A Project on

Scope of Untrue statement in prospectus under Companies

Act

SUBMITTED TO: - Mr. Shreyas Vyas

FACULTY, Corporate Law

SUBMITTED BY: -PANKAJ SHARMA

ROLL NO- 100 - ‘A’

SEMESTER V; BATCH XIV

22-09-2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY, UPARWARA,

NEW RAIPUR (C.G.) 493661

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 Acknowledgements
I would like to thank Mr. Sreyas Vyas, Faculty, Corporate Law, HNLU, for allotting me this
topic to work upon. And I would like to thank my parents, my friends and all those who helped
me. A heartily thank to the UNIVERSITY ADMINISTRATION for providing us with a good
WI-FI facility and Library without which my project would not have completed. THANK
YOU.

Pankaj Sharma

Semester V

Section A

Roll No. 100

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 CONTENTS

1. INTRODUCTION………………………….………………………….04
RESEARCH METHODOLOGY
OBJECTIVES OF STUDY
SCOPE OF STUDY
2. WHAT IS UNTRUE STATEMENT ………………………………...06
3. REMEDIES FOR UNTRUE STATEMENT:
CIVIL LIABILITY...…………………..……………………….…......09
4. CRIMINAL LIABILITY………………………………………….….12
5. DEFENSE AVAILABLE TO AVOID CRIMINAL LIABILITY….13
6. CONCLUSION……………………………….…………………….…15
7. BIBLIOGRAPHY…………………………….……………………….16

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 Introduction
At the point when prospectus is issued by any organization, it is chiefly to welcome open to
take shares or debentures of the organization or to store cash with the organization. It is the
obligation of the organization to see that the announcements made in the prospectus are of
genuine nature. However, in the event that there is any false data given in the prospectus and
people in general follows up on that, the Companies Act accommodates arrangements for the
people that who might be held at risk for misdirecting the general population.

The definition of prospectus in the Indian Companies Act 1956 was

“A prospectus 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 in or debentures of a body
corporate. "

Prospectus is one of the means by which he is informed of the soundness of the company’s
venture. This is the essential capacity of the prospectus. It is the obligation of the organization
to see that data given in the prospectus is valid. A portion of the essentials really taking shape
of the prospectus are:

Prospectus should be dated. This gives prima facie knowledge about the date of its publication
Prospectus to be registered. The registration of the prospectus has to be done with the Registrar
of Companies and the copy sent for the registration must be signed every person who is named
in the prospectus as a director or a proposed director of the company. It serves as a record of
the terms and conditions of the capital issue.

According to Sec-65, an announcement incorporated into an prospectus should be regarded to

be untrue if the announcement is deceiving in the structure and setting in which it is
incorporated. Where there is any exclusion of a matter from the prospectus and this is made to
misdirect, the prospectus is esteemed to be called as mislead prospectus in which an untrue
articulation is incorporated. In prospectus, as well as an announcement can be said to delude
regardless of the possibility that it is available in any report or update by reference fused in that
or issued therewith. The risk accumulates where any individual subscribes for any shares or
debentures on the confidence of the plan for any misfortune or harm he may have supported by
reason of untrue proclamation included in that.

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 REASERCH METHODOLOGY

The research project is descriptive and analytic in nature. The research project is mainly based
on secondary sources which include books and web pages. These methods do not include field
work and mainly depend on electronic resources. I owe my chief source of inspiration to our
respected faculty. The data base referred is not copied from any other source and is purely
authentic and genuine. All other authorities relied on have been duly mentioned in
‘Bibliography’ and various footnotes

Secondary and electronic sources have been largely used to gather information and data about
the topic. Books, dictionaries, websites and articles have also been referred.

OBJECTIVES OF STUDY

A. To study about the nature of untrue statement in prospectus.

B. To Examine the liability for mis-statement.

SCOPE OF STUDY

This project deals with the Scope of untrue statement in prospectus under Companies Act 1956
and 2013 and also deals with the civil and criminal liability. It gives us the idea about various
defences available against liability.

