What is Prospectus ? Discuss briefly the civil and criminal liability

What is Prospectus ? Discuss briefly the civil and criminal liability for misstatements in a Prospectus.

Discuss the Civil and Criminal liabilities which arise as a result of an untrue and misrepresenting statement in the prospectus.

What is a Prospectus ? Discuss the civil and criminal liabilities which are arised as a result of untrue statement in the Prospectus.

Discuss the consequences of misrepresentation, omission and concealment of facts in connection with prospectus of a company.

Ans.

MEANING AF PROSPECTUS

A Prospectus is a document which constitutes the basis of the contract between the company and the shareholders and therefore it must disclose all material facts, which may influence the judgement of a prospective investor whether shares or debentures should be bought or not.

Untrue or False Statement in Prospectus : A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included; and the omission (non disclosure) from a prospectus of any matter.

Remedies for Misstatement and Omission in a Prospectus – A person who has subscribed for shares on the faith of a misleading prospectus is an aggreived person. Following remedies are available to him:

(1) Remedies against the Company:

(1) Rescission of the Contract – A contract induced by misstatement of any material fact either innocently or fraudulently, is voidable as the option of the aggreived party. In this case the subscriber, therefore, is entitled to set aside his contract and return the shares to receive back his money.

To admit suit of rescission of the contract, the subscriber must prove the following facts:

(a) The prospectus contained a misrepresentation of facts and not a law or of opinion or expectation.

(b) the misrepresentation related to such facts as are likely to influence the justice.

(c) It must be proved that the subscribers have actually relied upon the statement in question while applying for shares.

(2) Claiming Damages for Fraud – The subscriber is also entitled to claim damages by way of interest, only it is proved that (a) the misstatements were made fraudulently and (b) he has actually been decided.

(II) Remedies against the Directors, Promoters and Other Liable Persons:

An aggrieved investor may also make all or any of the following persons liable to pay compensation or/and penalty:

(a) The directors at the time of issue of prospectus.

(b) Every person whose name is appeared in the prospectus as present or future director.

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

Release from Responsibility of Damages – The person shall not be liable if he proves that –

(i) he had withdrawn his consent for acting as Director,

(ii) the prospectus was issued without his knowledge or consent,

(iii) he was ignorant of the untrue statement,

(iv) he believed on reasonable grounds that the statement was true,

(v) the statement was based on expert’s opinion,

(vi) expert withdrew his consent in writing before delivery of the prospectus or registration,

(vii) he had withdrawn his consent in writing and gave a reasonable public notice to that effect.

CIVIL LIABILITY AND CRIMINAL LIABILITY

(1) Civil Liability [Section 62] – Any investor can claim against promoters and directors in the following cases:

(1) Damage for Fraud – A subscriber can take an action to cover damages against all or any of the person authorising the issue of prospectus.

(ii) Damages for Misrepresentation – The subscriber can claim for damage for any loss sustained by him due to any false statement.

(iii) Liability for Omissions – This section impose liability for omissions implied that omitted information which are required to be disclosed in a’ Prospectus. To claim damages the subscriber has to prove that he sustained loss due to some fact was not disclosed.

(2) Criminal Liability [Section 34 and 447] – It involves imprisonment on the guilty whereas civil liability involves a remedy of paying damages by way of compensation. Extent of punishment given below:

(a) imprisonment for a term not less than 6 months but which may extend to 10 years.

(b) fine not less than the amount involved in the fraud, or