Page 261 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes
Example: A company issued a prospectus. All the statements included therein were
literally true. One of the statements disclosed the rates of dividends paid for a number of years.
But dividends had been paid not out of trading profits but out of realised capital profits. This
material fact was not disclosed. Held, that the prospectus was false in material particulars and
Lord Kylsant, the managing director and chairman, who knew that it was false, was held guilty
of fraud [Rex v. Kylsant, (1932) 1 K. B. 442].
A person who has applied for shares in the company and who has been allotted shares has
certain remedies against the company and the persons issuing the prospectus. But a buyer of
shares in the open market or a subscriber to the memorandum has no such right. If, however, a
prospectus is issued with the object of including persons to buy shares in the open market, any
person who buys shares even in the open market on the basis of the statements made in it has a
right of action if the statements are untrue or there is material omission from the prospectus.

A false statement or omission of material facts gives rise to civil as well as criminal liability.

11.2.2 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 misstatements 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
misstatements 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 misstatement 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 allottee 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.

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