# Civil Liability for Mis-statement in Prospectus (Section 35)

## Section 35(I) — Persons Liable

These persons are liable to pay compensation for loss or damage sustained by reason of mis-statement / untrue statement / inclusion or omission of any matter in the prospectus:

1. Every person who is a director of the company at the time of issue of prospectus.

2. Every person who has authorised himself to be named and is named in the prospectus as a director (proposed directors).

3. Every person who is a promoter of the company.

4. Every person who has authorised the issue of the prospectus.

5. Every person who is named in the prospectus as an expert.

## Liability on Defraud

If a prospectus is proved to have been issued with intent to defraud applicants or any other person, or for any fraudulent purpose:

Every person above shall be personally responsible.
Liability is without any limitation.
For all losses or damages incurred by any person who subscribed on the basis of such prospectus.

## Section 35(II) — Exemptions from Liability

A person shall NOT be liable for mis-statement if he proves any of the following:

### Defence 1 — Withdrawn Consent

Where a person having consented to become a director withdrew his consent before the issue of the prospectus, and the prospectus was issued without his authority or consent.

### Defence 2 — Issued Without Knowledge/Consent

Where the prospectus was issued without the knowledge or consent of a person, AND on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge.

### Defence 3 — Reliance on Expert

Where the misleading statement was made by an expert OR contained in a copy/extract from a report/valuation of an expert, AND the defendant proves:

According to the expert, it was a correct and fair representation;
He had reasonable ground to believe and did believe (up to time of issue) that the expert was competent;
The expert had given the consent required by Section 26 and had not withdrawn it before filing with the Registrar or, to the defendant's knowledge, before allotment.

## Key Definitions

### Fraud

"Fraud" in relation to affairs of a company includes:

Any act, omission, concealment of any fact, or abuse of position

committed by any person (alone or with connivance), with intent to:

Deceive
Gain undue advantage from, OR
Injure the interests of

the company, shareholders, creditors, or any other person — whether or not there is any wrongful gain or wrongful loss.

### Wrongful Gain

The gain by unlawful means of property to which the person gaining is not legally entitled.

### Wrongful Loss

The loss by unlawful means of property to which the person losing is legally entitled.

## Key Doctrines

Loss or damage is the essential condition.
Governed by Civil Procedure Code, 1908.
Offence is against the counterparty (the affected investor).

Worked example

### Example 1

Example 1: Mr. Z agreed to be named as a director in DEF Ltd.'s prospectus but withdrew his consent in writing 5 days before the prospectus was issued. The prospectus was nonetheless issued without his authority. An investor sues Mr. Z.

Answer: Under Section 35(II)(1), Mr. Z is NOT liable, since he withdrew his consent before issue and the prospectus was issued without his authority. The defence applies.

### Example 2

Example 2: GHI Ltd.'s prospectus contained a valuation report by Mr. V (a registered valuer). The valuation turned out to be misleading. The director Mr. D relied on Mr. V's report in good faith. Is Mr. D liable?

Answer: Under Section 35(II)(3), Mr. D may escape liability if he proves: (a) the report was a correct/fair extract of Mr. V's valuation; (b) he had reasonable grounds to believe Mr. V was competent; and (c) Mr. V had given the requisite consent under Section 26 and had not withdrawn it before filing. If all conditions are satisfied, Mr. D is not liable.

⚠️ Common exam mistakes

Listing only directors as liable persons — proposed directors, promoters, authorisers of issue, and named experts are also liable.
Forgetting that liability becomes UNLIMITED in defraud cases (Section 35 proviso).
Confusing 'withdrew consent' (Defence 1) with 'no knowledge of issue' (Defence 2) — they are distinct.
Missing the requirement of 'reasonable public notice' immediately upon becoming aware (Defence 2).
Believing that wrongful gain/loss is essential to establish fraud — the definition explicitly states it is not required.

Bare-Act text Section 35 · The Companies Act, 2013 · click to expand

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 is a director, has authorised himself to be named, is a promoter, has authorised the issue of the prospectus, or is named in the prospectus as an expert, shall be liable to pay compensation to every person who has sustained such loss or damage.

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