# Misstatements in Prospectus — Section 34 (Criminal Liability)

## A. What is a Misstatement?

Misstatement = stating something false or inaccurate, either by:

Commission (positively false statement); OR
Omission (leaving out material facts).

A misstatement in a prospectus is a serious offense attracting both criminal and civil liability.

## B. When is a Statement 'Untrue'? [Sec 34]

A statement in a prospectus is considered untrue if:

1. The statement is misleading in form or context; OR

2. Any inclusion or omission is likely to mislead.

## C. Punishment — Section 447 (Fraud)

If a prospectus includes a misleading or untrue statement, every person who authorizes the issue of such prospectus is liable under Section 447 (penalty for fraud — imprisonment + heavy fine).

## D. Exception — When No Liability Arises

A person is NOT liable under Sec 447 if they prove either:

1. The statement or omission was immaterial; OR

2. They had reasonable grounds to believe the statement was true and continued to believe so till the prospectus issued.

## E. Two Critical Notes

### 1. Loss is NOT a Prerequisite

Proving actual financial loss from the misstatement is not necessary to establish guilt under Sec 34. The misstatement itself is the offense.

### 2. Strict Liability

Whether the omission was intentional or unintentional, the person will be held guilty under Sec 34 and liable under Sec 447 — this is a strict liability offense.

## Case Law Snapshots

### Henderson v. Lacon

A prospectus claimed that directors and friends had subscribed to a large portion of the capital. This was false. Held: misleading.

### Rex v. Kylsant

Prospectus stated the company had paid regular dividends, but in reality, the company had been incurring substantial losses. Held: misleading due to failure to disclose the full truth. (Half-truth = misleading)

### Smith v. Chadwick

A statement about turnover was true if read as production capacity, but misleading if read as actual production. Held: misleading because of ambiguity.

Worked example

### Example 1

Example 1: A director discovers, after signing the prospectus, that one revenue figure is overstated. He stays silent. Investors subscribe and the truth emerges. Is the director liable under Sec 34?

Answer: Yes. The omission to correct a known misstatement is itself a misstatement. He cannot claim 'reasonable grounds to believe true' as the exception.

### Example 2

Example 2: A prospectus omits to mention a pending criminal case against a director. Investors later sue. The company argues no actual loss was suffered. Can the directors escape liability under Sec 34?

Answer: No. Actual loss is not a prerequisite under Sec 34 — the misstatement (here, by omission) itself triggers liability.

⚠️ Common exam mistakes

Thinking that intent (mens rea) is required — Sec 34 is a strict liability offense.
Believing that absence of investor loss is a defense — it is not under Sec 34.
Confusing the 'immaterial' defense with 'I didn't know' — both must be proved by the defendant.
Missing that half-truths and ambiguities count as misstatements (Kylsant, Smith v. Chadwick).

Bare-Act text Section 34 (read with Section 447) · 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. Provided that nothing in this section shall apply to a person if he proves that such 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.

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Misstatements in Prospectus — Meaning and Criminal Liability (Sec 34)

Worked example

⚠️ Common exam mistakes