Section 34 Of Companies Act 2013: Misstatements In Prospectus
Updated: Oct 13, 2022
What is Section 34 of the Companies Act 2013?
Where a prospectus, issued, circulated, or distributed under this Chapter, includes any statement which isection-34-of-companies-act-2013-criminal-liability-for-misstatements-in-prospectuss untrue or misleading in form or context in which it is incorporated or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such Prospectus shall be liable under section 447: Punishment for fraud.
Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus belief, that the statement was true or the inclusion or omission was necessary.
In Layman's terms, this section deals with the legal proceedings against the misstatement in Prospectus.
Section 447:- Punishment for fraud Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, 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:
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Explanation:-For the purposes of this section—
(i) "fraud" in relation to affairs of a company or any body 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;
(ii) "wrongful gain" means the gain by unlawful means of property to which the person gaining is not legally entitled;
(iii) "wrongful loss" means the loss by unlawful means of property to which the person losing is legally entitled.
As per Section-34 of Companies Act 2013, whenever the Prospectus is issued, circulated, or distributed under Chapter-III (Prospectus and Allotment of Securities) of Companies Act, 2013, contains any statement which is untrue and misleading in any form or context or any inclusion or omission of any matter which likely to fool, every person shall be liable who authorizes the issue of such Prospectus under Section-447 (Liability for fraudulent conduct). Section-447 provides for punishment of fraud; it can be seen that misstatement in Prospectus is regarded as fraud. Thus, the person guilty of fraud shall be punishable with imprisonment for a term not 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 so as under Section-34.
A statement is considered to be untrue if it is false in the form or context in which it is contained. Omissions that usually mislead a person shall render the whole Prospectus false.
In Progressive Aluminium Ltd V. Registrar of Companies (1997), the company includes in its Prospectus that they had the experience of one and a half decades in its line of business. In actuality, it was not their experience rather an experience of partners of a firm which they had taken over. The court held that there was no malafide intention of the company behind such a statement. The statement made was not a misleading one, which would attract penal consequences.
Exceptions of Section 34
But there are certain situations when criminal liability does not arise. The exceptions to Sec-34 are as follows:- (a) If person prove that such statement or omission was immaterial, or (b) he had reasonable ground to believe or believed so, that such statement was true or inclusion or omission was necessary, up to the time of issue of the Prospectus.
Here, a question arises, "Who can sue under Section-34?" Under this section, any person or group of persons or any association of persons affected by a misleading statement or for inclusion or omission of matter in the Prospectus may file a suit or take any other action for misstatement in the Prospectus under this section.
Any kind of misleading statement in the Prospectus shall attract criminal liability under this section. Such misstatement in a prospectus is kept on equal footing as a commission of fraud. Thus, the punishments for both are the same. At the same time, there are some grounds that protect the person who authorizes the issue of the Prospectus from criminal liability.