Misstatements in Prospectus - Criminal and Civil Liability (Sections 34 & 35)
# Misstatements in Prospectus
## What is a Misstatement?
A misstatement is stating something false or inaccurate in a prospectus — either by:
Commission: actively including something false
Omission: leaving out something material
A misstatement in a prospectus is a serious offence attracting both criminal and civil liability.
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## A. Criminal Liability [Section 34]
### When is a Statement Considered 'Untrue'?
A statement is treated as untrue if:
1. It is misleading in form or context, OR
2. Any inclusion or omission is likely to mislead.
### Punishment
Every person who authorises the issue of such a prospectus is liable under Section 447 (fraud).
### Exceptions (No Liability)
A person escapes liability if they prove that:
(a) The statement/omission was immaterial, OR
(b) They had reasonable grounds to believe the statement was true.
### Important Notes
Loss is NOT necessary — actual investor loss need not be proved for Section 34 to apply.
Strict liability — whether the omission was intentional or unintentional, the person is liable under Section 34 (read with Section 447).
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## B. Civil Liability [Section 35]
### Who Compensates and to Whom?
If a person suffers loss from acting on a misleading statement/omission, the company AND every person involved must compensate that loss. Persons involved include:
Director
Proposed director
Promoter
Expert
Person who authorised issue of prospectus
### Exceptions (No Liability)
A person is NOT liable if they prove any of:
(a) They withdrew consent before the prospectus was issued and it was issued without their authority
(b) They gave public notice that the prospectus was issued without their knowledge
(c) They relied on an expert's authority, believing the statement to be true
### Unlimited Liability for Fraud
If the prospectus is issued with fraudulent intent to deceive investors, those responsible are personally liable for ALL losses — there is no cap on liability.
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## Key Comparison Table
Aspect
Section 34 (Criminal)
Section 35 (Civil)
Nature
Punishment (S. 447)
Compensation for loss
Loss required?
No
Yes
Liability
Strict
Defendable on grounds
Limit
Statutory punishment
Unlimited if fraud
Worked example
### Example 1
Henderson v. Lacon: Prospectus stated that directors and their friends had subscribed a large portion of capital. This was false. Held: Misleading statement — liability under misstatement provisions.
### Example 2
Rex v. Kylsant: Prospectus claimed the company had paid regular dividends. In reality, the company was incurring substantial losses (dividends were being paid out of reserves). Held: Misleading by failure to disclose the full truth — half-truth is a misstatement.
### Example 3
Smith v. Chadwick: A statement about turnover was technically true if read as 'production capacity', but misleading if read as 'actual production level'. Held: Misleading due to ambiguity — a statement capable of misleading is a misstatement.
### Example 4
Practice scenario: ABC Ltd issues a prospectus stating it owns 5 factories. In fact, it owns 3 and has signed MoUs for 2 more. Investor X subscribes based on this and the company performs poorly. Discuss liability.
Answer: The statement is misleading by inclusion (overstating ownership). Under Section 34, every person authorising the issue is liable under Section 447 (criminal), regardless of whether X suffered loss. Under Section 35, the company and directors/promoters/experts must compensate X for the loss — unless they prove they withdrew consent, gave public notice, or relied on an expert.
⚠️ Common exam mistakes
Confusing Section 34 (criminal liability) with Section 35 (civil liability) — Section 34 does not require proof of loss; Section 35 does.
Forgetting that liability under Section 34 is STRICT — intention is irrelevant; even unintentional misleading statements attract Section 447.
Missing that civil liability under Section 35 becomes UNLIMITED when fraud is involved.
Listing only directors as liable — promoters, experts, and persons authorising the prospectus are equally liable under Section 35.
Assuming 'omission' is not a misstatement — both inclusion and omission can mislead and trigger Section 34.
Bare-Act text Sections 34 & 35 · Companies Act, 2013 · click to expand
Section 34 — Criminal Liability for Misstatement in Prospectus: Where a prospectus issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under Section 447. Provided that nothing in this section shall apply if such person proves either that the statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.
Section 35 — Civil Liability for Misstatement in Prospectus: 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 director, promoter, expert and every other person who has authorised the issue of the prospectus shall be liable to pay compensation to every person who has sustained such loss or damage.