## Mis-statements in Prospectus [Sections 34 & 35]

A contract for shares is a contract of uberrimae fides (utmost good faith). If a prospectus contains a misstatement — a false or inaccurate statement, or omits material facts giving a wrong impression — it is a misleading prospectus.

### Overview of remedies for aggrieved shareholder

Against company (Indian Contract Act, 1872)	Against company & persons connected	Against persons who authorised issue
• Right of Rescission, or	• Civil Liability (Sec 35)	• Criminal Liability (Sec 34), or
• Right of Damages		• Damages for Deceit

### Right of Rescission

The agreement to purchase shares is voidable at the option of the person who purchased shares directly from the company on the basis of the misleading prospectus.

Exceptions — rescission NOT available to:

A subscriber to the MOA (company did not exist when he signed).
A subsequent purchaser of shares from the market.

### Right of Action for Damages

A person who has suffered damage by acting on a misrepresented material fact in the prospectus (with intent of fraud) may sue for damages against the company. This remedy survives even if the company is in liquidation.

### Civil Liability [Section 35]

If a person sustains loss by acting on an inclusion/omission in a misleading prospectus, the following are liable to pay compensation (irrespective of intent of fraud):

1. The company, AND

2. Every person who is/was —

A director at the time of issue of the prospectus,
Has authorised himself and is named as director in the prospectus,
A promoter and an expert, and
Authorised issue of the prospectus.

Defences (the person is not liable if he proves that):

He withdrew his consent as a director before issue and the prospectus was issued without it,
He gave public notice that the prospectus was issued without his knowledge/consent,
The misleading statement was made by an expert (or was an extract from an expert's report) and was a correct representation — and he reasonably believed the expert was competent, had consented, and had not withdrawn consent before filing,
The statement was not made by him in capacity of expert.

> If the prospectus is proved to have been issued with intent to defraud, the above persons are personally liable without limitation for loss/damage.

### Criminal Liability [Section 34]

If a prospectus is issued that includes a misleading statement, or an inclusion/omission likely to mislead, with intent to defraud, every person who authorised issue is liable under Section 447 (fraud). Loss from misstatement is not essential.

Defences:

The misstatement/omission was immaterial, or
He had reasonable grounds to believe (and did believe until issue) that the statement was true or the inclusion/omission was necessary.

### Damages for Deceit

Available to the original allottee who saw the prospectus and was actually deceived — even if rescission is lost against the company or the company has gone into liquidation. Available only to a person who purchased shares on the basis of the prospectus.

### Quick rule

Situation	Sections applicable
Fraud	Section 35 (compensation) + Section 34 (penalty u/s 447)
Misstatement without fraud	Only Section 35 (compensation)

Worked example

### Example 1

Q. Mr. R subscribed to shares of K Ltd. relying on a prospectus that overstated the company's turnover. The directors authorised this with knowledge of its falsity. What remedies are available to Mr. R?

A. Since R purchased directly from the company:

He may rescind the contract.
He may sue for damages against the company.
Under Section 35, the company, every director, promoter and expert who authorised issue are jointly liable to compensate his loss.
Because the misstatement was made with intent to defraud, under Section 34 those who authorised issue are also criminally liable under Section 447.
He may additionally claim damages for deceit even if rescission is lost or K Ltd. is wound up.

⚠️ Common exam mistakes

Allowing rescission to a subsequent market purchaser — only the direct allottee from the company can rescind.
Treating Section 35 as requiring proof of intent to defraud — civil liability arises irrespective of fraudulent intent.
Assuming Section 34 needs actual loss — it doesn't; the offence is in the false issuance itself.
Forgetting that a director who withdrew consent and gave public notice before issue has a complete defence under Section 35.

Bare-Act text Sections 34 & 35 · Companies Act, 2013 · click to expand

Section 34: 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. Section 35: 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 [specified] shall be liable to pay compensation to every person who has sustained such loss or damage.

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Mis-statements in Prospectus — Civil and Criminal Liability [Sections 34 and 35]

Worked example

⚠️ Common exam mistakes