Section 35 of Companies Act. Civil liability for mis-statements in prospectus.

“ (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.

(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.”

Precedent pertaining to Section 35 of Companies Act – P.N.B Housing Finance Ltd. v. Karam Chand & Ors.–

PNB Housing Finance was the allegation by the SEBI against PNB Housing Finance and 12 individuals that PNB Housing Finance had violated the norms in preferential securities issuance to US-based Carlyle Group and a deal with Carlyle Group was scrapped later. The housing finance player, part of state-owned Punjab National Bank, and the 12 individuals, who were directors of the company as of May 31, 2021, jointly paid Rs 72.76 lakh towards settlement.

The amount includes Rs 44.26 lakh as legal costs, the Securities and Exchange Board of India (Sebi) said in an order on Tuesday.

The order came after PNB Housing Finance along with its directors approached Sebi proposing to settle the alleged violations of LODR (Listing Obligations and Disclosure Requirement) rules in the Carlye Group case “without admitting or denying the findings” through a settlement order.

Scope of liability under Section 35 of Companies Act

What is a Mis-statement of the prospectus:

A statement included in a prospectus shall be deemed to be untrue if the statement is misleading in the form or context or if there is any omission from the prospectus in any manner to mislead. A liability arises when any person subscribes for any shares or debentures based on content provided in the prospectus. If any person suffers loss or damages due to untrue information in the prospectus.

Who can be held liable for the damages under Section 35 of the Companies Act, 2013?

Section 35(1) prescribed the parties who are liable for the violation the provisions are

Directors play a key role in every action of the company, directors are responsible for all the decisions for ensuring the prospectus’s accuracy. If the director fails due diligence while preparing the prospectus.
Promoters are also held responsible for looking after the company’s formation and public offering as information is issued in the prospectus.
Reports or statements made by experts appearing in the prospectus can be held liable if is proved that the intention of misleading.
Signatories are those who sign the prospectus, including auditors, legal advisors, and brokers, and become legally bound to the civil liabilities.
Others: Those who are intentionally participated in the misleading act also liable under this provision.

How Board of Directors is held liable for offenses?

There is a collective involvement of the Board in taking any business actions for the company. Sometimes there is collective Board liability or individual directors held liable as per the involvement in the malafide act.

The liabilities can arise for various reasons as given here:

Liability of the company for fraud
Liability to the third parties
Liability for breach of warranty
Liability for breach of statutory duties
Liability for acts of another director
Criminal Liability

Conclusion

Section 35 deals with key provisions for the criminal liabilities for the misstatement in the prospectus by the company in the form of imposing penalties or damages. It also provides the defenses available against it. Also, this provision acts as a safeguard by imposing civil liabilities for those who are involved in misstatements with misleading intentions.

FAQs

1. Who can be responsible for civil liability under Section 35 for misstatements in a prospectus?

Anyone who has been found to the malafide intentions in the act of violation of Section 35 is held liable for compensation. It can be directors of the company, Promoters, Experts, Signatories, and others.

2. What are the defenses available to individuals or companies against civil liabilities under Section 35?

Individuals or companies can take the following defense by proving that-

The company has taken all due diligence while preparing a prospectus.
Misstatement was due to lack of knowledge i.e. unaware of the mistakes.
Misstement happened because the company relied on the expert’s statement which was later found inaccurate.
Issuing public Notice about the misstatement.

3. Does the degree of intent behind the misstatement affect the potential liability under this section?

Yes, The degree of intent can affect the potential liability due to negligence, recklessness, or fraud.

4. How damages can be compensated for under Section 35 of the Companies Act, 2013 ? Are there any limitations on the amount of compensation recoverable?

Section 35 provides a civil remedy for damages caused due to misstatement in the prospectus. Damages can be considered as below-

Calculating a difference between the purchase price and the actual value of the securities.
Applicable Interest, legal fees, and other related expenses.

There is no limit on compensation but it varies in every matter as per the intensity of the crime and loss that occurred to the aggrieved party.

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Section 35 of Companies Act 2013

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