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MISSTATEMENT OR
UNTRUE STATEMEN

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• A misstatement or an untrue statement is


one which is misleading in the form and
context in which it has included in a
prospectus. A prospectus shall also be
deemed to have untrue statement, if
omission of any matter from it is calculated
to mislead those who act on the faith of
the prospectus. [Sec. 65]

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• In other words, a prospectus is said to be


‘misleading prospectus' in the following
cases: -
• (i) where a prospectus includes a
statement which is untrue in the form and
context in which it is included.
• (ii) where a prospectus omits any matter
which is calculated to mislead those who
act on the faith of the prospectus.

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CONSEQUENCES OF
/REMEDIES FOR
MISSTATEMENT

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• If a prospectus contains misstatement or omits


material facts, it will give rise to many
consequences. The aggrieved allottee of the
shares will have the "following remedies for
misstatement/untrue statement in the
prospectus: -
• (I) Remedies against the company.
• (II) Remedies against the directors, promoters
etc. and
• (1lI) Remedies against the experts.

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(1) Remedies against the company


• A company is liable for every
misstatement in its prospectus to any
person who on the faith of it subscribes for
shares in the company. Such subscriber is
entitled to the following remedies against
the company:-
• A. Rescission of the contract
• B. Damages for deceit
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• A. Rescission of the contract-


• A person who takes shares on the faith of a
misleading prospectus, may apply to the court
for the rescission of the contract. On rescission
the subscriber returns the shares allotted to him
and gets back his money with interest.
• The aggrieved subscriber can exercise the right
to rescind the contract, if the following conditions
are satisfied:-
• (i) The prospectus must have been issued by the
company or by' some one on behalf of the
company.
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• (ii) There must be an untrue or misleading


statement in the prospectus.
• For instance, the prospectus of a company
stated that it had paid dividends during the years
of economic depression. But it was not disclosed
that the dividends were paid out of the realized
capital profits whereas there were considerable
trading losses during those years. Held, the
prospectus was false in material particulars .
.[Rex. v. Kylsant, (1932) 1 KB 442]

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• (iii) The misstatement must relate to the material


fact.
• For instance, prospectus of a company stated
that two leading businessmen of repute have
agreed to become directors of the company. In
fact, they had only expressed their willingness to
help the company. Held, the prospectus
contained misstatement of fact and subscribers
could rescind the contract. [Metropolitan Coal
Consumers' Association, Re Karberge's Case,
(1892) 3 Ch 1]
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• (iv) The subscriber must have relied


on the statement in the prospectus
and it must have induced him to
subscribe for shares. If a person buys
shares in the open market, he has no
remedy against the company even
though he might have bought relying
the prospectus. [Week v. Gurney,
(1873) 6 LR 377 HL]

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• (v) The omission of material fact from


a prospectus must be misleading. If
omission of any material fact is not
calculated to mislead the subscriber,
he cannot rescind the contract.
• (vi) The right of rescission must be
exercised within a reasonable time,
before any proceedings to wind up
the company have been commenced.
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Loss of right of rescission

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• The right of rescission of contract is lost in the following


circumstances:
• (i) If the subscriber affirms or adopts the contract for
purchase of shares. For instance, if the subscriber
attempts to sell the shares allotted, receives dividends,
pays calls or attends general meeting; he is said to have
affirmed the contract.
• (ii) If the subscriber fails to exercise his right of
rescission within a reasonable time after becoming
aware of the misstatement in the prospectus. [ Shiromani
Sugar Mills Ltd. v. Debi Prasad, AIR (1950) All 50 B]

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• (iii) If the right of rescission is not


exercised· before commencement
of proceedings of winding up of
the company. [Shiromani Sugar
Mills Ltd. v. Debi Prasad)

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• B. Damages for deceit


• Any person who has been induced to take
shares by a fraudulent statement in a prospectus
can sue the company for damages. this right is
available under the Contract Act. He can claim
compensation of loss suffered by him from the
company. But this right can be availed of only,
when he rescinds the contract. The allotted
cannot, however, retain the shares well as claim
the damages. He can choose from anyone of the
two.
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(2) . Remedies Against the


Directors, Promoters etc. :

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• Every director, promoter and every


other person who authorized, the
issue of the prospectus containing
untrue statement (i.e. misleading
prospectus) is liable to compensate to
every person who subscribes for
shares on the faith of such
prospectus.

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• The liability of such persons may


be classified under the two heads:
• (A) Civil liability and
• (B) Criminal liability.

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• A. Civil Liability:
• The directors, promoters etc. have liability
towards every person who subscribes on the
faith of the misleading prospectus. In other
words, every aggrieved party has the following
remedies against the directors etc. :
• (1) Damages for misstatement.
• (2) Damages for omission .and
• (3) Damages under the general law.

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• 1. Damages for misstatement


• An aggrieved subscriber may sue
director, promoters etc. for payment
of loss or damages caused to him by
a misrepresentation in the prospectus
issued by them. [Sec. 62(1)] He can
initiate action for damages within
three years from the date of the
allotment of shares.
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• Defences available to directors etc.-


According to Section 62(2), a director will not
be liable for payment of compensation of
damages, if he proves any of the following:-
• (i) Withdrawal of consent before issue"-A
director will not be liable, if proves that he
had withdrawn the consent to become
director before the issue of the prospectus
and the prospectus was issued without his
consent.
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• (ii) Issued without knowledge-A


director will not be liable even, if
he proves that the prospectus
was issued without his knowledge
or consent and on becoming
aware he forthwith gave public
notice to that effect.

