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Company Law – Liability for a mis-statement in a Prospectus

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Published on: May 25, 2008

When any prospectus is issued by the company, then it is basically to invite people to purchase their share.

 Now, it is the duty of the company to see that the statements mentioned in the prospectus are of true nature. As, prospectus is a soul of the company, it is the duty of the co. to prepare such prospectus with complete due care. Also, when any prospectus is made the co. is bound to mention every detail regarding the co. in its prospectus. Omission of single fact also may mislead the investors. Preparing a prospectus is of a great responsibility. Thus, the company, director or a promoter is liable if any of the statement mentioned in the prospectus is of untrue nature.

This paper work basically deals with the civil liability of a company, director and the promoter with respect to the prospectus issued, if there is any misleading statement is drawn in it. By various judgments and authorities I have tried to prove that the civil liability is very strict and if any of the investors is aggrieved by such prospectus, Court is ready to provide them protection under this section. So, this project deals with the Remedies against the co., Director, Experts and Promoters Liability. So, this is what my project deals with.

           


MIS-STATEMENTS IN THE PROSPECTUS (S. 62) [CIVIL LIABILITY]

 

Every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. Section 62 was first enacted in England in the Director’s Liability Act, 1890, which was subsequently replaced by section 43 of Companies Act, 1948. The section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every person who subscribes for any shares of debentures on the faith of the prospectus for any loss or damage he may have suffered by reason of any untrue statement made in the prospectus. These would include Directors of the company, Promoters, or even the company. Thus, this section deals with the cases of misstatements of facts in a prospectus. It is immaterial for the purpose of this section whether the Director sees the prospectus or not; it is enough that he authorizes its issue.

The effect of Section 62 is not to alter the tortuous nature of the acts in respect of which there is to be liability but, to render it easier to establish liability against the Directors in a common law action of deceit by raising certain legal presumptions against them. Thus, this provision is an effective remedy to the deceived shareholders. This section is meant to tighten up the duties of directors and others who are in connection with the prospectus. So, this section provides statutory civil liability for ‘untrue statement’.

Misstatement means a falsehood or concealment or an ambiguity or an exaggeration – all of these have the potential to mislead a prospective investor in the company. The term ‘untrue statement’ or ‘misstatement’ is used in the broader sense. So, an ‘untrue statement’ means a statement in fact untrue, not a statement in the belief of the Directors untrue. It includes not only false statements but also statements which produce a wrong impression of actual facts.

Conditions for invoking Section. 62:

1)      The company had issued a prospectus inviting persons to subscribe for its shares or debentures.

2)      An untrue statement was included in the prospectus.

3)      The person who is claiming for the compensation had subscribed for the shares or debentures offered by the prospectus.

4)      Such person has subscribed for the shares or debentures relying upon the untrue statement contained in the prospectus.

5)      Such person has sustained a loss or damage after having subscribed for the shares or debentures.

 

Persons liable under Section.62:

1)      Every director holding the office at the time of the issue of the prospectus.

2)      Every person named in the prospectus as a director or a proposed director, if he has consented to include his name in the prospectus as such.

3)      Every promoter of the company as defined in sub-section (6) (a) of this section.

4)      Every other person who has authorized the issue of prospectus.

 

Defenses to escape from liability:

1)      Withdrawal of consent: The director will not be liable if he had withdrawn his consent to become a director before the issue of the prospectus and it was issued without his authority or consent. ‘Reasonable public notice’ must be given of withdrawal of consent.

2)      Issue without knowledge: The director can escape from his liability if he proves that the prospectus was issued without his knowledge and when he became aware about it, and then he gave a public notice for it. “Some of the principal” newspapers is not enough, it should be “all” newspapers in which the prospectus was advertised and with same frequency too. But, I don’t agree with this statement as it is very difficult to advertise in all the newspapers, and it may cause huge expenses too.

3)      Withdrawal of the consent after the issue of the prospectus but before allotment: When the director becomes aware about such misstatement in the prospectus, after the issue of the prospectus but before the allotment, then he can withdraw his consent and can give a public notice for it.

