The prospectus is issued for giving inspiration of
purchasing shares or debentures by creating reliability in the public. There is a golden rule in this regard which was assessed in the suit of Newvaniswek etc. Company v/s Mogrin (1867) 17 L. T. 596. The essence of this rule is
The persons who issue the prospectus, attract the public towards those considerable profits which shall be held by the purchasers of the proposed shares of the company. Only after believing the points given in the prospectus, public is invited for purchasing the shares. Thus the public depends upon mercy of emigraters of the company.
Therefore each point should not be mentioned in the form of such fact which is not such fact in reality and non of such
facts must be left, in absence of which the nature and qualities of those privileges and advantages are least affected, under which temptation is given for taking shares. In brief the activities must be revealed as these are.
The omissions or misstatements committed in the prospectus affect the prospectus a lot. Omissions and misstatements are two different mental conditions:
(A) The effect of omissions – If a necessary fact is
not described by mistake in the prospectus under Section 56(1) of the Act, then according to Section 63 each guilty officer can be penalised with Rs. 5,000/- for misstatement or omission. In case of such type of omission, if shares orndebentures are, purchased by public, then only on this basis, the indentures cannot be broken up from the company, because by such type of purchase if they suffer loss then for its indemnity they can take legal step against the working convener, director of the company and the persons responsible for issue of the prospectus. But under the following circumstances the directors of the company shall not be held responsible to the public for omission in the prospectus-
If that omission is committed by them while doing bonafide work.
If in the opinion of the court that omission is not
significant or that is worth excuse.
If they were not having knowledge of the omission innthe prospectus.
(B) The effect of misstatement and fraud- If for the purpose of attracting the public, some type of false statement is made then it shall be called asmisstatement. Like- wise to hide some thing for cheating purpose or mention of false facts knowingly and purposely then it shall be called as fraud.
On the basis of that prospectus in which misstatement or false details are given, if an individual purchases shares or debentures, then for the different parties related to the company the following rights arise-
(i) The buyer of the shares or debentures, finishing the indenture, gets right of taking back the amount with interest given by the company.
(ii) On confirmation that the statement was made with an intention of fraud then the responsible person can present suit in the court for indemnity against the conveners, founders or other persons. In the opinion of court, if the misstatement was made knowingly for cheating purpose and the same is proved then the indemnity is a must.
Liabilities arise as a result of an untrue statement-
The following liabilities on the company can arise as a result of an untrue and fraudulent statement in the prospectus
a.Civil liabilities for misstatement,
b.Criminal liabilities for misstatement,
c.Liabilities under law of torts for misstatement.
(A) Civil liabilities for misstatement- According to
Section 62(1) of the Companies Act if the holder of shares or debentures, has purchased shares or debentures taking the misstatement, given in the prospectus, as true and faced loss, then he can get indemnity by lodging civil suit against the above said persons. But under the following circumstances the directors of the company shall not be responsible-
(1) According to Section 62(2)(a) if prior to the issuenof prospectus having misstatement the director might have has been made without his consent.
already withdrawn his consent and issue of the prospectus
(2) According to Section 62(2) (d) (i) if after conducting of the prospectus but before allotment the director has withdrawn his acceptance on account of having knowledge regarding omissions in the prospectus and the general inpublic.
(3) According to Section 62(2)(d)(ii) if the misstatement of the prospectus is certified by a specialist and the specialist gave written opinion for conducting of the prospectus and that has not been withdrawn till attachmentwith the prospectus then in that case the directors cannotnbe held responsible.
(4) According to Section 62(2)(d)(iii) if the misstatement is a certified true copy of a Govt. document or the description of Govt. officer then for such misstatement the directors of the company shall not be held responsible.
(5) According to Section 62(2)(b) if there is the name of a director in the prospectus but that prospectus is issued without opinion of that director then immediately on coming of this fact to the knowledge of the director the public must be informed about this fact through a general information that the said prospectus was conducted without his consent. In this position he can save himself from his liability.
(B) Criminal liabilities for misstatement – Section
63 of the Act explains that each that person who has been authorised to issue the prospectus, can be imprisoned for such a period which can be of two years or can be penalised or both can be awarded.
Under Section 63 of the Indian Companies Act the following persons are recognised as responsible for fraudulent publication-
Each such person who was director of the company at the time of issue of the prospectus.
Each such person who has got himself authorised to include his name as a director in the prospectus.
Each such person who has been authorised to issue the prospectus.
(C) Liabilities under law of torts for Mis-statementcompany having good faith in the statement made by the Any person who has purchased shares or debentures of the company in the prospectus he can lodge a suit of deceit Indemnity from the company. In this suit he shall have to against that company under the law of torts and can get