Civil Liability for Misstatements in Prospectus (Section 35) — Persons Liable, Defraud Rule, Exemptions
# Civil Liability for Misstatement in Prospectus (Section 35)
## Object
Section 35 gives a subscriber a statutory cause of action to recover compensation for loss or damage caused by reliance on an untrue / misleading statement in, or omission from, a prospectus.
## Persons Liable (Five Categories)
Compensation can be recovered from:
1. Every director of the company at the time of issue of the prospectus;
2. Every person who has authorised himself to be named, and is named, in the prospectus as a director (proposed director);
3. Every promoter of the company;
4. Every person who has authorised the issue of the prospectus; and
5. Every person named in the prospectus as an expert.
## Special rule when Prospectus is issued to defraud
Where it is proved that the prospectus was issued with intent to defraud applicants for securities or for any fraudulent purpose, every person referred above is:
personally responsible,
without any limitation of liability,
for all losses sustained by any person who subscribed on the basis of such prospectus.
(This effectively pierces the usual director-protection shield in fraud cases.)
## Exemptions — Defences to Civil Liability
No person is liable for civil compensation if he proves:
### 1. Consent withdrawn before issue
Having consented to become a director, he withdrew his consent before the prospectus was issued, and the prospectus was issued without his authority or consent.
### 2. Prospectus issued without his knowledge / consent
It was issued without his knowledge or consent, AND on becoming aware of its issue, he forthwith gave a reasonable public notice to that effect.
### 3. Reasonable belief in expert's report
Where the misleading statement is from / extracted from an expert's report or valuation, the defendant escapes liability if:
the expert maintains it was a correct and fair representation / extract; AND
the defendant had reasonable ground to believe, and did up to the time of issue believe, that the expert:
was competent to make it; AND
had given the consent required by Section 26 to issue of the prospectus; AND
had not withdrawn that consent before filing with the Registrar (or, to the defendant's knowledge, before allotment).
## Civil vs Criminal — Quick Recap
Section 35 (Civil)
Section 34 (Criminal)
Purpose
Compensate the subscriber
Punish the wrongdoer
Trigger
Loss or damage from misstatement
Misstatement, regardless of damage
Mens rea
Not required for action; but available in fraud route
Essential
Procedure
CPC, 1908
CrPC, 1973
Offence against
The counterparty (subscriber)
The State
## Memory Hook for the 5 liable persons — "D-P-P-A-E"
Director (at time of issue), Proposed director (named with consent), Promoter, Authoriser of issue, Expert (named).
Worked example
### Example 1
Example 1 — Withdrawal of consent
F agreed to be named as a director in the prospectus of W Ltd. A week before the prospectus was filed, F formally withdrew his consent in writing. The prospectus, by oversight, still listed F as a director and contained misstatements.
Treatment: F is exempt under Section 35(2)(a) — he withdrew consent before issue, and the prospectus was issued without his authority.
### Example 2
Example 2 — Expert defence
G, a director, relied on a valuation report by V, a SEBI-registered valuer, which was reproduced in the prospectus. V later admits the valuation was overstated but maintains it was a fair representation at the time. G had no reason to doubt V's competence or consent.
Treatment: G can rely on the expert-report defence and avoid civil liability under Section 35.
### Example 3
Example 3 — Defraud route, unlimited liability
The court finds the prospectus of H Ltd. was issued with intent to defraud investors. Director J argues that his exposure should be capped at his shareholding.
Treatment: Under Section 35(3), in fraud, J is personally responsible without any limitation of liability for all losses suffered by subscribers.
⚠️ Common exam mistakes
Missing the 'proposed director who is named' as a separate liable category — students often merge it with 'director at time of issue'.
Treating subsequent open-market purchasers as eligible claimants under Section 35 — only those who subscribed on the basis of the prospectus may claim.
Ignoring the requirement of a public notice forthwith in the 'no knowledge / consent' defence — mere ignorance is not enough.
Confusing the expert defence: the defendant must show reasonable belief AND the expert must (a) be competent, (b) have given Section 26 consent, and (c) not have withdrawn that consent before filing.
Forgetting that fraud strips away the limitation of liability — directors cannot hide behind procedural defences when intent to defraud is proved.
Bare-Act text Section 35 · Companies Act, 2013 · click to expand
Section 35: Civil Liability for Mis-statements in Prospectus. (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. (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.