Section 35 Of Companies Act: Civil Liability For Misstatements In Prospectus
Updated: Oct 13, 2022
What is a Prospectus?
A prospectus is an important aspect of any company. Consumers typically look for a company's prospectus to assess whether or not they should invest in it. The information in the prospectus must be accurate. Prospectuses are created by businesses to entice consumers to come in and buy the firm's debentures or borrow money from it. The prospectus must provide correct information. If there are any inaccuracies in the prospectus and the public relies on such information, the business may be held liable in civil or criminal court.
"Any document classified or disseminated as a prospectus, including notifications, circulars, and papers, as well as adverts providing an offer to acquire or subscribe stocks," according to Section 2(70) of the Companies Act of 2013. A prospectus, simply put, is a document that solicits public deposits or offers to subscribe to shares or debentures. A prospectus is also a document that allows members of a corporation to sell their shares. In the prospectus, the Securities and Exchange Board of India (SEBI), in collaboration with the Central Government, must offer financial fact information and reports. A prospectus is a crucial document that may be used to assess the legitimacy of a company's programme. The corporation should determine whether or not the contents of the prospectus are accurate.
Misstatements in prospectus
A prospectus is a document that includes information on a company's securities that the public may use to subscribe to or acquire them. It will have enormous repercussions if it contains any errors. Misstatements in the prospectus relating to any erroneous or deceptive statement in the prospectus. The inclusion or omission of an information that is likely to mislead the public is characterised as a misrepresentation. If a significant item has been omitted from the prospectus and such omission is likely to mislead the public, the prospectus will be considered a prospectus with an erroneous statement.
There have been times when future event representation has also been called into doubt. A simple assertion that something will be done or happen in the future is not a statement of fact that might lead to misrepresentation liability. It must be activated by a misrepresentation of an existing fact. Liability would arise if a representation was truthful only at the time of prospectus issue and not at the time of allocation. A prospectus statement concerning the individuals who would be directors is a substantial statement, and if it is inaccurate, a person who subscribed on the basis of it has the right to withdraw their subscription.
Civil Liability in case of misstatements in prospectus
If a person who has subscribed for a company's securities suffers any loss or suffering as a result of any misleading assertion made in the prospectus, or any inclusion or omission of a deceptive item included in the prospectus, and acts on the prospectus' content, the company and everyone involved:
is a director of the company at the time the prospectus was issued,
or is mentioned as a director of the firm in the prospectus or has committed to becoming one,
or is a corporate promoter, or has authorized/allowed the prospectus's release, and is an expert who has been involved or interested in the founding, management,
or marketing of the company.
Without prejudice to any punishment that may be imposed, any person who has incurred such loss or damage must be accountable to provide compensation to each person who has experienced such loss or damage.
Exemption from liability for prospectus misstatements
No one can be held accountable for making a false statement if they can show that-
Before the prospectus's distribution, the individual had revoked his approval. If a person who agreed to become a director of the company later withdraws his consent and argues that the prospectus was distributed without his approval.
When a prospectus is distributed without the approval or knowledge of a person. When a prospectus is issued without a person's knowledge or consent, the person must make a reasonable public notice saying that the prospectus was issued without his consent.
Issuing a prospectus to deceive or for any other nefarious purpose–
If it is proven that a prospectus was issued with the intent to defraud applicants for the company's securities, or any other person for that matter or for any other malicious purpose, each of the individuals listed in the preceding paragraph will be personally liable for all or any of the damages suffered by anyone who subscribed to the securities on the basis of such prospectus.
Extreme caution and prudence are essential while preparing a prospectus. The prospectus must be checked for any errors or anomalies before it is distributed to the broader audience. For any misstatements disclosed in a company's prospectus, the Companies Act holds individual people accountable and punishes them. The prospectus' integrity must be kept since the general public relies on it to make investment decisions.