Amended and updated notes on section 35 of Companies Act 2013. Detail discussion on provisions and rules related to civil liability for misstatements in prospectus.
Chapter III (Sections 23–42) of the Companies Act, 2013 (CA 2013) deals with the provisions related to prospectus and allotment of securities. Section 35 of CA 2013 provides for civil liability for misstatements in prospectus.
Recently, we have discussed in detail section 34 (Criminal liability for misstatements in prospectus) of CA 2013. Today, we learn the provisions of section 35 of Companies Act 2013 read with the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Section 35 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 2754(E) issued dated 12.09.2013. This notification was come into force from 12th September, 2013 i.e. the commencement date of section 35 is 12-9-2013.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | III |
| Chapter Name | Prospectus and Allotment of Securities |
| Section No. | 35 |
| Section Name | Civil liability for misstatements in prospectus |
| Monthly Updated Edition | Company Law PDF |
Civil Liability for Misstatements in Prospectus
Section 35(1):
Section 35(1) Liabilities of Persons: 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, then the company and following person shall be liable to pay compensation to every person who has sustained such loss or damage:
- Director at the time of the issue of the prospectus;
- Person authorised/ agreed to be director as per prospectus [Proposed Director];
- Promoter;
- Person authorised the issue of the prospectus; and
- Expert u/s 26(5).
Note that such person also liable for punishment u/s 36 i.e. Punishment for fraudulently inducing persons to invest money.
Section 35(2):
Section 35(2) Persons not Liable: No person shall be liable u/s 35(1), if he proves that—
(a) He withdrew consent to become a director before the issue of the prospectus; or
(b) He gave a reasonable public notice that prospectus was issued without his knowledge or consent.
(c) Every statement made by an expert or copy of or an extract from a report or valuation of an expert was:
- correct and fair representation of the statement; and
- he had reasonable ground to believe at the time of the issue of the prospectus that the person making the statement was competent to make it and that the said person had given the consent u/s 26(5) and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.
In section 35(2)(c) for the words “delivery of a copy of the prospectus for registration”, the words “filing of a copy of the prospectus with the Registrar” was substituted by the Companies (Amendment) Act, 2019 w.e.f. 15th August 2019.
Section 35(3):
Section 35(3) Intentional Defraud: Every person referred to u/s 35(1) shall be personally responsible without any limitation of liability if it is proved that a prospectus has been issued with intent:
- To defraud applicants for the securities of a company or any other person; or
- For any fraudulent purpose.
Such liability shall be 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. Section 37 empowers to file a suit or take any other action under section 35 affected person by any misleading statement in the prospectus.
Section 35 of Companies Act 2013: Civil liability for misstatements in prospectus
Section 35 shall come into force on 12th September, 2013 vide Notification No. S.O. 2754(E) dated 12.09.2013 except clause (e) of sub-section (1) which shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(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.
- (c) that, as regards every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by sub-section (5) of section 26 to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.
(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 subsection (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.