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• (iii) Withdrawal of consent after issue-


Sometimes a director may be unaware of
the misstatement made in the prospectus,
but he comes to know of the same after
issue of the prospectus. In such a case,
the director will not be liable if he proves
that on becoming aware of the
misstatement, he withdrew his consent by
a public notice before allotment of shares/
debentures.
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• (iv) Reasonable ground for belief-


A director shall not be liable, if he
proves that he had reasonable
ground to believe and did up to
the time of allotment believe that
the statement was true.

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• (v) Statement by expert-A director will not be


liable even where he proves that the
misstatement is correct or fair representation or
copy of the statement made by an expert. The
director also will have to prove that he had
reasonable ground to believe and did up to the
time of issue of the prospectus believe that the
expert was competent to make it and he had
given his consent and had not withdrawn that
consent before registration of prospectus.

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• (vi) A copy or extract of official


document-A director may escape
from his liability for misstatement,
if he proves that the statement is
a copy of or extract from an
official document or is based on
the statement made by an official
person. [Sec. 62(2)]
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2. Damages for omission


• Every prospectus must contain the matters and set out
reports specified by Schedule ll. However, if it omits
certain things, it may give rise to a right of an action for
damages to the subscriber for shares, who has suffered
the loss thereby. The right of such action may arise
even, if the omission does not make the prospectus false
or misleading. But such subscriber must prove that he
has suffered loss by reason of the omission of a matter
from the prospectus. It may be noted that the Act does
not expressly specify that the directors will be liable but
this seems to be implied from Section 56(4).

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• A director etc., however, will not be liable for omission of


any matter from the prospectus in any of the following
cases:-
• (i) If he proves that he had no knowledge of the matter
not disclosed.
• (ii) If he proves that the non-disclosure arose from an
honest mistake of fact on his part.
• (iii) If the non-compliance was immaterial in the opinion
of the Court.
• (iv) If in the opinion of the Court, the person sued ought
to be excused for non-compliance. [Sec. 56(4)]

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3. Damages under the general law


• Any subscriber who has been induced to take shares in
a company by fraudulent prospectus can sue the
persons responsible for issuing it. He can claim
compensation of loss sustained by him as a result of
fraud. But he will have to establish that he acted on the
faith of prospectus and was defrauded by it. This remedy
is available even in the following cases: -
• (i) where the aggrieved subscriber has lost the right of
rescission of contract as against the company due to
negligence.
• (ii) where the company goes into liquidation.

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• The directors etc., however will not be


liable for the compensation of loss, if
it is proved that they honestly
believed the statement to be true.

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• Illustration: The directors of a tramway company


obtained the permission of the authority (i.e. Board of
Trade) to run the horse trams and had also the right to
use steam power provided, the authority granted the
permission. The directors believed this permission would
be granted. They issued a prospectus stating that the
company had permission to use steam power although
permission was afterwards refused. A shareholder
brought on action against the directors for fraudulent
statement.
• Held, the directors were not liable for fraud because they
honestly believed what they stated in the prospectus to
be true.
• [Derry v. Peek, (1889) 14 AC 3371 31
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• B. Criminal Liability of
Directors or Promoters etc.

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• B. Criminal Liability of Directors or


Promoters etc.
• The criminal liability of directors etc. are as
follows:-
• 1.Criminal liability for misstatements in
prospectus- Where a prospectus issued
includes any untrue statement, every person
who authorised the issue of the prospectus shall
be punishable with imprisonment for a term
which may extend to two years or with fine which
may extend to Rs. fifty thousand or both.
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• But he will not be liable, if proves the


following:-
• (i)The statement was immaterial or
• (ii)He had reasonable ground to
believe, and did up to the time of the
issue of the prospectus believe, that
the statement was true.
• [Sec. 63(1) as amended in 2000]
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• 2. Criminal liability for inducing


persons to invest money -Sometimes, a
person fraudulently (i.e. either by
knowingly or knowingly 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 of the following agreements: -
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• (i) An agreement for acquiring, disposing of,


subscribing for, or underwriting shares/ debentures.
• (ii) An agreement (the purpose or pretended
purpose of which is) to secure a profit to any of the
parties from the yield of shares/debentures, or by
reference to fluctuations in the value of shares/
debentures.
• If a person enters into any of such agreements, he
shall be punishable with imprisonment for a term
which may extend to five years, or with fine which
may extend to Rs. one lakh or both. [Sec. 68 as
amended in 2000]
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III. Remedies Against Experts

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• An expert who has given his consent to issue


the prospectus (under Sec. 58) containing
untrue statement made by him, shall be liable to
every subscriber who takes shares on faith of his
statement. The aggrieved subscriber is entitled
to claim the following from the expert:-
• (i) Damages under the general law, e.g., the
Contract Act.
• (ii) Damages under Section 62.

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• An expert may escape from his liability on any of the


following grounds:-
• (i) Withdrawal of consent before
• (ii) withdrawal of consent after (before allotment of
shares)
• (iii) Reasonable ground for belief

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Thank You

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