4)      Reasonable ground for belief: The director shall be protected if he can show that he had such reasonable ground to believe, which he did up to the time of allotment. Here, showing honesty is not enough, as one has to go beyond the principle of honesty.

5)      Statement of expert: If any statement is made by the expert, then director can always contended the fact that he had a reasonable ground to believe that such statements made were made under competent authority, and he did believe such statement to be true till the time of allotment. Even for public official document, the same rule shall apply.

 

 

 


REMEDIES AGAINST THE DIRECTOR:

 

1)      Damages for Fraudulent Misrepresentation:

In Contract Law, Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing the party into the contract. The misrepresentation should relate to a material fact. Where it is represented that something will happen or be done in future, this does not amount to a representation of fact.

The person who has been allotted the share may bring an action for fraudulent misrepresentation. Now, a director who was aware that a prospectus was being issued to the public, and if that person did not read the prospectus and did not withdraw his consent, is very much responsible for the contents of the prospectus. In certain cases, where the representation which are true at the time of issue of prospectus become false before the allotment is made. In such cases, the applicant should be informed about the changed circumstances.

Lord Hewart C.J. in one of his judgments pointed out that, “As a normal business seeking development when money is really being asked to feed and supply an ambitious gamble, is merely deceit. The argument is not that in this or that particular this prospectus was untrue; the argument is that its whole purpose and effect were to deceive”.

P.P.S. Gogna states that “It may be noted that the liability of these persons (it includes promoters, directors or other persons) is for a mere untrue statement in the prospectus, and it is not necessary that such a statement should be made with an intention to deceive the investors. Thus, the investor can claim compensation for any untrue statement in the prospectus without proving any fraud or intention to deceive.” However, in Taxmann it’s stated, “There must be an intention to defraud and that is to be proved by him.”

When those who have made a misrepresentation wish to resist the claim, the onus is upon them to show that notice of the misrepresentation was given to and received by the person whose claim they are residing.

 

Cases:

Derry vs. Peek

            The directors of a tramway company issued a prospectus stating that they had the right to run tram cars with steam power instead of with horses as before. The Act incorporating the company provided that such power might be used with the sanction of the Board of Trade. But, the Board of Trade refused to give permission and the company had to be wound up. One of the shareholders sued the directors for damages for fraud. Now, the House of Lords held that the directors were not liable in fraud because they honestly believed what they said in the prospectus to be true. Lord Herschel in this case observed that “Fraud is proved when it is shown that false representation has been made (a) knowingly, (b) without belief in its truth, or, (c) recklessly, carelessly whether it be false or true. 

 

Hallows vs. Fernie

            Here, the prospectus contained one statement which said that the company would commence operations with six crew steamships of 20,000 tons and 300 H.P. each having capacity of 2000 tons of cargo. Also, the steamers were guaranteed to steam 10 knots and calculated to perform the voyage from F to R in 25 days. But, there were no steamships in possession of the company when the prospectus was issued. And neither had it had any contract to obtain those steamships. Thus, the contention which was made was that the statements misrepresentation of fact. But, this contention was overruled. Court held that, the prospectus did not announce clearly and in unequivocal language to the public that the promoters of the company actually possess any steamships or has entered in the contract with respect to that. The Court further observed that there is a difference when we talk about words which can bear one meaning and another which is left to people to interpret. Also, the future sense must be given to words in the past or present to which it contains. Thus, in this way Court gave a very mild interpretation in this case.

 I firmly disagree with this case as when any statement is issued in the prospectus then any individual would infer the fact that it is true. Here, when the prospectus mentions the details of the steamships then anyone would think that the ships are in possession. Thus, Court has given a very liberal judgment to the case.

 

Re Reese River Silver Mining Company.     

            In this case, the prospectus contained the statement that the property which the company had contracted consisted of 50 acres land. It also said, “Containing several very valuable claims, some of which are in full operation, and make large daily returns”. The statement made was completely false as no such claims were in full operation. Now, the party contented that the statement was based on the report which was received by the director, and believed the same honestly. The Court said that there was a misrepresentation of facts. Court further observed that the company had committed the mistake by stating the circumstances as facts instead of stating as information received. If the company speaks that they have got the information from the report, then its their duty not to mention as facts.

