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Consequences of Untrue and Fradulent Statement in Prospectus

Every person who has purchased shares or debentures of the company on the basis of false statement and statement given in the prospectus, has the following two rights


(I) Rights of the shareholders against the company Under this, the shareholders get the following rights against the company for the false statements made in the prospectus


(1) Right of Rescision of Contract – A shareholder may relinquish any contract which he has entered into by taking the false or false article of the prospectus to be true, whether this false description is due to ignorance or fraud. Such a person has the right to renounce the contract and return his shares and can also take money from the company in return for them. The aggrieved subscriber can exercise this right subject to the following conditions:

(i) the prospectus is issued by the company or by any person on behalf of the company


(ii) the statement or particulars made or given in the prospectus must be false. An attempt has been made to hide something in the description. For example, if a company states in the prospectus that it has distributed 20% dividend in the last 5 years, while in reality this company has only incurred loss in the last 5 years, there has been no profit. The company has been paying dividend out of the past accumulated profits. But this fact was not written in the prospectus. An attempt has been made here to hide this important point. So it is a fraudulent act.


(iii) the false statement or suppression must be made with respect to any material fact which is likely to affect the decision to subscribe or not to subscribe to the securities. For example, in the prospectus of a company it was written that 2 big reputed businessmen have agreed to become the directors of the company. The reality was that both of them had expressed a desire to help the company. It was held that the material fact in the prospectus was a misstatement. Hence the subscriber is entitled to cancel the contract.


(iv) has subscribed securities only by reliance on a false statement in the statement of the subscriber or by reason of such statement. If a subscriber subscribes the securities without seeing or reading the prospectus, he is not entitled to terminate the contract.


(v) The right of cancellation of the contract lies with the original subscribers/allottees only. If


If a person buys shares from an inventory exchange center, he cannot waive the contract by resorting to misstatement in the prospectus. (vi) exercise the right of cancellation of the contract within a reasonable time and


Closing should be done before it starts. (2) To Receive the Compensation – On the basis of false statement


But after termination of the contract, damages can also be recovered from the company, but this right can be recovered only after the termination of the contract. He has to prove the following facts for getting compensation


(i) He had subscribed the securities of the company only on reliance on misleading/false statements.


(ii) the return was issued by the company or by any person on behalf of the company. (iii) has actually suffered damages by reason of that misleading or false statement.


(II) Right against Directors, Promoters, Experts etc. (Right against Directors, Promoters, Experts etc.)

The Act provides a list of persons who are liable for misleading false statements. they are as follows

(i) every person who is a director of the company at the time of issue of the return.

(ii) every person who has given permission to be named as a director of the company in the prospectus of the company or has given his consent to be a director of the company.

(iii) every person who is a promoter of the company.

(iv) every person authorized to issue a return.

(v) every expert who is or has been a stakeholder in the formation, promotion or management of the company.


The liability of the operators, promoters, experts can be divided into the following two categories A. Civil or Civil Liability All the operators, promoters, experts etc. of the company (all the above mentioned) have civil / civil liability towards those subscribers. who has subscribed for the securities of the company on reliance on misleading / false statements. In other words, every aggrieved subscriber has the following remedies against such operators etc. 1. Compensation for false statement or omission of facts.


Having subscribed to the securities by reliance on a misleading statement (in which certain facts have not been included / omitted from the facts), he may recover from the directors etc. of the company all the losses which he has suffered on account of subscription.


2. Unlimited Personal Liability for Fraudulent Statement – Sometimes it is established that a prospectus was issued with the intention of defrauding applicants of securities or any other person or for any fraudulent purpose. In such a case, every operator, promoter, specialist etc. will have unlimited personal liability. He shall be personally liable for the damages suffered by each person who subscribed the securities on the basis of such statement.


B. CRIMINAL LIABILITY If any false statement is issued, disseminated or distributed, every person authorizing the issue of that statement shall be liable. Any person found guilty of fraud shall be punished with imprisonment of either description for a term which may extend to six months and not exceeding ten years. In addition, he may also be punished with a fine of not less than the amount involved in the fraud and with a fine of up to three times the amount involved in the maximum fraud. If the question of public interest is also involved in any fraud, the punishment of imprisonment shall not be less than three years.

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