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 Chapter-1

Untrue statement

According to section 34(1) of the act, a statement included in a prospectus shall be deemed to
be untrue:

A) if the statement is misleading in the form or context in which it is included;

B) where any inclusion or omission from a prospectus of any matter is likely to mislead.

Thus, in regard to considering a prospectus as fraudulent, it is not necessary that there should
be false representation in it; even if every word included in the prospectus is true, the
suppression of material facts may render it fraudulent. to judge its effect, it should be read as a
whole. it is not necessarily enough if the prospectus refers to the contracts and put the intending
shareholder upon enquiry as to their contents. sometimes half a truth is no better than a
downright falsehood.1 In this case 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 it did not disclose
that under the agreement with T Ltd. The accused were in arrears in making payment of
instalment to T Ltd. and for this default the company could cancel their contract.

According to Section 65 of companies act, 1956, untrue statement in prospectus refers to those
statement, which enforce any unscrupulousness in among amount of shares or debentures and
where omission has present in between amount of various provisions. We can also say that
statement which executes any fact but in actual, it would not present exactly. Generally, this
statement has published for the reason of fraud and cheat with shareholders. However, if
company law board has found any untrue statement in company’s prospectus, then they will
penalize him during a period of time. If representation has executed, which will be done or
happens in future, cannot be treated as unscrupulous representation. Untrue statement only
based upon existing facts, which is executed in present. A representation should be true only
at the time of issue of prospectus, not at the time of allotment.

If shareholder accepts false statement as true statement, then he will not be deprived for the
remedy of their damages because they neglect an untrue statement and choose to go on next
step. On the other hand, if a statement in prospectus is correct and an applicant misled in read
any statement, then he will not be liable to get return of allotment money.

1
In re MK Sreenivasan (1944) 14 company cases 193 mad.

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Now we discuss about those person who will be liable for giving damages, which have been
given because of misstatements:

1. Every person, who is the Director of the company at the time of issue of prospectus, would
be liable for misstatement.

2. Every person who introduce to himself in the prospectus as a director or as a futuristic

director, are liable for misstatement.

3. Every person, who plays the role of promoter of company.

4. Who authorised the prospectus for issuing of shares.

5. An expert, who gives their expert advice on any matter of prospectus, is liable for
misstatement. However, he will liable only for that statement, which is consider after taking
his advice.

Under Sec.65 of the Companies Act, 1956 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)]

The Madras High court held that this was a case of Suppression of material facts. The reference
to this assignment of the interest in the agreement with T Ltd. Was on the face of the face of
prospectus itself a half truth intended to deceive and no better than a downright falsehood. In
the light of the circumstances, the failure to disclose that the accused were in arrears with their
payment and the agreement might be cancelled for that reason, was also intended to deceive
and amounted to a deliberate suppression of material facts.

In rex v/s. kylsant 2, 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, dividends had been paid not out of trading profits but out of realised capital profits. This
material fact was not disclosed. Held, that the prospectus was false in material particulars and

2
[1932] 1 K.B. 422

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Kylsant, the managing director and chairman, who knew that it was false, was held guilty of
fraud.

In Peek v. Gurney, A mere silence cannot be a sufficient foundation for setting aside the
allotment of shares. The withholding of facts should be such that if not stated it makes that
which is stated absolutely false.3 Lord Herschel in this case observed that “Fraud is proved
when it is shown that false representation has been made (a) knowingly, (b) without belief in
its truth, or, (c) recklessly, carelessly whether it be false or true.

In Progressive Aluminium Ltd. V. Registrar of Companies4, Again Claiming experience of the

promoters as the experience of the company was held as not a Mis-representation.

The prospectus stated that the company PCL was a large construction company engaged in the
construction activity for two and half decades and, was a profit making and dividend paying
company.

The fact of the matter was that the promoters of PCL were the partners of a firm called PEC
and it was through their experience that the company claimed that it had acquired experience
in a particular field.

