A Detailed Study On Civil And Criminal Liability For False And Misleading Statements Ina Prospectus

Key takeaways

• A prospectus is a document that invites the potential investors to subscribe for a company's shares and debt obligations.
• According to the Companies Act, certain individuals are liable and subject to punishment for any inaccuracies discovered in a company's prospectus.
• Criminal Liability: Every person who permits the release of a prospectus containing false and misleading statements shall be liable under section 447 of the Companies Act of 2013.

A prospectus is a crucial component of a company. A prospectus is a document that invites potential investors to subscribe for a company's shares and debt obligations. Consequently, it should include accurate and complete material information, and no material fact should be withheld.

Mis-statements in prospectus

The information that the public relies on to subscribe for or purchase a company's securities is contained in a prospectus. If there are any inaccuracies, there will be significant repercussions. False and misleading statements, also known as Mis-statements in the prospectus are any statements that are made in the prospectus that are untrue or deceptive. A misstatement is any inclusion or exclusion of information that could lead the general public astray. The prospectus will be judged to be a prospectus with an inaccurate statement if a matter that is significant enough has been left out and is likely to mislead the public.

There have been instances when questions about representation for upcoming events in a company have been raised. A mere assertion that something will be done or will occur in the future does not constitute a representation of fact capable of giving rise to misstatement liability. It requires a misstatement of an established truth in order to be used. If a representation was accurate only at the time the prospectus was released and not at the time of allotment, it would trigger the liability. A prospectus's description of the people who will serve as directors is a significant statement, and if it's inaccurate, everyone who subscribed based on that belief is in theory allowed to withdraw.

Criminal liability for Mis-statements in prospectus

Every person who permits the release of a prospectus shall be liable under section 447 of the Companies Act of 2013 if the prospectus contains any statement that is false or misleading, or if the inclusion or omission of any matter is likely to cause misrepresentation.

Nothing in this section applies to a person who can demonstrate that the statement or omission was irrelevant or that he had good reason to believe—and did believe—that the statement was accurate or that the inclusion or omission was required at the time the prospectus was released.

Punishment for wrongfully getting people to invest money

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

Remedy

Every person who authorised the issue is punished with a fine up to Rs. 50,000 or with imprisonment for up to 2 years, or with both, if a prospectus contains any untrue statements.

Anyone who intentionally and fraudulently makes any misstatements in the prospectus to persuade people to invest money in the company faces a punishment of up to five years in prison, a fine of up to Rs. 1,000,000, or both.

Civil Liability for mis-statement in prospectus

Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—

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

(b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;

(c) is a promoter of the company;

(d) has authorised the issue of the prospectus; and

(e) is an expert referred to in sub-section (5) of section 26,

shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

(3) Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in sub-section (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

Remedy

An aggrieved shareholder who purchased shares by placing reliance on the misleading prospectus has:

Remedies Against the Company

The aggrieved shareholder has two remedies against the company. They are

• Rescission of the Contract: If a prospectus contained false information, the buyer of the shares could cancel the agreement (cancel the contract). He is entitled to rescission regardless of whether the false statement was made on purpose or not. He must provide the company his shares in exchange. His name will thereafter be struck from the list of members.

The company will reimburse him for the money he paid. The requirements for making a revocation claim are as follows:

• There must be an untrue statement.
• The misstatement must be material to the contract of issuing shares. It should not be a mere expression.
• The shareholders must have relied on the untrue statement.
• The statement must have induced the shareholder to purchase the shares.
• The shareholder must apply for rescission within a reasonable time and before the liquidation of the company.
• The shareholder should not have affirmed the contract for purchase of shares.

Damages for fraud: Following the cancellation of the contract, the aggrieved shareholder may sue the company for damages. He must demonstrate that the false statement was made on purpose.

Remedies against the Promoters, Directors, Experts, and Persons authorized the issue of the Prospectus

Damages for Misstatement: The directors, promoters, experts, and anyone who approved the prospectus's release are obligated to pay the offended shareholder any losses or damages he may sustain as a result of the false statement.

Damages for Non-disclosure of Material Facts: If a material fact has been omitted from the prospectus,

• the person responsible for the issue shall be fined up to Rs.50,000 and
• the aggrieved can recover damages from the persons responsible for the issue.

Conclusion

While creating a prospectus, sufficient caution and judgment must be exercised. Before being released to the general public, the prospectus must be examined for any errors or anomalies. According to the Companies Act, certain individuals are liable and subject to punishment for any inaccuracies discovered in a company's prospectus. Because the prospectus is used by the general public to make investment decisions, its integrity must be upheld.