            The Court is completely right in judging the case as the Company shouldn’t have mentioned such claims when they don’t exist.

 

            Again, the Court has done a fair job by judging the case as the prospectus stated entirely about wheels, that they have been ordered and now they are in use, but the fact mentions that no such wheels have been ordered. So, it’s nothing but misrepresentation of facts. When we see the definition of misrepresentation, then the statement is falsely made in the prospectus and the persons should be liable for the same.

 

2)      Damages for omission:

Lord Macnaghten has rightly stated that, the prospectus must be taken as a whole for “everybody knows that half a truth is no better than a downright falsehood”. A prospectus may be fraudulent where its statements are true but on omitting something, it may create a false impression. To render a prospectus fraudulent, it is not necessary that there should be a false representation in it. The suppression of material fact is also fraudulent. If an omission of a material fact is such that even if the omitted statement were included in the prospectus it would not render untrue the statement made in the prospectus, such omission will not entitle the purchaser to avoid the contract; nor will it make the persons responsible for the issue of the prospectus liable in damages. Thus a prospectus must be looked from a point of view of “Constitution of a Company”. So, in this regard, a company should never omit material facts which are directly relevant for investing in the company. Omission of such material facts should be handled strictly.

S. 56 do not provide in clear terms that such persons are liable for omission of the particulars in the prospectus. It is immaterial whether or not the omission made in the prospectus is false or misleading. It is important to note that S. 56 does not entitle the shareholder to rescind the contract to take shares by reason merely of the omission of any of the facts required to be disclosed. But, in Shiromani Sugar Mills Case, it was held that if the omission amounts to fraud of misrepresentation, the contract may also be rescinded.

A person responsible for the issue of prospectus shall not be liable if: (a) if there is no knowledge of the particular statement that such  statement has not been disclosed, (b) there was a honest mistake of fact on his part, (c) when Court considers that omission should be excused or is immaterial.

 

Cases:

Rex v. Kylsant

            Here, Kylsant issued a prospectus where it was stated that the company had paid dividend varying from 5 to 8% every year between 1911 to 1927, except in or 2 years where a lower rate of dividend or no dividend was paid. The prospectus thus rejected that the company was financially strong and stable. But, the facts were that the last 7 years, the company had incurred heavy losses and dividends were paid only out of the accumulated profits which had been stored up during the war period. The Court held that the prospectus was misleading not because of what is stated but because of what it concealed or omitted.

            The Court is completely right in judging the case as the fact that the company has incurred heavy losses from past 7 years, and that the dividends is paid form a fund is a material fact. And so, it’s the duty of a company to disclose such fact.

 

Peek v. Gurney

            Here, in this case, a deceitful prospectus was issued by the defendants on behalf of a company. The plaintiff received a copy of it but did not take any shares originally in the company. The allotment was completed and after several months, the plaintiff bought 2000 shares on the stock exchange. His action against the directors was rejected. A purchaser of shares in the open market has no remedy against the company or the promoters though he might have bought on the faith of the representations contained in the prospectus. The Court further observed that “Those only who are drawn on by the misrepresentation in the prospectus to become allottees can have remedy against the directors.” The Court also held that “As regards omission and concealment of material facts the Directors and other persons responsible for issue o the prospectus are liable, and the purchasers of shares are entitled to avoid their contracts for the purchase of shares in the company, if the facts concealed or omitted are not only material facts but are also of such character that if stated in the prospectus they would render false that which is included in the prospectus or would render false statement, or any part thereof, contained in the prospectus”. The conditions drawn in this case are:

o       The misstatement in the prospectus must be fraudulent i.e. must be made knowingly and with the intention to deceive. In other words, there must exist the elements of fraud.

o       The fraudulent misstatement must relate to some existing facts which are material to the contract of purchasing shares or debentures and the investor must be induced to purchase the shares of debentures in the co.

o       The investor must have taken the shares directly from the co. A person who purchases the shares in the open market has no remedy against the co. or directors etc. even if he bought the shares on the faith of representation contained in the prospectus.