The Andhra Pradesh High Court held that considering the fact that the partners of PEC, who
were the promoters of the petitioner company, did have the necessary experience in the field
spread over a period of two and a half decades, the statement made in the prospectus could not
be termed as untrue; it was not be smeared with any malafide intention of fraud upon the
subscribers. It suffered at the most as wanting in clarification that the experience claimed was
that of the persons manning the partnership firm and not of the firm itself. Omission of such
clarification could not be treated as rendering any credibility to the substratum of the statement
because it was a matter of ordinary prudence that the experience of a body corporate was always
that of the persons manning the body corporate and not of the body corporate itself.

3
[1873] LR 6 (HL) 377
4
[1997] 26 CLA 277 A.P.

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 Chapter-2

Remedies for Mis-statement in a prospectus

Civil Liability for Mis-Statement

Civil liability arises when there is a mis-statement or misrepresentation of fact in a prospectus

or an omission of material fact calculated to misled, and such a statement or omission has
induced a shareholder to buy shares on the faith of such statement. Every director or promoter
of a company, and all other persons including an expert who has authorized the issue of such
prospectus are liable for such misstatement or misrepresentation to the allottee of shares. The
shareholder who has purchased shares on the faith of such mis-statement has remedy in a civil
action against the company, as well as directors, promoters, experts etc. for any loss or damage
suffered by him. Every person authorizing the issue of prospectus has a primary responsibility
to see that the prospectus contains the true state of affairs of the company and does not give
any fraudulent picture to the public.

CIVIL LIABILITY FOR MIS STATEMENT [Section 35]

Liability Where any person subscribes for securities on the basis of misleading statements or
inclusion or omission of any matter in the prospectus resulting in any loss or damages, then the
company and every person who has authorized the issue of such prospectus or a director,
promoter and the other, whosoever is liable- shall have to compensate every person who has
sustained such loss or damage. Defence available No person shall be liable, if he proves that

(a) having consented to become a director of the company, he withdrew his consent before the
issue of the prospectus, and that it was issued without his authority or consent; or

b) the prospectus was issued without his knowledge or consent, and that on becoming aware
of its issue, he forthwith gave a reasonable public notice that it was issued without his
knowledge or consent.

 Remedies against the Company

For mis-statement or misrepresentation in a prospectus, the remedies available to a shareholder

against the company are: (i) rescission of the contract, and (ii) damages for deceit. Any person
who takes shares on the faith of statements contained in a prospectus, can apply to the Court

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for rescinding or setting aside the contract on the ground that the statements are false or
fraudulent or that some material information has been withheld.

 Remedies against Directors, Promoters etc.

Against the directors, promoters, experts and other persons, the remedies available are: (i)
damages for fraudulent misrepresentation under the general law; (ii) compensation for loss or
damage under Sec.62 of the Act; and (iii) damages or loss suffered due to omission of statement
under Sec.56 of the Act.

1. Under the General Law, a shareholder can hold persons responsible for the issue of a
prospectus (directors, promoters etc.) liable for damages for any fraudulent misrepresentation
or misstatement in the prospectus, if he was deceived by reason of acting on the faith of such
prospectus. But the directors (or promoters etc.) will not be held liable for such mis-statement,
if they honestly believed what they said in the prospectus to be true.

2. Compensation under Sec.62. If a person purchases shares or debentures of a company on

the faith of statements made in the prospectus and thereby suffers any damage or incurs loss,
he is entitled to claim compensation for the loss or damage in a civil action against the directors,
promoters, and all other persons who have authorized the issue of the prospectus [Sec.62(1)].

3. Damages under Sec.56. If there is an omission from the prospectus of any matter required
to be included by Sec.56, any subscriber for shares who has suffered loss due to the omission
can bring action for damages, even if such omission does not make the prospectus false or
misleading.

P.P.S. Gogna states that “It may be noted that the liability of these persons (it includes
promoters, directors or other persons) is for a mere untrue statement in the prospectus, and it
is not necessary that such a statement should be made with an intention to deceive the investors.
Thus, the investor can claim compensation for any untrue statement in the prospectus without
proving any fraud or intention to deceive.” However, in Taxmann it’s stated, “There must be
an intention to defraud and that is to be proved by him.”

