# Remedies Available for Misstatement in Prospectus

When an investor is misled by a prospectus, three remedies are available:

1. Right of Rescission (against company)

2. Right of Action for Damages (against persons responsible)

3. Damages for Deceit (under Indian Contract Act)

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## A. Right of Rescission

### When Can It Be Sought?

A person who buys shares based on a misleading prospectus can apply to the court for rescission under the Indian Contract Act, 1872.

### Effect of Rescission

The agreement to buy shares becomes voidable at the option of the subscriber.
On rescission:
Company removes the subscriber's name from the register.
Returns money with interest and incidental costs.
Compensation for damages from non-fulfilment may be claimed under Section 75, Indian Contract Act, 1872.

### When Rescission is NOT Available

Subsequent purchasers from the secondary market cannot rescind (they didn't rely on the prospectus from the company directly).
A subscriber to the MOA cannot seek rescission — they were not influenced by the prospectus when signing.

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## B. Right of Action for Damages

### When Can Damages Be Claimed?

If the misstatement amounts to fraud, the investor can claim damages — even if the company is in liquidation.

### Pre-requisites (all three must be satisfied)

1. There was a fraudulent misrepresentation in the prospectus.

2. The person was intended to act on it.

3. The person suffered damages by acting on it.

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## C. Damages for Deceit

### When is This Remedy Available?

Deceit remedy is available under Section 19, Indian Contract Act, 1872 — even where rescission is lost due to negligence OR where the company is in liquidation.

### Pre-requisites

1. There was a fraudulent misstatement of material facts.

2. The person is the original allottee who saw the prospectus.

3. The person was actually deceived by the misstatement.

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## Quick Comparison

Remedy	Against Whom?	Requires Fraud?	Available After Liquidation?
Rescission	Company	No (misleading is enough)	No (usually lost)
Damages	Persons responsible	Yes	Yes
Deceit	Persons responsible	Yes	Yes

Worked example

### Example 1

Example 1 — Rescission: Mr A bought 1,000 shares of XYZ Ltd at ₹10 each based on a prospectus claiming a non-existent factory. He discovers the truth and approaches the court.

Answer: A can seek rescission — the contract is voidable. The company must remove his name from the register and refund ₹10,000 with interest. A may also claim incidental costs under S. 75 of the Indian Contract Act.

### Example 2

Example 2 — No Rescission: Mr B bought XYZ Ltd shares from the stock exchange (secondary market) one year after the IPO, having read the prospectus online.

Answer: B cannot rescind — rescission is unavailable to subsequent purchasers from the market. B's only remedy is damages/deceit if fraud is proved.

### Example 3

Example 3 — Damages despite liquidation: XYZ Ltd has gone into liquidation. The prospectus contained fraudulent statements about reserves.

Answer: Rescission is lost (company in liquidation), but investors can still claim damages or sue for deceit against directors, promoters, and experts personally — fraud claims survive liquidation.

⚠️ Common exam mistakes

Thinking rescission is available to anyone who bought shares — it is only for original allottees who acted on the prospectus.
Forgetting that MOA subscribers cannot rescind — they didn't rely on the prospectus.
Confusing 'misleading' (enough for rescission) with 'fraudulent' (needed for damages/deceit).
Believing that liquidation kills all remedies — damages and deceit survive liquidation; only rescission is generally lost.
Treating damages and deceit as the same — deceit specifically requires the claimant to be the original allottee who actually saw and was deceived.

Bare-Act text Section 75 & Section 19, Indian Contract Act, 1872 · Indian Contract Act, 1872 (read with Companies Act, 2013) · click to expand

Section 19, Indian Contract Act, 1872 — Voidability of agreements without free consent: When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true. Section 75, Indian Contract Act, 1872 — Party rightfully rescinding contract entitled to compensation: A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.

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Remedies for Misstatements - Rescission, Damages, and Deceit

Worked example

⚠️ Common exam mistakes