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Mumbai University · FY LLB · Sem II
The Chinpak Holdings Ltd. Company issued a prospectus stating all the details of the company, including its share capita
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The Chinpak Holdings Ltd. Company issued a prospectus stating all the details of the company, including its share capital, pre-incorporated contracts. All the statements were signed by the two Directors, Auditor and the CFO. Mr. Bhola Ram subscribed for securities of a company acting on the above statements. However, it was proved that the prospectus was issued with the intention to defraud the applicants. (i) What are the rights of Mr. Bhola Ram? (ii) What is the liability and who are liable for the mis-statements in the prospectus?
Q3Answer the following by giving reasonAttempt Any Two • 6 marks each • Total: 12 marks2023
(b)The Chinpak Holdings Ltd. Company issued a prospectus stating all the details of the company, including its share capital, pre-incorporated contracts. All the statements were signed by the two Directors, Auditor and the CFO. Mr. Bhola Ram subscribed for securities of a company acting on the above statements. However, it was proved that the prospectus was issued with the intention to defraud the applicants. (i) What are the rights of Mr. Bhola Ram? (ii) What is the liability and who are liable for the mis-statements in the prospectus?
Facts

Chinpak Holdings Ltd. issued a prospectus signed by two Directors, Auditor, and CFO. Mr. Bhola Ram subscribed to shares relying on it. It is proved that the prospectus was issued with fraudulent intent.

(i) Rights of Mr. Bhola Ram

Mr. Bhola Ram has both civil and criminal remedies under the Companies Act, 2013:

  • Right to rescind the contract of allotment — he can repudiate the application and allotment, treating the subscription as void from the beginning, and recover the full application/allotment money paid, since the contract was induced by fraud.
  • Right to claim compensation / damages under Section 35 from every person who authorised the prospectus (directors, auditor, CFO) for any loss or damage sustained due to any untrue statement in the prospectus.
  • Right to file a criminal complaint — since the prospectus was issued with intent to defraud, Mr. Bhola Ram can report the offence under Section 36 (civil liability for fraudulent inducement) and Section 447 (punishment for fraud), which carries imprisonment of 6 months to 10 years and a fine.
  • Class Action remedy under Section 245 — if other allottees are similarly affected, they may jointly apply to NCLT for relief.

(ii) Liability and Persons Liable for Mis-statements in the Prospectus

Under Section 35 of the Companies Act, 2013, civil liability for mis-statements in a prospectus arises against:

  • Every director of the company at the time of issue of the prospectus — the two directors who signed are personally liable.
  • Every person named in the prospectus as a director or proposed director.
  • Every promoter of the company.
  • Every person who has authorised the issue of the prospectus — this includes the CFO and the Auditor who signed.
  • Every person who is an expert (e.g., valuers, lawyers) whose report or opinion is included in the prospectus.

Nature of liability: they are jointly and severally liable to pay compensation to every person who subscribed based on the untrue statement and suffered loss.

Criminal liability under Section 34: where a prospectus includes any false statement knowingly or recklessly (i.e., with fraudulent intent as here), every person who authorised the issue of the prospectus is punishable under Section 447 with imprisonment of not less than 6 months (up to 10 years) and a fine not less than the amount of fraud (up to three times the amount of fraud).

Derry v. Peek (1889) 14 AC 337 — The House of Lords held that fraud requires a false statement made knowingly, without belief in its truth, or recklessly as to its truth. If a misrepresentation is made honestly (even carelessly), it is not fraud. In Chinpak's case, since fraudulent intent is proved, Section 447 criminal liability applies in addition to civil compensation under Section 35.

Statutory Defence

The persons liable under Section 35 may escape liability if they can prove that they had reasonable grounds to believe, and did believe up to the time of allotment, that the statement was true — or that the statement was fairly stated as an opinion or report of an expert. Since fraudulent intent is proved here, this defence is unavailable.