 

Manavedan Tirumalpad (T), Rajah of Nilumbur vs. Amirchand Dass

            Here, in this case, a prospectus contained a statement that the Government of Cochin have agreed to encourage the company by giving a steady and continuous supply of timbers extracted from the state forests required for the purpose of the company at economical prices in order to encourage the establishment of industries for which there are natural advantages in the State. Now, in reality, there was only a conditional promise held out by the Government to give such steady supply of timber at reasonable rates that the first years transaction should be found to be mutually satisfactory. It was held that the statement made in the prospectus was false and misleading and the same did not amount to any fair representation of what was stated by the Government. The Court also held that “ If the directors have taken the responsibility of asserting that there was an unconditional promise given by the Cochin Government to supply timber steadily for the purposes of the company, they must bear the consequences.”

            This case clearly shows that the company suppressed the material fact for its own benefit. The condition mentioned by the Government was not at all disclosed and with this any prudent man would believe that the agreement with the Government is unconditional. So, the Court has completely justified the case by stating that the statement made in the prospectus is misleading and not true.

 

3)      Compensation under Section. 62:

An allottee of shares or debentures is entitled to claim compensation from directors, promoters and any other persons who authorized the issue of a prospectus, for damages sustained by reason of any who authorized the issue of prospectus, for any damages sustained by reason of any untrue statement in it.

The persons liable to pay compensation are: Every person who is the director of the company at the time of issue of prospectus, or any person who has authorized himself to be named in the prospectus or has agreed to become a director, every person who is the promoter of the company, or every person who has authorized the issue of the prospectus.

If a person who makes a false statement entertains a bonafide belief that the statement is true, an action of deceit cannot be maintained against him on the ground that he formed his belief carelessly or on insufficient reason. The compensation which is given must be with reference to the loss sustained by a person and not to be seen as penalty imposed.

Only such subscribers who apply for allotment of the securities on the faith of the prospectus purporting to contain an ‘untrue statement’ are entitled to be compensated for any loss or damage sustained by reason of the untrue statement. The shareholder is entitled to recover the difference between what he paid for the shares and what they were worth (i.e. true value) when they were allotted to him.

 

Cases:

Kisan Mehta vs. Universal Luggage Mfg. Co. Ltd.

            Here, in this case, Mehta filed a suit for injunction to restrain the company from issuing a prospectus. Mehta alleged that it contained misleading statements. The suit was later dismissed. Court held that “Only a person who has suffered loss or damage on the faith of the prospectus is entitled to a remedy under the section”. Thus, public interest litigation shall not be allowed with this. The Court further said that “If a subscriber, who purchases shares on the faith of a prospectus which allegedly contains misstatements, wants to take an action in addition to what is contemplated under section 62 or section 63, it is open to him to take an action; but that does not mean that any other person who is not interested in the company at all can come forward and say that the statements contained in the prospectus are false, and that a future investor might be duped, that he might suffer, and therefore, the company should be restrained from acting in any particular manner.”

            Thus, the Court is right in judging the fact that any person is not entitled to file a case stating that the prospectus is misleading. The right is absolute and is given only to those people who have subscribed such shares.

 

Clark vs. Urquhart

            Lord Summer held in this case that, “Compensation had no technical significance. The word was selected because it represented the difference between the actual value of the shares or debentures taken and the sums paid for them on the fact of the prospectus and at the same time avoided the invidious association of damages.”

 

4)      Damages under the General Rule:

The persons responsible for the issue of false prospectus may also be held liable for the payment of damages under the general law. Thus, a person who has been induced to invest money in a company by fraudulent statement in a prospectus can recover damages for fraud under the ‘Indian Contract Act’ or the ‘Law of Trots’.

