Liability for Untrue Statement in Prospectus

In this article, we will discuss about liability for untrue statement in prospectus and some other provisions about company’s prospectus. Therefore, first of all, we discuss about Company’s prospectus. Let’s take a look:


It means a document, which describes the existence of notice, circular, advertisement or various provisions of general meetings. In other words, any document, which is issued before inviting to public for subscription of shares or debentures, by any corporate or business entity.

All fundamentals have to be mentioned in prospectus, which are necessary for investors for taking decision deliberately, such as, Prices of shares, classes of shares, date of issuing, maturity period, return from investment, or other general provisions, which is related to issuing of shares, are mentioned in prospectus. It could be treated as an invitation to general public for subscribing of shares on against specific consideration.

Prospectus should be issued by only listed companies before issuing of share of debenture and they must be reported in registrar office of company before issuing of shares.

Here, we mention the Golden Rules, which have to be followed by company before issuing of shares:

1. Shall be disclosed the exact amount of company’s capital.

2. While the prospectus has drafted, the full faith of representation has to be existed in prospectus for inviting the general public for subscription.

3. The mandatory information, which is required to publish as per Part I and Part II of Schedule II of the act, should be fair and correct without including unlawful manner.

Well, after discussing about Prospectus, here we explain that what the liability has arisen for untrue statement in prospectus. However, here we briefly explain the meaning of untrue statement.

According to Section 65 of companies act, 1956, untrue statement in prospectus refers to those statement, which enforce any unscrupulousness in among amount of shares or debentures and where omission has present in between amount of various provisions. We can also say that statement which executes any fact but in actual, it would not present exactly. Generally, this statement has published for the reason of fraud and cheat with shareholders. However, if company law board has found any untrue statement in company’s prospectus, then they will penalize him during a period of time. If representation has executed, which will be done or happens in future, cannot be treated as unscrupulous representation. Untrue statement only based upon existing facts, which is executed in present. A representation should be true only at the time of issue of prospectus, not at the time of allotment.

If shareholder accepts false statement as true statement, then he will not be deprived for the remedy of their damages because they neglect an untrue statement and choose to go on next step. On the other hand, if a statement in prospectus is correct and an applicant misled in read any statement, then he will not be liable to get return of allotment money.

Now we discuss about those person who will be liable for giving damages, which have been given because of misstatements:

1. Every person, who is the Director of the company at the time of issue of prospectus, would be liable for misstatement.

2. Every person who introduce to himself in the prospectus as a director or as a futuristic director, are liable for misstatement.

3. Every person, who plays the role of promoter of company.

4. Who authorised the prospectus for issuing of shares.

5. An expert, who gives their expert advice on any matter of prospectus, is liable for misstatement. However, he will liable only for that statement, which is consider after taking his advice.

Penalty and Fine:

Any individual, who is liable for untrue statement in prospectus, if he does not mention the salient features of prospectus, is liable for Rs. 50000 fine. Fine could be extended under general law or other provisions.

Any other individual, who plays the role of an expert and who has participated in formation or promotion of prospectus, is liable for penalty which is Rs. 50000.

Any person, who participate in making a statement, forecast or promise, which is untrue and trying to fraud with shareholders by enter into (a) any contract for subscribing, underwriting, acquiring or disposing of any debenture or shares (b) any contract, which have a purpose to pretend the profit securely of any parties, are punishable fine with imprisonment of 5 years and the amount of fine is Rs. 1 Lakh, which may extend under the lawful provision

Civil Liability:

Civil Liability has enforced in against defaulter, who default with investors or shareholders. According to section 62 of the companies act, 1956, company has to pay compensation to investors on against their loss or damages, which incurred by unlawful statement in prospectus. The amount of damages is the difference between actual or market value of shares and amount, which is published in prospectus.

The limitation period for suing on defaulter party is 3 years as per Article 113 of limitation act, 1963.

Criminal Liability:

According to section 63, the criminal liability has arisen on against defaulter for unlawful statement in prospectus. They are punishable with an imprisonment, which may extend to 2 years or with fine, which may extend to Rs. 50000 or with both.


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Post Author: fn007

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