Page 181 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes 9.20 Civil Liability (S. 62)

Where a prospectus is issued inviting persons to subscribe for shares in, or debentures of a
company, the following persons shall be liable to pay compensation to every subscriber for loss
or damage he may have sustained by reason of any untrue statement included in the prospectus
on the faith of which he had applied for the shares or debentures:
1. every person who is a director of the company at the time of the issue of the prospectus;
2. every person who has authorised himself to be named and is named in the prospectus as
a director, or as one having agreed to become a director, either immediately, or after an
interval of time;
3. every promoter of the company; and

4. every person (including an expert) who has authorised the issue of the prospectus. But an
expert is liable only in respect of his own untrue statements.
Thus, an allottee of shares, who had applied for shares on the faith of prospectus containing
untrue statements has remedies available against the different persons, i.e., the company,
directors, promoters and experts.

Remedies against the company. Any person who, relying on mis-statements in or omission of
material facts from a prospectus, takes shares from the company may: (1) rescind the contract to
take the shares; (2) claim damages. The effect of the rescission of the contract would be that the
shareholder would give up the shares and get back his money with interest. He must, however,
take action to rescind to contract: (a) within a reasonable time, (b) before proceedings to wind up
the company have commenced; and (c) before he does anything (after he comes to know of the
mis-statements in the prospectus), which is inconsistent with the right to repudiate, e.g., to accept
dividends. The allottee can claim relief only if he can show that the mis-statement or omission
was: (i) one of fact and not of law, nor an expression of opinion, (ii) material; and (iii) acted upon
by him.
The second right of the allotte against the company is to sue for damages for deceit. In order to
succeed, the allottee must, in addition to the three facts mentioned above (in connection with the
rescission of contract), prove: (i) that those acting on behalf of the company acted fraudulently;
(ii) that those purporting to act on behalf of the company were authorised to act in its behalf; and
(iii) that he suffered a loss or damages.
It is important to remember that the allottee cannot both retain the shares and get damages from

the company. In actual practice, suit for damages against the company is rarely filed. The usual
claim against the company is for rescission of the contract of allotment. Damages are generally
claimed from the directors, promoters and other persons who had authorised the issue of the
prospectus personally, or from experts who had signed reports referred to in the prospectus.
Remedies against directors or promoters. A shareholder who had been induced to take shares
may claim from the directors or promoters or from any one else responsible for untrue statement
occurring in the prospectus: (i) damages for fraudulent misrepresentation; (ii) compensation
under s.62; (iii) damages for non-compliance with the requirements of s.56 regarding contents
of the prospectus.
Damages for fraudulent misrepresentation. An allottee of shares may bring an action for deceit,
i.e., fraudulent misrepresentation. There must be an intention to defraud and that is to be proved
by him. The directors, etc., will not be liable for the tort of deceit if they honestly believed the
statements to be true. The facts in Derry v. Peek were as follows: The directors of a Tramway
Company issued a prospectus stating that they had the right to run tram-cars with steam power
instead of with horses as before. In fact, the Act incorporating the company provided that such
power might be used with the sanction of the Board of Trade. But the Board of Trade refused to

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