 

Period of Limitation: There is no such Article in the Limitation Act, 1963 which specifically provides for actins against a director or a promoter of a co. in respect of a false statement made in the prospectus. The Madras High Court in one of its judgment stated that the suit alleging compensation must be filed within two years from the date of cause of action. Also, any people who claim to retire from a company on the ground that he was induced to become a member by misrepresentation in the prospectus is bound to come at the earliest possible moment after he becomes aware of the misrepresentation.


REMEDIES AGAINST THE COMPANY

 

1)      Recession of the Contract

It is a general principle of law that if one of the parties to a contract does not disclose what he is bound to disclose to the other party, then he has full rights to rescind the contract. Where a prospectus contains certain misstatement then the shareholder has full right to rescind the contract. Thus, by avoiding such a contract, a person is able to get rid of his shares and can claim the money he paid for it. Section 75 of the Contract Act speaks that a person who lawfully rescinds a contract is entitled to compensation for any damages which he has sustained in the non-fulfillment of the contract.

A suit for compensation or damages under this section is thus not based on a cause of action arising out of a contract, because at the stage of issue of prospectus there is no contract between a shareholder and anybody else. So, when the shares are allotted, then the contract is between the shareholder and the co. and with the director of the company. Recession will not be a remedy if the investor has been induced to buy shares on a material misrepresentation of law.

There are certain conditions for Recession of the contract. They are:

o       It must be established that the prospectus issued by the co. or by someone on behalf of the co.

o       There must be an ‘untrue statement’ in the prospectus.

o       The misrepresentation contained in the prospectus must be material to the contract of taking shares. A fact will be material if it is likely to influence the judgment of a prospective investor in deciding whether he should purchase shares in the co. or refrain from doing so. Misrepresentation must be one of fact and not merely an expression of opinion or expectation.

o       The aggrieved party must have relied upon the prospectus while applying for shares. He must have taken the shares directly from the co.

o       The aggrieved party must exercise the right to rescind the contract within reasonable time of becoming aware of a misstatement in the prospectus.

The contract is valid till it’s rescinded. A shareholder has only a limited time to rescind the contract. So, he must rescind it promptly on becoming aware of the fraud which is done to him. The right of recession is not available where the allottee has subscribed for the shares before looking at the prospectus, where the prospectus itself makes it clear that such statements are mere hearsay statements and are not true otherwise, where the allottee has not relied on such statements but made a personal investigation for it, he is such a person who cant get misled merely by the statements of prospectus.

The reason that a shareholder should be prompt in rescinding the contract is that the register of the shareholders is to be the creditors guarantee, showing them to whom and to what they have to trust. A shareholder knowing hat he has been induced by fraud to enter into the contract of purchase of shares, cannot lie by, let his name remain in the register and let the third party enter into the contracts with the co. on the faith of the register.

Loss of right to recession: To avoid the contract must be done within a reasonable period of time. Though there is no specific time which has been allotted, but when a person gets to know about such fraud, then he must rescind the contract duly. Also, where a party who has a right to rescind the contract and even after having the knowledge of it acts which affirms the contract, then later that same person can’t avoid the contract. In certain cases the right to recession is lost. They are:

o       If the proceedings for recession are not begun within a reasonable time.

o       If he affirms the contract, directly or indirectly after becoming aware of the misleading nature of the prospectus.

o       If he initiates legal action only after the commencement of the winding up proceedings of the co. the reason for this is that the creditors would have relied upon his membership also while making the deals with the co.

o       If it is proved that he had not been induced by the prospectus to make the contract.

o       The right of recession is lost on the commencement of winding up of the co.

Thus, this right to recession is a better remedy against the company and on becoming aware of any such fraudulent conduct of the co. one should definitely use this rt. and should rescind the contract immediately.

 

2)      Damages for fraud:

The allottee can claim for damages of fraud from the co. Now, such damages can be claimed only after the allottee has rescinded the contract and ceased to remain the shareholder. Thus, if he still continues to be a shareholder of that same co. even after knowing the fact that the co. is acting fraudulently, then that person has no right to ask for any further damages.

