Mis-statement in a Prospectus: Civil and Criminal Liability

Because thousands of investors may commit their savings on the strength of a single document, the Companies Act, 2013 treats any untrue or misleading statement in a prospectus with real severity, and fixes liability on the people responsible for putting the document out - not merely on the company as an abstract entity.

Civil liability (Section 35). Where a prospectus includes an untrue statement, every person who subscribed for securities on the faith of that prospectus and suffered loss or damage as a result may claim compensation from:

• every director of the company at the time of issue;
• every person named in the prospectus as a proposed director, who has given consent to be so named;
• the promoter of the company;
• every person who authorised the issue of the prospectus (including experts, to the extent of statements attributed to them).

A person so sued has certain defences under Section 35(2) - for instance, that they withdrew their consent before the prospectus was issued and it was issued without their knowledge; that the prospectus was issued without their knowledge or consent and they gave reasonable public notice on discovering the fact; or that they had reasonable grounds to believe, and did believe, the statement was true up to the time of allotment. A statement made on the authority of an expert is a defence for a director if it was a correct and fair copy or extract from the expert's report.

An allottee who was misled also has a general-law remedy independent of Section 35: rescission of the contract to buy the shares - that is, having the allotment set aside and their money returned - provided they act promptly on discovering the mis-statement and before, for example, the company goes into liquidation. …