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This query is : Resolved
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Anonymous
(Querist)
01 May 2013
what is the civil and criminal liability of an expert for a misstatement in a prospectus.
01 May 2013
Hi
Liability for misstatements in prospectus
Civil liability:
The primary document in respect of every public issue of securities for subscription is the prospectus. It is solely on the basis of the prospectus that prospective investors get the information about the company and takes decision for investments. Therefore, the prospectus of the company must not suppress any material fact or omission of which may affect the decision of the investors. There are two kinds of liabilities provided under the Companies Act, 1956 for misstatements in prospectus. One is the civil liability provided under section 62 and the other is a criminal liability prescribed under section 63 of the Act. The criminal liability for misstatements in the prospectus provided under section 63 of the Act is in addition to civil liability.
It has been provided that where a prospectus invites persons to subscribe for any shares or debentures of a company, the following persons shall be liable to pay compensation to every person who subscribes for
any shares in or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement contained in the prospectus:—
(a) every person who is a director of the company at the time of the issue of the prospectus;
(b) every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;
(c) every person who is a promoter of the company; and
(d) every person who has authorised the issue of the prospectus.
Consent given by a person as an expert in respect of his statement contained in the prospectus under section 58 or consent in writing given by any person named as auditors, etc., in the prospectus under section 60(3) shall not make such person liable as a person who has authorised the issue of the prospectus and such person can be held liable only in respect of an untrue statement, if any, purporting to be made by him as an expert. However, a person shall not be liable for misstatements in prospectus under section 62(1), if he proves that:—
(a) having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;
(b) the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent;
(c) after the issue of the prospectus and before allotment thereon, becoming aware of any untrue statement contained therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reasons therefor; or
(d) (i) as regards every untrue statement not purporting to be made on the authority of an expert or of a public official document or statement, he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, as the case may be, believe, that the statement was true; and
(ii) as regards every untrue statement purporting to be a statement by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that person had given the consent required by section 58 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus for registration or, to the defendant's knowledge, before allotment thereunder; and
(iii) as regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or a correct copy of, or a correct and fair extract from, the document.
It has been provided that section 62(2) shall not apply in the case of a person liable, by reason of his having given a consent required of him by section 58, as a person who has authorised the issue of the prospectus in respect of an untrue statement, purporting to be made by him as an expert.
Liability for misstatements in prospectus
Civil liability:
The primary document in respect of every public issue of securities for subscription is the prospectus. It is solely on the basis of the prospectus that prospective investors get the information about the company and takes decision for investments. Therefore, the prospectus of the company must not suppress any material fact or omission of which may affect the decision of the investors. There are two kinds of liabilities provided under the Companies Act, 1956 for misstatements in prospectus. One is the civil liability provided under section 62 and the other is a criminal liability prescribed under section 63 of the Act. The criminal liability for misstatements in the prospectus provided under section 63 of the Act is in addition to civil liability.
It has been provided that where a prospectus invites persons to subscribe for any shares or debentures of a company, the following persons shall be liable to pay compensation to every person who subscribes for
any shares in or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement contained in the prospectus:—
(a) every person who is a director of the company at the time of the issue of the prospectus;
(b) every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;
(c) every person who is a promoter of the company; and
(d) every person who has authorised the issue of the prospectus.
Consent given by a person as an expert in respect of his statement contained in the prospectus under section 58 or consent in writing given by any person named as auditors, etc., in the prospectus under section 60(3) shall not make such person liable as a person who has authorised the issue of the prospectus and such person can be held liable only in respect of an untrue statement, if any, purporting to be made by him as an expert. However, a person shall not be liable for misstatements in prospectus under section 62(1), if he proves that:—
(a) having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;
(b) the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent;
(c) after the issue of the prospectus and before allotment thereon, becoming aware of any untrue statement contained therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reasons therefor; or
(d) (i) as regards every untrue statement not purporting to be made on the authority of an expert or of a public official document or statement, he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, as the case may be, believe, that the statement was true; and
(ii) as regards every untrue statement purporting to be a statement by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that person had given the consent required by section 58 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus for registration or, to the defendant's knowledge, before allotment thereunder; and
(iii) as regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or a correct copy of, or a correct and fair extract from, the document.
It has been provided that section 62(2) shall not apply in the case of a person liable, by reason of his having given a consent required of him by section 58, as a person who has authorised the issue of the prospectus in respect of an untrue statement, purporting to be made by him as an expert.