Fraud occurs when any statement is made without belief in the truth or carelessly. It shall be necessary to establish that there is fraudulent misrepresentation in the prospectus. If the aggrieved person can prove it, he can claim for the all the loss which has been sustained by him as a result of such fraudulent acts or statement. The fraudulent statement must be related to facts which were material to the contract of purchasing shares and the aggrieved party must have actually relied on such facts and must have taken the shares on the basis of such statement only. Thus, the right to claim damages is exercised against the co. as wll as against the directors or promoters of the co.

 

Case:

Edington vs. Fitzmaurice

            A company issued a prospectus inviting subscriptions for debentures. The prospectus contained a statement that “the objects of the issue of debentures are (a) to complete alterations in the buildings of the co., (b) to purchase horses and vans and, (c) to develop the trade of the co.” However, the real object raised by debenture was to payoff the liabilities. Relying upon the statement in the prospectus, a person advanced money to the co. and purchased its debentures. The co. became insolvent, and that person filed a suit against the directors for fraud. It was held that the directors were liable for fraud. Here, the statement made was of existing fact as the director has misrepresented their state of mind and the statement made in the prospectus was material to the contract of purchasing debentures.

            Here, the Court is right in judging the case as the object of the debentures mentioned in the prospectus is totally contradictory to the actual purpose. The company is rightly liable for fraud.


EXPERT’S LIABILITY

 

            The provision of experts was introduced in the English Act, 1947. Section 58 of the Indian Companies Act, 1956, speaks that before an opinion of an expert is relied upon by a co. the co. must have the opinion in writing, and the manner of publication of such opinions should be different. An expert who has given the consent under Section 59 of the Companies Act, 1956, shall not by reason of having given such consent be liable as a person who has authorized the issue of the prospectus except any untrue statement made by him being an expert unless he establishes bonafide pleas which are available to him.

            It has been held in some English cases that if a co. issues a prospectus on the bonafide report of an expert and the report proves to be inaccurate, any material inaccuracy in the prospectus though based on the report, will be a ground for recession of the contract to take shares unless the prospectus contains a clear and unambiguous warning to the public that the co. does not guarantee the accuracy of the statements contained in the report.

            An expert is also liable to pay compensation under Section 62. However, he may not be entitled to pay the same is he proves that:

  • That having given the consent in the prospectus, he withdrew the same in writing before the delivery of a copy of the prospectus to the registration; or
  • After the delivery of prospectus for registration but before allotment he withdrew his consent in writing when he became aware about such untrue statement made, and he also gave a public notice for the same.
  • That he was competent to make such statement, and believed on reasonable grounds that it was true.

The allottee of the shares, who has been induced to take shares on the faith of the untrue statement made by an expert, is entitled to claim damages and compensation under Section 62 from the expert. The expert shall be entitled to give compensation in the same manner as director or promoter gives. The expert shall not be criminally liable for any misstatements in the prospectus. 


PROMOTERS LIABILITY

 

            Promoter has lots of meanings. It was an old name for a common informer and the technical term for the prosecutor of a suit in the ecclesiastical Courts. But, in general terms, the promoters of a co. are those who are leading in the formation or floatation of the company. The Act does not define promoter. Lord Justice Bowen in one of his case speaks that: “the term ‘promoter’ is not a term of law but of business usefully summarizing-up in a single word a number of business operations familiar to commercial world by which a co. is generally is brought into existence.”

            A promoter stands in the fiduciary relationship to the company and his duties includes, drafting the prospectus, negotiating with people, getting the directors of the company, entering into agreements, hiring the professionals like company accountants etc. So, one can say that a promoter is the one who promotes the business or rather funds the business, gives a new identity as co., prepares the souls of the company i.e. memorandum and articles of association. It’s the promoter who appoints the directors for the company. Thus, a promoter is the one who is the machinery of the company where the business is in his hands.

            A promoter may be personally liable for any breach of contract done by him before a new company is formed. But, the persons who are merely a servant or agents of the promoters or other persons working for the company can’t be classified under the term promoter. Also, those people who have subscribed their share initially can’t be treated as a promoter of the co.

            A company promoter stands in a fiduciary relationship with the company Fiduciary is a person, such as trustee, who holds a position of trust or confidence with respect to someone else and who is, therefore, obliged to act solely for that persons benefit. Thus, the position of a promoter is of trust and confidence. Thus, promoters stand in the fiduciary relationship to the future allottees of the shares. If promoters attempt to acquire any secret profits out of their dealings with the company, they are responsible to make good to the company with those profits. Also, the promoter cannot make any co-promoter liable for any of his own independent acts done by him.

            The duties of a promoter are:

o       The promoter shouldn’t make any secret or extra profits form the expense of the co. if any such profits accrued by any promoter are disclosed by the promoter, then that profit shall no longer be secret. Thus, a promoter can’t retain any profit made out of a transaction to which co. is a party, without full disclosure.

o       A promoter is an independent Board of Directors

o       A promoter is an existing and intended shareholder

o       To act honestly for the co. by taking the due care of the co.

There are certain rights of a promoter. They are:

o       The promoter has full right in getting the profits even when he sells off the co. even if he discloses such a fact; the promoter has full right to do so.

o       The directors may pay a promoter certain expenses which are incurred by him at the time of formation of the co.

o       The promoter has no right of indemnity against the co. in respect of any obligation undertaken on his behalf before its incorporation, stipulating that he shall be paid a certain sum as the preliminary expenses.

There are certain remedies available if a promoter fails to make full disclosure of a profit made by him out of the promotion. They are:

o       Where the promoter has e.g. has sold his own property to the company, the co. may rescind the contract and recover the purchase-money paid.

o       The co. may compel the promoter to account for any profit he has made.

o       The co. may sue the promoter for damages for breach for his fiduciary duty.

 

Thus, even a promoter is liable for any such breach. He is treated the same as to the directors of the co. Thus, the promoter is not the king of the co. who can do whatever he likes if he has formed the company even he is abided by the rules of law and can’t deny them. So, we can say that the promoter, director or the company can’t move away from their duties and responsibilities. Even though they are at a particular position, they have to go in accordance with the law, and for any breach they shall be punished.

 

 


CONCLUSION

 

            One thing which is clear is that every one is liable to the shareholders if any wrong is committed by the co. or by any other person who is working on behalf of the company. Thus, law leaves no one when it comes to giving justice to people. Court is very strict in every minute thing also that it sees that if there is any aggrieved person is there then shelter must be provided by the law.

            So, the shelter given by the Court gives more rights to the shareholders and scares the co. not to do any illegal act which may affect the shareholder. In many judgments Court has tried to come up with justice by making company liable. Thus, the civil liability covers every aspect of wrong which is normally done by the company the Court has laid down exclusive principles also in many of the cases. Thus, the remedies available against the company and the directors or the promoters are quite enough for any shareholder to take help and gain compensation for any loss.

            One can easily infer the fact from various cases that the Court has understood the importance of money and has passed the judgments which are in favor of the shareholder. Thus, it is very difficult for the company to escape from such civil liability.


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Ghosh, K.M; Chandratre, K.R(DR.). Company Law. Thirteenth Edition. Vol. 1. Bharat Law. Delhi.

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S. 62(2) of The Indian Companies Act, 1956, provides defenses which are available to avoid the civil liability.

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(1889) 14 App Cas 337

(1868) LR 3 Ch App 467.

(1867) 2 Ch App 604

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Gogna, P.P.S. Company Law. S. Chand and Company. New Delhi. 2004.

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19 (1873) 43 LJ Ch 19

 

 

14 Comp Cas 125 (Mad)

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24 (1988) 63 Comp Cas 398

25 (1990) BCC 517 (Ch D)

(1930) AC 28

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(1885) 29 Ch. D. 459

Discussed in Mair vs. Rio Grande Rubber Estates Ltd. (1913) AC 853 (HL)

Whaley Bridge Calico Printing co. vs. Green and Smith (1880) 5 QBD 109

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1 Comment - Leave a comment
  1. Roshan says:

    It is really benefacial for those student who are preparing CA.

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