What are the consequence of mid statement in a prospectus?
Answers
Answer:
The liabilities for Mis-statements in prospectus can be covered under the following heads:
Civil Liability
Criminal Liability
Civil Liability
Where a person who has subscribed for securities of a company based on any statement included or any inclusion or omission of a matter, in the prospectus that is misleading and upon acting on the content of the prospectus, suffers any loss or damage as a consequence, then the company and every person who–
is a director of the company at the time of issue of the prospectus,
or is named in the prospectus as the director of the company or agreed to become such director,
or is a promoter of the company,
or has authorised/allowed the issue of the prospectus
and is an expert who has been engaged or interested in the formation, management or promotion of the company.
Shall be liable to pay compensation to every person, without prejudice to any punishment to which any person may be liable, to every person who has suffered such loss or damage.
Exemption from Liability
No person shall be liable for misstatement if the person proves that-
the person had withdrawn his consent before the issue of the prospectus. If a person who had consented to become the director of the company, withdraws his consent before the issue of the prospectus and that it was issued without his consent.
or the prospectus is issued without the consent or the knowledge of a person. In case the prospectus was issued without the knowledge or the consent of a person, and after knowing of its issue, the person gives a reasonable public notice specifying that the prospectus was issued without his consent.
Issuance of Prospectus with intent to defraud or any other fraudulent purposes–
Where it has been proved that a prospectus has been issued with an intent to defraud the applicants for the securities of the company or any other person for that matter or for any other malicious purpose, each person referred in the above-mentioned passage shall be personally liable, without any limitation of liability, for all or any of the damages incurred by any person who had subscribed to the securities on the basis of such prospectus.
Criminal Liability
Section 63 of the Companies Act deals with criminal liability for mis-statements in prospectus
Where a prospectus issued, circulated, or distributed includes any statement that is untrue or misleading in any form in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises such issue of the prospectus shall be liable for fraud.
“Fraud” under Sec. 447 comprises of an act, omission, concealment of any fact with an intent to deceive, gain undue advantage, or to injure the interests of the company, its shareholders, its creditors or any other person. It is not necessary that such an act involve any wrongful profit or wrongful loss. If a person commits abuse of position, then that shall also be considered fraud under this section.
Punishment for mis-statement
If a person is found to be guilty of the offence of fraud, then that person shall be punished with imprisonment for a term that shall not be less than six months and may extend to ten years. He shall also be liable to fine, which shall not be less than the amount involved in the fraud and may extend to three times the amount involved in the fraud.
If the fraud so committed involves public interest, the term of imprisonment shall not be less than three years.
Note: – It has to be noted that once the prosecution establishes the mis-statements in prospectus signed by a director, etc., the onus shifts to the defendant of proving either that the statement was immaterial or that he believed it to be true. An expert who has given the consent will not be deemed to be ipso facto a person who authorised the issue of prospectus.
Explanation: