The prospectus is a document inviting the prospective investors to subscribe for the shares and debentures of a company. Therefore, it should contain full and honest material facts and so no material fact should be concealed. But what are the remedies in case if there is a misstatement in the prospectus. Lets discuss below.
Remedies for Misstatement in Prospectus
If the prospectus contains a misleading statement, the liability of the company, the directors, promoters and others who authorized the issue can be classified into three kinds viz.,
1. Civil Liability
An aggrieved shareholder who purchased shares by placing reliance on the misleading prospectus has
- remedies against the company, and
- remedies against the directors, promoters and experts.
a. Remedies Against the Company
The aggrieved shareholder has two remedies against the company. They are
- Rescission of the Contract, and
- Damages for fraud.
1. Rescission of the Contract
The person who purchased shares on the basis of the prospectus containing misstatements can rescind the contract (cancel the contract). He is eligible for rescission whether the misstatement is made intentionally or unintentionally. He has to surrender his shares to the company. Then his name will be removed from the register of the members.
The money paid by him will be refunded by the company. The following are the conditions to be satisfied for claiming rescission:
1. There must be an untrue statement.
2. The misstatement must be material to the contract of issuing shares. It should not be a mere expression.
3. The shareholders must have relied on the untrue statement.
4. The statement must have induced the shareholder to purchase the shares.
5. The shareholder must apply for rescission within a reasonable time and before the liquidation of the company.
6. The shareholder should not have affirmed the contract for purchase of shares.
2. Damages for Fraud
After rescinding the contract, the aggrieved shareholder can claim damages from the company by filing a suit in the Court. He has to prove that the misstatement was made fraudulently.
1. Damages for Misstatement
The directors, promoters, experts, and others who have authorized the issue of the prospectus are liable to compensate the aggrieved shareholder for the loss or damages he may have to incur because of the untrue statement.
2. Damages for Non-disclosure of Material Facts:
If a material fact has been omitted from the prospectus, (a) the person responsible for the issue shall be fined up to Rs.50,000 and (b) the aggrieved can recover damages from the persons responsible for the issue.
2. Criminal Liability
1. If a prospectus contains any untrue statement, every person who authorized the issue are punishable with fine up to Rs.50,000 or with imprisonment up to 2 years or with both.
2. Anyone who fraudulently (knowingly) makes any misstatement in the prospectus to induce persons to invest money in the company is punishable with imprisonment up to 5 years or with fine up to Rs.1,00,000 or with both.
3. Liability under General Law of Contract
Under the general law, the aggrieved shareholder can recover damages from all or any of the persons responsible for the issue of the prospectus. The necessary thing is to prove that there is a fraudulent misstatement or non-disclosure.
Liability in case of open market purchase
One who purchased shares in the open market from any shareholder of the company (not relying on the prospectus) can’t rescind the contract for the purchase of shares. The person who authorized the issue of prospectus cannot be held liable.