01 May 2013
Criminal liability
Section 63 of the Act says that where a prospectus issued, if it includes any untrue statement, every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. Fifty thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.
Therefore, in order to invoke the provisions of section 63 of the Act, there must be 'included' in the prospectus an 'untrue statement'. Untrue statement has been clarified by sub-section (1) of section 65. Although, the expression used is the same as in the case of section 62, yet the standard of proof required for successful prosecution under section 63 of the Act. Following are the relevant points which should be considered very carefully in this regard:—
(i) Every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term, which may extend to two years, or with fine which may extend to Rs. 50,000, or with both.
For defending from the criminal liability to such person has to prove that:—
(a) either that the statement was immaterial; or
(b) that he was having reasonable ground to believe, that the statement was true and did so up to the time of the issue of the prospectus.
(ii) If a person is to be prosecuted then the presence of mens rea is essential; language of the section itself provides that, in order to make a person liable for prosecution, it must be shown that untrue statement was made with criminal intention. It should also be noted that the principle of strict liability for criminal prosecution cannot be applied in this case. Also, prosecution under this section cannot be launched where the statement made would in any case be inconsequential or immaterial. A person charged with an offence under this section may also seek immunity under the 'general exceptions' to the criminal prosecution mentioned in the Indian Penal Code.
(iii) Every person authorising the issue can be prosecuted under section 63 of the Act. Every directors and promoters would necessarily come within the purview of the expression 'every person who authorised the issue of the prospectus'. Furthermore a person who agrees to be a director of the company can be branded as a person who authorised the issue of the prospectus.
However, the auditor, legal adviser, attorney, solicitor, banker and broker of the prospective company and even an expert giving his consent under section 58 will also be deemed to be persons who authorised the issue of the prospectus subject to the limited sphere of their liability.
(iv) An expert cannot be made liable for all the untrue statements that may appear in the prospectus, he is only liable when a particular untrue statement can be attributed to them under this section. Section 63(2) imposes a limited criminal liability for untrue statements, which can be properly attributed to them. However, the position of the directors are distinct and they are liable for all the untrue statements that may appear in the prospectus as also for any untrue statement that may appear in any report or memorandum appearing by way of separate annexure or documents available for inspection.
(v) In order to launch a prosecution, there must be included in the prospectus an untrue statement. The statement must be shown to be misleading or must be shown as being calculated to mislead. Clause (a) of section 65(1) encompasses a statement actually made while clause (b) refers to an omission of a statement from the prospectus. Therefore, both suppression vary and suggestions are used in interpretation of what constitutes an untrue statement.
(vi) A person may use language in such a way as though in the form of hope and expectation, it became a representation as to existing facts, and if so, and if it is brought to one's knowledge that these facts are false, it is a fraud.
(vii) The suppression of material facts might amount to misrepresentation in prospectus. According to its reasonable interpretation, where one has a written statement which is false, not in any specific words or any specific figures which it contains, but which is false in the way in which a document may be fraudulent, viz., where one can take every word and every figure and say:' Now there is nothing false about this, there is nothing false about that', but the document as a whole may be false-the document as a whole may be false, not because of what it states, but because of what it does not state, because of what it implies. However, mere silence cannot be a sufficient foundation for setting aside the allotment of shares. Mere non-disclosure of material facts would form no
ground for an action in the nature of an action for misrepresentation. There must be some active misstatement of facts. The withholding of facts should be such, withholding which if not stated, makes that which is stated, absolutely false.
It may be concluded that in order to make a prospectus fraudulent it is not necessary that there should be false representation in it; even if every word is true, the suppression of material facts may render it fraudulent. To judge its effect, it should be read as a whole. It is not necessarily enough if the prospectus refers to the contracts and puts the intending shareholder upon enquiry as to their contents. As is said that sometimes half a truth is no better than downright falsehood.
(viii) Section 621 says that offences against the Act are cognizable on complaint by Registrar/ shareholder or on complaint of a person authorised by the Central Government in that behalf. The Central Government has authorised an officer of SEBI to file complaint in respect of an offence punishable under section 63. Notification No. GSR 716(E), dated 24-11-l993. Persons being prosecuted can take recourse to section 621A. Application for compounding the offence should be made to SEBI, which in turn would forward the same to the concerned Registrar of Companies. — Circular No. 13/93 (F. No. 10/8/82 Cl.V., dated 2-12-1993).
