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  • Writer's pictureRashi Srivastava

Section 35 Of Companies Act 2013: Civil Liabilities For Misstatement In Prospectus

Updated: Oct 17, 2022

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Section 35 of the Companies Act 2013 provides for a statutory cause of action to any person who has subscribed for securities of a company offered through a prospectus and has suffered losses by relying on any statement in the prospectus that was untrue or misleading or owing to the omission of any matter in the prospectus.

What is Section 35 of Companies Act 2013?

*35. (1) 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 authorized 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 authorized 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.

(2) No person shall be liable under sub-section (1) if he proves—

(a) that, 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) that 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.

1[(c) that, as regards every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by subsection (5) of section 26 to the issue of the prospectus and had not withdrawn that consent before 2[filing of a copy of the prospectus with the Registrar] or, defendants' knowledge, before allotment thereunder.]

(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 subsection (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.

What is meant by Civil Liability?

Civil liability is the obligation to compensate for bodily injury or tangible or intangible damage that may be caused to a third party by the company's belongings or staff over the course of work completed. There are a number of situations in which the company's liability may be invoked.

In simple words, civil liabilities are the responsibilities of companies towards their stakeholders to compensate them in case of any fraudulent act caused by them.

The legal responsibility of paying money for damage to another person's health, business, or property: Company directors face criminal and civil liability for knowingly filing false accounts in the annual report.

What is meant by Misstatement?

A misstatement is an incorrect statement or the giving of false information.

Misstatement means an untrue statement of a material fact or an omission to state a material fact required to be stated in a Registration Statement or Prospectus, or necessary to make the statements in a Registration Statement or Prospectus (in the light of the circumstances under which they were made) not misleading.

What is a Misstatement in Prospectus?

Any incorrect or misleading statement is included in the prospectus; then, it would be termed a misstatements in the prospectus. Any inclusion or omission of a fact which is likely to mislead the public shall also be termed as a misstatement.

A prospectus constitutes the basis of a contract between the company and the shareholders, and notwithstanding, it must disclose all material facts very accurately.

A prospectus containing false, ambiguous, or fraudulent statements of material facts (misstatements in the prospectus) suppressing material fact is termed as "Misleading Prospectus."

Owing to which a Prospectus must tell the truth, the whole truth, and nothing but the truth. Also, it must not conceal any fact which ought to be disclosed.

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