The section 62 of the Companies Act, 1956 makes certain person liable to pay compensation
to every person who subscribes for any shares of debentures on the faith of the prospectus for
any loss or damage he may have suffered by reason of any untrue statement made in the

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prospectus. These would include Directors of the company, Promoters, or even the company.
Thus, this section deals with the cases of misstatements of facts in a prospectus. It is immaterial
for the purpose of this section whether the Director sees the prospectus or not; it is enough that
he authorizes its issue.

The effect of Section 62 is not to alter the tortuous nature of the acts in respect of which there
is to be liability but, to render it easier to establish liability against the Directors in a common
law action of deceit by raising certain legal presumptions against them. Thus, this provision is
an effective remedy to the deceived shareholders. This section is meant to tighten up the duties
of directors and others who are in connection with the prospectus. So, this section provides
statutory civil liability for ‘untrue statement’. Misstatement means a falsehood or concealment
or an ambiguity or an exaggeration – all of these have the potential to mislead a prospective
investor in the company. The term ‘untrue statement’ or ‘misstatement’ is used in the broader
sense. So, an ‘untrue statement’ means a statement in fact untrue, not a statement in the belief
of the Directors untrue. It includes not only false statements but also statements which produce
a wrong impression of actual facts.

Lord Macnaghten has rightly stated that, the prospectus must be taken as a whole for
“everybody knows that half a truth is no better than a downright falsehood”. A prospectus may
be fraudulent where its statements are true but on omitting something, it may create a false
impression. To render a prospectus fraudulent, it is not necessary that there should be a false
representation in it. The suppression of material fact is also fraudulent. If an omission of a
material fact is such that even if the omitted statement were included in the prospectus it would
not render untrue the statement made in the prospectus, such omission will not entitle the
purchaser to avoid the contract; nor will it make the persons responsible for the issue of the
prospectus liable in damages. Thus a prospectus must be looked from a point of view of
“Constitution of a Company”. So, in this regard, a company should never omit material facts
which are directly relevant for investing in the company. Omission of such material facts
should be handled strictly.

In Shiromani Sugar Mills Case, it was held that if the omission amounts to fraud of
misrepresentation, the contract may also be rescinded.

In the case of, Rajah of Nilumbur vs. Amirchand Dass, Here, in this case, a prospectus
contained a statement that the Government of Cochin have agreed to encourage the company
by giving a steady and continuous supply of timbers extracted from the state forests required

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for the purpose of the company at economical prices in order to encourage the establishment
of industries for which there are natural advantages in the State. Now, in reality, there was only
a conditional promise held out by the Government to give such steady supply of timber at
reasonable rates that the first year transaction should be found to be mutually satisfactory. It
was held that the statement made in the prospectus was false and misleading and the same did
not amount to any fair representation of what was stated by the Government. The Court also
held that “If the directors have taken the responsibility of asserting that there was an
unconditional promise given by the Cochin Government to supply timber steadily for the
purposes of the company, they must bear the consequences.” This case clearly shows that the
company suppressed the material fact for its own benefit. The condition mentioned by the
Government was not at all disclosed and with this any prudent man would believe that the
agreement with the Government is unconditional. So, the Court has completely justified the
case by stating that the statement made in the prospectus is misleading and not true.

CHAPTER-3

CRIMINAL LIABILITY FOR MIS STATEMENT

Liability according to sections 34 of the companies act, 2013, where any prospectus is issued
or circulated or distributed containing any statement

Which is untrue or misleading in form in which it is included, then every person who
authorizes the issue of such prospectus shall be liable for fraud. Defence available he can escape
his liability under this section if he can prove that:-

(a) statement was immaterial; or

(b) he had reasonable ground to believe the statement to be true.

Knowingly including an untrue statement in the prospectus or fraudulently inducing a person

to invest money in shares, gives rise to criminal liability on the part of the persons authorizing
the issue of such a prospectus. Section 63 and 68 of the Companies act provide for heavy
punishment for such criminal liability.

If a prospectus contains any untrue statement, every person who has authorized the issue of the
prospectus is punishable with imprisonment for a term which may extend to two years, or with
fine which may extend to five thousand rupees, or with both (sec. 63)

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The act has also laid down that if a person knowingly or recklessly makes any statement,
promise or forecast which is false, deceptive or misleading, or dishonestly conceals material
facts, and thereby induces or attempts to induce another person to subscribe to the shares of a
company, he 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 (sec.68).

