Mis statement & Their Remedies

Mis-Statements in Prospectus:

Mis-statements and false statements in the prospectus are instruments by which dishonest company promoters may practice fraud on the public money. In order to prevent this practice the law imposes certain duties and liabilities on those persons who are responsible for such issues.

If, however, the prospectus contains any mis-statement of a material fact or if the prospectus wants in any material fact, two types of liabilities will arise.

They are:

(1) Civil Liability

(2) Criminal Liability

Before discussing the above we are to know the liability which may arise for Untrue Statement. It is the duty of the authors of the prospectus to see that the prospectus does not contain any untrue statement which may mislead the public.

According to Sec. 65 of the Companies Act, Untrue Statement’ in connection with a prospectus shall deem to include:

(i) A statement which is misleading in the form and context in which it is included, and

(ii) An omission which is calculated to mislead.

In short, untrue statement means and includes any statement which is not only a false statement but also a statement which creates a wrong impression of actual fact. Concealment of material fact is also treated as mis-statement or untrue statement.

Now we are going to highlight the civil and criminal liabilities that may appear due to mis-statement in the prospectus:

(1) Civil Liability:

Sec. 62(1) of the Companies Act states that such persons are liable to pay compensation for any loss or damage which any person may suffer from the purchase of any share or debenture on the basis of the untrue statement. Consequently, a person who has suffered a loss may claim contribution from the others who were associated relating to issue of prospect until it appears that he was guilty of fraud while the others were not proved to be guilty.

(2) Criminal Liability:

According to Sec. 63(1) of the Companies Act, every person who has authorised the issue of a prospectus containing untrue statements shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. 5,000 or both.

Penalty:

Sec. 68 of the Companies Act provides that a person shall not, either knowingly or recklessly, by making any statement, promise or forecast which is false, deceptive or misleading or, by any dishonest conceal­ment of material facts, induce or attempt to induce another person to enter into or to offer to enter into any

(i) Agreement for acquiring, disposing-off, subscribing for or underwriting shares or debentures;

(ii) Agreement, the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by inference to fluctuations in the value of shares or debentures.

Otherwise, he shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to Rs. 10,000 or with both.

Persons who are liable for untrue statements in the prospectus:

According to Sec. 62 (1) of the Companies Act, the following persons are liable and punishable for untrue statements in the prospectus:

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

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

(c) Every person who is a promoter of the company; and

(d) Every person who has authorised the issues of the prospectus.

Defence available in an action on the prospectus:

The parties against whom the proceeding have been taken for mis-statement in the prospectus may use certain pleas as their defence:

1. Defences against the Civil Liability:

According to Sec. 62(2) of the Companies Act, no decree for damage shall be passed if the person charged can prove any one of the followings:

(a) Withdrawal of consent:

A person is not liable if he withdrew his consent before the issue of the prospectus.

(b) Issue without knowledge and consent:

If the person can prove that the prospectus was issued without his knowledge or consent and, after becoming aware of its issues, he gave public notice that the same was issued without his knowledge and consent.

(c) Statement of an expert:

If the statement which is alleged to be untrue purports to be a statement of an expert or a copy or of a valuation report of an expert, the person charged can be discharged from his liability if he can prove:

(i) It is a fair and correct copy or representation or extract of the expert’s statement;

(ii) He had reasonable grounds to believe;

(iii) The expert had given his consent to the issue of the prospectus;

(iv) The expert had not withdrawn his consent before registration.

(d) True Statement:

The person charged can escape from his liability if he can prove that he had reasonable ground to believe and did, up to the time of the allotment of shares or debentures, believe that the statement was true.

2. Defences available to an expert:

Sec. 62(4) states that an expert whose opinion was included in the prospectus can use the following as defence:

(a) Withdrawal of consent:

After giving consent, he withdrew it in writing before delivery of a copy of the prospectus for registration.

(b) Knowledge of untrue statement:

If the person, on becoming aware of the untrue statement, withdrew his consent in writing and gave public notice with reasons thereof, after delivery of the copy of the prospectus to and before allotment.

(c) True statement:

He was competent to make such statement and he had reasonable grounds to believe and did up to the time of the allotment of shares and debentures, believe that the statement was true.

3. Defense’s against Criminal Liability:

Sec. 63(1) states that a person charged in a criminal court will be acquitted if he can prove any one of the following:

(a) That the statement was immaterial, or

(b) That he had reasonable grounds to believe and did, up to the time of the issue of the prospectus, believe that the statement was true.