Criminal liability
Section 63 of the Act says that where a prospectus issued, if it includes any untrue statement, every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. Fifty thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.
Therefore, in order to invoke the provisions of section 63 of the Act, there must be 'included' in the prospectus an 'untrue statement'. Untrue statement has been clarified by sub-section (1) of section 65. Although, the expression used is the same as in the case of section 62, yet the standard of proof required for successful prosecution under section 63 of the Act. Following are the relevant points which should be considered very carefully in this regard:—
(i) Every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term, which may extend to two years, or with fine which may extend to Rs. 50,000, or with both.
For defending from the criminal liability to such person has to prove that:—
(a) either that the statement was immaterial; or
(b) that he was having reasonable ground to believe, that the statement was true and did so up to the time of the issue of the prospectus.
(ii) If a person is to be prosecuted then the presence of mens rea is essential; language of the section itself provides that, in order to make a person liable for prosecution, it must be shown that untrue statement was made with criminal intention. It should also be noted that the principle of strict liability for criminal prosecution cannot be applied in this case. Also, prosecution under this section cannot be launched where the statement made would in any case be inconsequential or immaterial. A person charged with an offence under this section may also seek immunity under the 'general exceptions' to the criminal prosecution mentioned in the Indian Penal Code.
(iii) Every person authorising the issue can be prosecuted under section 63 of the Act. Every directors and promoters would necessarily come within the purview of the expression 'every person who authorised the issue of the prospectus'. Furthermore a person who agrees to be a director of the company can be branded as a person who authorised the issue of the prospectus.
However, the auditor, legal adviser, attorney, solicitor, banker and broker of the prospective company and even an expert giving his consent under section 58 will also be deemed to be persons who authorised the issue of the prospectus subject to the limited sphere of their liability.
(iv) An expert cannot be made liable for all the untrue statements that may appear in the prospectus, he is only liable when a particular untrue statement can be attributed to them under this section. Section 63(2) imposes a limited criminal liability for untrue statements, which can be properly attributed to them. However, the position of the directors are distinct and they are liable for all the untrue statements that may appear in the prospectus as also for any untrue statement that may appear in any report or memorandum appearing by way of separate annexure or documents available for inspection.
(v) In order to launch a prosecution, there must be included in the prospectus an untrue statement. The statement must be shown to be misleading or must be shown as being calculated to mislead. Clause (a) of section 65(1) encompasses a statement actually made while clause (b) refers to an omission of a statement from the prospectus. Therefore, both suppression vary and suggestions are used in interpretation of what constitutes an untrue statement.
(vi) A person may use language in such a way as though in the form of hope and expectation, it became a representation as to existing facts, and if so, and if it is brought to one's knowledge that these facts are false, it is a fraud.
(vii) The suppression of material facts might amount to misrepresentation in prospectus. According to its reasonable interpretation, where one has a written statement which is false, not in any specific words or any specific figures which it contains, but which is false in the way in which a document may be fraudulent, viz., where one can take every word and every figure and say:' Now there is nothing false about this, there is nothing false about that', but the document as a whole may be false-the document as a whole may be false, not because of what it states, but because of what it does not state, because of what it implies. However, mere silence cannot be a sufficient foundation for setting aside the allotment of shares. Mere non-disclosure of material facts would form no
ground for an action in the nature of an action for misrepresentation. There must be some active misstatement of facts. The withholding of facts should be such, withholding which if not stated, makes that which is stated, absolutely false.
It may be concluded that in order to make a prospectus fraudulent it is not necessary that there should be false representation in it; even if every word is true, the suppression of material facts may render it fraudulent. To judge its effect, it should be read as a whole. It is not necessarily enough if the prospectus refers to the contracts and puts the intending shareholder upon enquiry as to their contents. As is said that sometimes half a truth is no better than downright falsehood.
(viii) Section 621 says that offences against the Act are cognizable on complaint by Registrar/ shareholder or on complaint of a person authorised by the Central Government in that behalf. The Central Government has authorised an officer of SEBI to file complaint in respect of an offence punishable under section 63. Notification No. GSR 716(E), dated 24-11-l993. Persons being prosecuted can take recourse to section 621A. Application for compounding the offence should be made to SEBI, which in turn would forward the same to the concerned Registrar of Companies. — Circular No. 13/93 (F. No. 10/8/82 Cl.V., dated 2-12-1993).
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