The offence is compoundable under sec 621a. It has to be noted that under such cases, once the
prosecution establishes the falsity of statement in a prospectus signed by a director, etc., the
onus is shifted to the defendant of proving either that the statement was immaterial or that he
believed it to be true. An expert who has given the consent will not be deemed to be ipso facto
a person who authorized the issue of prospectus.

DEFENCES AVAILABLE TO AVOID CRIMINAL LIABILITY

The aforesaid criminal liability will not be attracted if the person proves that such statement or
omission was immaterial or that he had reasonable grounds to believe that the said statement
are true, and did up to the time of issue of the prospectus believe, that the statement was true
or the inclusion or omission was necessary.

Punishment for fraudulently inducing persons to invest money (section 36):

Any person who, either knowingly or recklessly makes any statement, promise or forecast
which is false, deceptive or misleading, or deliberately conceals any material facts, to induce
another person to enter into, or to offer to enter into,—

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any
of the parties from the yield of securities or by reference to fluctuations in the value of
securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution;

Shall be liable for action under section 447 i.e. Fraud.

Agreements covered under section 36 include:

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 A) Any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting securities
B) Any agreement, the purpose or the pretended purpose of which is to securea profit to
any of the parties from the yield od securities or by reference to fluctuations in the value
of securities
C) Any agreement for, or with a view to obtaining credit

ACTION BY AFFECTED PERSON (SECTION 37):

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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 Conclusions

Every person authorizing the issue of prospectus has a primary responsibility to see that the
prospectus contains the true state of affairs of the company and does not give any fraudulent
picture the public. There are also some defences available to the persons held liable for the
misstatement and they can evade the consequences if the conditions are satisfied. Hence it is
clear that ever one is held liable to the shareholders if any wrong is committed by the company
or any person working on behalf of the company. Law leaves no one if the wrong is proved
against them. Court is very strict in every minute thing also that it sees that if there is any
aggrieved person is there then shelter must be provided by the law. So, the shelter given by
the Court gives more rights to the shareholders and scares the co. not to do any illegal act which
may affect the shareholder. In many judgments Court has tried to come up with justice by
making company liable. Thus, the civil liability covers every aspect of wrong which is normally
done by the company. Thus, the remedies available against the company and the directors or
the promoters are quite enough for any shareholder to take help and gain compensation for any
loss. One can easily infer the fact from various cases that the Court has understood the
importance of money and has passed the judgments which are in favour of the shareholder.
Thus, it is very difficult for the company to escape from such civil and criminal liability.
Moreover, independent professionals shall also be held liable for action and proceeded against
under the Act.

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 Bibliography
 Bulchandani, K.R. Business Law for Management. Fourth Edition. Himalaya
Publishing House. Mumbai. 2006.
 Ghosh, K.M; Chandratre, K.R(DR.). Company Law. Thirteenth Edition. Vol. 1. Bharat
Law. Delhi.
 Sethna, M.J; Indian Company Law. Eleventh Edition. Vol. 1. Modern Law
Publications. Allahabad. 2005.
 Aggarwal, S.K; Singhal, K. Indian Corporate Laws. First Edition.
 Galgotia Publications Pvt. Delhi. 2006.. S. 62(2) of The Indian Companies Act, 1956,
provides defenses which are available to avoid the civil liability.
 Majumdar, A.K, Kapoor, G.K. Company Law Practice. Twelth Edition. Taxmann. New
Delhi. 2007.
 Bagrial, k, Ashok. Company Law. Vikas Publishing House Pvt. Ltd. Delhi.
 Aggarwal, S.K, Singhal,k. Indian Corporate Laws. First Edition.
 Bulchandani, K.R. Business Law for Management. Fourth Edition. Himalaya
Publishing House. Mumbai.

Webliography

 www.scribd.com
 www.indiankanoon.com
 http://hanumant.com/CompanyLaw-ByAvinash.html

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