Liability for mis-statement in the prospectus under Companies Act 2013

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The Companies Act 2013 deals with two types of liability for incorrect or false statements in the prospectus: –

Civil Liability

When anyone has subscribed to securities of a company relying on any included statement, or the inclusion or omission of any matter, in the prospectus, which is misleading and has suffered a loss or damage as a result, the company and any person who: –

  • is a director of the company when the prospectus is issued,
  • has authorized himself to be named in the prospectus as a director of the company, or has consented to become such a director, either instantly or after a certain period of time,
  • is a promoter of the company,
  • authorized the issuance of the prospectus, and
  • is an expert referred to in Section 23 (5) Companies Act 2013

is obliged to pay compensation to any person who has suffered such loss or damage.

No one can be held responsible if he proves that having consented to become a director of the Company and if he had withdrawn his consent before the issue of the prospectus and that it was issued without his consent or if he proves that the prospectus has been issued without his consent and after becoming aware of the matter, he had given reasonable public notice that it was published without his knowledge or consent or if he can prove that in this regard which relates to every misleading statement allegedly made by an expert, the statement has been fairly presented, reported or valued, and had reasonable grounds to believe and has made until the date of issue of the prospectus believe, that the person making the declaration was competent to make it and that said person had given the required consent to the issuance of the prospectus and had not withdrawn that consent before the delivery of a copy of the prospectus for registration or to knowledge of the defendants before the allotment thereof.

Criminal Liability

When an issuance, circulation or the distribution of  a prospectus under Chapter III of the Companies Act 2013 contains any statement which is false or misleading in the form or context in which it is included or where the inclusion or omission of any question is liable to mislead, each and every person who authorizes the issuance of such a prospectus is liable under section 447 of the Companies Act 2013.

According to section 447 of the Companies Act 2013, anyone found guilty of fraud is liable to imprisonment for a term of not less than six months but up to ten years and is also liable to a fine which may not be less than the amount of the fraud, but which may be up to three times the amount of the fraud. Whenever the fraud in question involves the public interest, the prison sentence cannot be less than three years.