Page 182 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 9: Prospectus

give permission and the company had to be wound up. P, a shareholder sued the directors for Notes
damages for fraud. The House of Lords held that the directors were not liable in fraud because
they honestly believed what they said in the prospectus to be true.
Compensation for untrue statement (s.62). Another remedy available to an allottee of shares

for misstatements in a prospectus is to file a suit for compensation under s.62. A claim can be
made, whether the statements are fraudulent or innocent. Section 65 provides that a statement
is deemed to be untrue if it is misleading in the form and context in which it is issued. It is not
necessary for the allottee to prove any fraud or knowledge on the part of the directors that the
statement was untrue.
If a director pays damages under s.62, he is entitled to recover contributions from his co-directors,
if they, too, are guilty of misstatement, misrepresentation, untrue statement; and on the death of
the co-directors, from their estates.
Defences available to avoid civil liability [s.62(2)]. Section 62 names persons who are liable to
pay compensation but certain defences are available to them. In a claim for compensation, the
director may prove in defence that:
(i) he withdrew his consent to act as director before the issue of the prospectus and it was
issued without his authority or consent; or
(ii) the issue was made without his knowledge or consent and on becoming aware of the issue
he gave reasonable public notice of that fact; or

(iii) he withdrew his consent after the issue of the prospectus but before allotment and public
notice was given; or
(iv) he had reasonable ground to believe that the statements were true and believed them to be
true; or
(v) the statement was correct and fair summary or copy of an expert’s report; or
(vi) the statement was made by an offi cial document.
Another remedy available to an allottee of shares is to file a suit for damage in case the prospectus

does not include the matters required to be included in accordance with the provisions of the
Act.
Remedies against expert. The allottee to the shares who has been induced to take shares on the
faith of an untrue statement of an expert in the prospectus is entitled to claim from the expert: (i)
damages, (ii) compensation under s.62.

An expert is liable in damages in respect of his own untrue statement, wrong report or valuation
made by him and contained in the prospectus and the same principles apply as in the case of
a fraudulent or an innocent statement made by the directors. An expert is also liable to pay
compensation under s.62. However, he shall not be liable if he proves: (i) that having given his
consent, he withdrew it in writing before delivery of a copy of the prospectus for registration;
or (ii) that after delivery of prospectus for registration and before allotment, he became aware of
the untrue statement, withdrew his consent in writing and gave reasonable public notice of the
withdrawal and his reasons; or (iii) that he was competent to make the statement and believed
on reasonable grounds that it was true.

Liability under s.56. An omission from a prospectus of a matter required to be stated under
s.56 (i.e., as per Sch. II) may give rise to an action for damages at the instance of a subscriber for
shares, who has suffered loss thereby, even if the omission does not make the prospectus false or
misleading. But, the plaintiff must prove that he has sustained damage by reason of the omission
of a matter required to be stated in the prospectus. A director or other person sued under s.56
may escape liability if he proves: (a) that he had no knowledge of the matter not disclosed; or (b)
that the contravention arose out of an honest mistake of fact; or (c) in the opinion of the court,

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