them remain oblivious of the provisions
in the Indian Law against any sort of misrepresentation or fraudulent information present in
the prospectus of a company and how the director of a company can be held
liable/accountable for all these misdeeds. With the low level of awareness it becomes
imperative for the managers to take the onus of ensuring that any such misrepresentation
or even an inkling of it does not leak out in the public domain which has the potential of
bringing disrepute to the company or its director.
This makes it imperative for the organizations to undertake sessions or talks where all the
issues which count as misrepresentation and their potential ramifications are discussed at
length. This is because the familiarity with these instances is going to help the managers
identify any such discrepancy which might creep up even though unintentionally in the final
version of the prospectus.
Help of legal experts who are well versed in this domain shall be solicited and disseminated
not just to manager level employees but each and every member of the organization so
that they are cognizant of the statutes and norms governing a prospectus. Some basic
information pertaining to what exactly constitutes a prospectus and what goes into it should
be known to every person occupying a managerial position in the company.

THE GOLDEN RULE FOR PROSPECTUS INTERPRETATION

The Golden Rule as regards the drafting of the prospectus was laid down in the leading case
New Brunswick and Canada Railway and Land Co. v. Muggeridge,1 as:

32

Only true nature of the companys venture shall be disclosed;

Strict and scrupulous accuracy shall be maintained in drafting prospectus as it invites
the public to take shares on the faith of the representations contained in the
prospectus;
In addition to the mandatory information required to be given as per Part I and Part II
of Schedule II of the Act, there must be voluntary disclosures of information as would
reasonably constitute a fair representation of facts for the public to act upon.

WHAT CONSTITUTES AN OFFER TO PUBLIC?

It is important to take a note in the definition of prospectus about the offer being made to the
public and about accepting deposits from public. Section 67 of the Act takes an insight into
the construction of references to offering shares or debentures to the public. The Act is clear
that an offer of shares to the companys shareholders cannot be termed an offer to the
public. It is necessary to understand the meaning of this expression in order to find out as
to what constitutes a prospectus. Where an invitation is made by the management of a
company to selected persons for subscription or purchase by less than 50 persons receiving
the offer or invitation, the shares or debentures and such invitation or offer is not calculated
directly or indirectly to be availed of by other persons, such invitation or offer shall not be
treated as an offer or invitation to the public. If a prospectus addressed to the general public,
or to a section of the public, is published, that no doubt constitutes an offer to the public, even
though none of the public come in; but possibly if this offer is made without any intention to
let the public take up any of the shares, it might be found as a fact that there was no real
offer to the public.

REFERENCES
1.
2.
3.
4.

33

Taxmanns Company Law and Practice by A. K. Majumdar and G. K. Kapoor

Central Law Agnecys Company Law by Dr. N.V. Paranjape
EBCs Company law by Avtar Singh
www.casebriefs.com