Imagine you invested ₹2 lakhs in an IPO based on rosy projections in the prospectus — and then discovered the company had hidden its massive debt. You lost money because of a misleading statement (or a deliberate omission). Section 35 is what gives you the legal right to sue and get compensated. This is civil liability — meaning money compensation, not jail — though criminal liability under Section 36 can run alongside it.
Who can be sued? Section 35(1) casts a wide net. Any person who subscribed to securities and suffered loss due to a misleading statement or omission in the prospectus can claim compensation from: (a) directors of the company at the time of the prospectus, (b) persons named as directors or who agreed to become directors, (c) promoters, (d) anyone who authorised the issue of the prospectus, and (e) experts (like valuers, auditors, engineers) whose reports were included under Section 26(5). The company itself is also liable. This is a frequently tested 4-mark or 6-mark question — examiner loves asking you to list who is liable.
Defences available — Section 35(2): Not every named person is automatically stuck. A director can escape liability by proving they withdrew consent before the prospectus was issued and it was published without their authority. Similarly, if the prospectus was issued without their knowledge, and they gave prompt public notice upon discovering it, they're protected. For expert statements, the defence is that the expert's statement was correctly and fairly reproduced, and the director had reasonable grounds to believe the expert was competent and had given valid consent under Section 26(5).
The nuclear clause — Section 35(3): If the prospectus was issued with intent to defraud investors, all protections vanish. Every liable person becomes personally responsible without any limit on the compensation they must pay. No hiding behind the company's limited liability shield. This fraud angle is what separates Section 35 from ordinary negligence — the moment fraud is proved, the gloves come off.
📊 Worked example
Example 1 — Who is liable?
Rajesh & Co. Pvt. Ltd. issues a prospectus to raise funds. The prospectus includes a valuation report from CA Mehta (an expert) that inflates land value by ₹80 lakhs. Ms. Iyer, a retail investor, subscribes for shares worth ₹3,00,000 relying on this. The shares later crash and she sustains a loss of ₹1,80,000.
Working:
- Ms. Iyer subscribed based on a misleading statement ✓
- She suffered loss of ₹1,80,000 ✓
- Persons liable under Section 35(1):
1. Rajesh & Co. Pvt. Ltd. (the company)
2. Directors at the time of issue
3. Promoters of the company
4. Person who authorised the prospectus
5. CA Mehta — as the expert under Section 26(5)
Answer: All of the above are jointly liable to compensate Ms. Iyer ₹1,80,000.
---
Example 2 — Defence by a director
Mr. Sharma was proposed as a director of Sunrise Ltd. He gave consent to be named in the prospectus but withdrew it in writing 10 days before the prospectus was issued. The promoters ignored this and issued the prospectus anyway naming Mr. Sharma. An investor, Mr. Pillai, lost ₹50,000 relying on the prospectus and now sues Mr. Sharma.
Working:
- Mr. Sharma was named as a director → prima facie liable under Section 35(1)(b)
- Defence under Section 35(2)(a): He withdrew consent before issue, and the prospectus was issued without his authority
- Mr. Sharma must prove this withdrawal (written record helps enormously here)
Answer: Mr. Sharma is not liable to Mr. Pillai. The promoters who ignored his withdrawal bear the liability.
⚠️ Common exam mistakes
- Confusing civil and criminal liability: Students write that Section 35 sends people to jail — it doesn't. Section 35 = civil compensation. Section 36 = criminal punishment. The bare Act even says 'without prejudice to any punishment under Section 36,' meaning both can apply simultaneously.
- Missing the company as a liable party: Many students list only the directors and promoters and forget that the company itself is also liable under Section 35(1). Always include the company in your answer.
- Forgetting experts as a liable category: CA Mehta or a valuer is easily missed. If an expert's report was included in the prospectus under Section 26(5), that expert is also on the hook — list them.
- Applying Section 35(3) too broadly: Section 35(3) (unlimited personal liability) applies only when fraud is proved. Don't apply it to every misstatement — ordinary negligence or innocent misstatement only attracts regular compensation under 35(1).
- Vague defence answers: When asked about defences, students write 'the director was not aware.' That's incomplete. You must state the specific conditions: withdrew consent before issue AND it was issued without authority — or — issued without knowledge AND forthwith gave reasonable public notice. Both conditions in each branch must be satisfied.
📖 Bare Act text — Section 35, Companies Act 2013
(click to expand)
(1) Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—(a) is a director of the company at the time of the issue of the prospectus;(b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;(c) is a promoter of the company;(d) has authorised the issue of the prospectus; and(e) is an expert referred to in sub-section (5) of section 26,shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.(2) No person shall be liable under sub-section (1), if he proves—(a) that, 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; or(b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent;(c) that, as regards every misleading statement purported to be made 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 the said person had given the consent required by sub-section (5) of section 26 to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant's knowledge, before allotment thereunder.(3) Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in sub-section (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
Test yourself
Practice questions on this section, AI-graded with citations.
⚡ Practice now →