Section 35 - Civil Liability for Misstatements in Prospectus
# Section 35 - Civil Liability for Misstatements in Prospectus
## When Does Liability Arise?
Where a person has:
1. Subscribed for securities of the company,
2. Acting on any misleading statement included in the prospectus or because of the inclusion / omission of any matter, and
3. Sustained loss or damage as a consequence.
...then the persons listed in sub-section (1) are jointly and severally liable to compensate every such person.
## Who Is Liable?
1. The Company;
2. Every person who is a Director of the company at the time of the issue of the prospectus;
3. Every person who has authorised himself to be named as a director in the prospectus, or has agreed to become a director (immediately or after an interval);
4. Every Promoter of the company;
5. Every person who has authorised the issue of the prospectus; and
6. Every Expert referred to in Section 26(5), in respect of statements purporting to be made by them.
## Statutory Defences - Section 35(2)
No person shall be liable under Section 35(1) if he proves any of the following:
### (a) Withdrawal Before Issue
Having consented to become a director, he withdrew his consent before the issue of the prospectus, and it was issued without his authority or consent.
### (b) Issue Without Knowledge
The prospectus was issued without his knowledge or consent, and on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent.
### (c) Reliance on Expert's Report
As regards every untrue statement purporting to be a statement made by an expert or contained in what purports to be a copy of or extract from a report or valuation of an expert, the person proves that:
It was a correct and fair representation of the expert's statement, or a correct copy / fair extract from his report;
He had reasonable grounds to believe that the expert was competent to make the statement; and
The expert had given his consent to the issue and had not withdrawn that consent before delivery of the prospectus for registration.
## Fraudulent Intent - Section 35(3)
Where it is proved that a prospectus has been issued with intent to defraud the applicants 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 losses or damages.
## Remedy NOT Available To
A subsequent purchaser of the securities in the secondary market (i.e., one who did not subscribe on the basis of the prospectus but bought the securities later from another holder) cannot avail of the remedy under Section 35. The remedy is confined to original allottees who subscribed on the faith of the prospectus.
Worked example
### Example 1
Example 1 - Three ingredients for liability
Mr. X reads ABC Ltd.'s prospectus stating it has long-term contracts worth Rs. 500 crore (false). He subscribes for 1,000 shares. The truth emerges and the share price crashes; he loses Rs. 2 lakh.
Treatment: All three conditions are met - subscription, reliance on misleading statement, and loss. ABC Ltd., its directors, promoters and the persons who authorised the prospectus are jointly and severally liable.
### Example 2
Example 2 - Director's withdrawal defence
Mr. D consented to become a director, but withdrew his consent in writing two days before the prospectus was issued. The prospectus was nevertheless issued naming him.
Treatment: Mr. D escapes liability under Section 35(2)(a) - he withdrew before issue and the prospectus was issued without his authority.
### Example 3
Example 3 - Reliance on expert
The prospectus includes a valuation by a SEBI-registered valuer; the directors had no reason to doubt his competence; his consent was obtained and not withdrawn. The valuation later proves wrong.
Treatment: The directors can plead the expert-reliance defence under Section 35(2)(c). The expert himself may still be liable.
### Example 4
Example 4 - Secondary market purchaser
Mr. Y did not subscribe in the IPO but bought shares 6 months later in the secondary market, in reliance on the same misleading prospectus.
Treatment: Section 35 remedy is not available to Mr. Y - he is not an original subscriber.
### Example 5
Example 5 - Intent to defraud
The Court finds the prospectus was deliberately fabricated to defraud investors.
Treatment: Under Section 35(3), every person in sub-section (1) is personally liable without any limitation - directors cannot rely on the company being the primary obligor.
⚠️ Common exam mistakes
Allowing subsequent market purchasers to claim under Section 35 - the remedy is only for those who subscribed on the faith of the prospectus.
Forgetting that experts are also liable under Section 35(1)(e) for statements purporting to be theirs.
Treating Section 35(2) defences as automatic - the person claiming the defence must prove it.
Missing the fraud override in Section 35(3) - once fraudulent intent is proved, defences collapse and liability is personal and unlimited.
Confusing Section 35 (civil compensation) with Section 34 (criminal liability under S.447) - both may apply to the same misstatement but their elements differ.
Bare-Act text Section 35 · Companies Act, 2013 · click to expand
Section 35(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.
Section 35(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.
Section 35(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.