Civil Liability for Mis-statements in a Prospectus

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.

Take the list apart, because each entry catches a different person.

(a) Directors at the time of issue. The date of issue fixes the class. A person who resigned the day before is outside it, subject to (b).

(b) Named or agreed to be named. This catches the person lent to a prospectus for respectability. He is liable because he authorised himself to be named and was named, even though he never acted as a director, and even where he agreed to become one only after an interval of time.

(c) Promoters. Defined by section 2(69), and dealt with in [Promoters: Position, Duties and Liabilities].

(d) Anyone who authorised the issue. The widest limb, and it catches persons who hold no office at all. It is the same expression used in section 34.

(e) The expert. But only an expert within section 26(5), that is, a person independent of the formation, promotion and management of the company who gave written consent to the issue and did not withdraw it. An expert is liable for his own statement, not for the rest of the prospectus.

Three elements the claimant must show, and they are the marks in a problem question:

1. He subscribed for securities of the company;
2. He acted on the misleading statement, inclusion or omission, so there is reliance; and
3. He sustained loss or damage as a consequence, so there is causation.

Note who is not on the list. A person who bought the shares in the market from an earlier subscriber has not subscribed on the faith of the prospectus, and section 35(1) does not reach him. His remedies lie elsewhere.

The three defences: section 35(2)

No person shall be liable under sub-section (1) if he proves one of the following. The burden is squarely on the defendant.

Defence (a): withdrawal of consent before issue. That, having consented to become a director, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent. Both limbs are needed: withdrawing is not enough if the prospectus went out with his blessing anyway.

Defence (b): issued without knowledge or consent, plus a public notice. 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.

The word "forthwith" carries the defence. A director who learns of the prospectus in March and publishes a notice in July has not acted forthwith, and the defence fails however genuine his ignorance was. And the notice must be public and reasonable, so a letter to the Board is not enough.

Defence (c): reasonable reliance on an expert. That, as regards every misleading statement purporting 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 expert had given the consent required by section 26(5) and had not withdrawn it before filing of a copy of the prospectus with the Registrar, or, to the defendant's knowledge, before allotment thereunder.

This is the defence that makes the expert regime in section 26(5) work. A director may rely on a valuer's report, but only if he reproduced it accurately and reasonably believed the valuer was competent and had consented.

Fraud: 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.

Three things change when fraud is proved.

The defences go. The sub-section opens "notwithstanding anything contained in this section", which sweeps away sub-section (2).

Liability becomes unlimited. "Personally responsible, without any limitation of liability" means the whole of the person's estate answers, not a proportionate share.

The class of losses widens. "All or any of the losses or damages that may have been incurred by any person who subscribed" is broader than the loss flowing from the particular misstatement.

Note also the wording of the trigger. It is enough that the prospectus was issued with intent to defraud the applicants or any other person, or for any fraudulent purpose. The intent need not be aimed at the particular claimant.

Who may sue: section 37

A suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.

Short, and it does two useful things. It confirms that the same facts can support proceedings under the criminal sections and the civil one. And it lets a group or association act together, which is the practical answer to the problem that each individual investor's loss may be too small to be worth a suit on its own. Read it with the class action in section 245.

A worked example

Chandrapur Steels Limited issues a prospectus in June 2026. It says the company holds a mining lease valid to 2041. In fact the lease expired in 2025 and the renewal was refused.

The prospectus names five directors; Mr Deshpande, who agreed to become a director three months after listing and consented to be named; and it carries a valuer's report on the ore body by an independent valuer who consented in writing. Ms Rane, a promoter, approved the issue. Mr Bhatt, a consultant holding no office, gave the final instruction to print and publish.

Amol subscribes for two lakh rupees of shares relying on the lease statement, and loses most of it when the truth emerges.

Who is liable under section 35(1)? The company; the five directors under clause (a); Mr Deshpande under clause (b), because he authorised himself to be named and agreed to become a director after an interval; Ms Rane under clause (c) as a promoter; Mr Bhatt under clause (d) as a person who authorised the issue; and the valuer under clause (e), but only for his own statement, which was accurate.

Amol must show that he subscribed, that he acted on the statement, and that he lost money as a result.

Defences. One director, Ms Fernandes, had resigned and withdrawn her consent before the prospectus was issued, and it went out without her authority. She is protected by defence (a). Another, Mr Iyer, was abroad and knew nothing of the issue; he learned of it on 2 July and published a reasonable public notice on 4 July. He is protected by defence (b). Had he waited until September, he would not be.

The remaining directors say they relied on the valuer. That is defence (c), but it protects them only as regards the valuer's statement, which was correct. It does nothing about the lease statement, which was the company's own. They remain liable.

Now suppose it is proved that the lease statement was inserted deliberately to induce subscriptions. Section 35(3) applies. The defences fall away, and every person named in sub-section (1) is personally responsible without any limitation of liability for the losses of everyone who subscribed on the faith of the prospectus.

And Amol need not sue alone. Under section 37 any person, group of persons or association of persons affected may sue or take action under sections 34, 35 or 36.

Distinctions that carry marks

What this does NOT mean

It does not mean every investor who lost money can recover. He must have subscribed, must have acted on the misleading matter, and must show the loss was a consequence of it. A person who bought in the market, or who never read the prospectus, fails on the first or second element.

It does not mean a named director escapes because he never acted. Clause (b) catches a person who authorised himself to be named, even if he was to become a director only later.

It does not mean an expert answers for the whole prospectus. He is liable under clause (e) for his own statement.

It does not mean the defences survive fraud. Section 35(3) begins "notwithstanding anything contained in this section".

Quick revision

• Section 35(1), five categories plus the company: (a) a director at the time of issue; (b) a person who authorised himself to be named and is named as a director, or agreed to become one, immediately or after an interval; (c) a promoter; (d) a person who authorised the issue; (e) an expert under section 26(5).
• Claimant must show: subscription, reliance, and loss as a consequence.
• Section 35(2), three defences: (a) consent withdrawn before issue and issued without his authority or consent; (b) issued without his knowledge or consent and he forthwith gave reasonable public notice; (c) an expert's statement correctly and fairly represented, with reasonable belief in the expert's competence and consent up to the time of issue.
• Section 35(3): prospectus issued with intent to defraud or for a fraudulent purpose means every person in sub-section (1) is personally responsible without any limitation of liability, and the defences do not apply.
• Section 37: any person, group of persons or association of persons affected may sue or act under sections 34, 35 or 36.

Test yourself

1. Who is liable to pay compensation under section 35(1)? The company, and every person who is a director at the time of the issue; who authorised himself to be named and is named as a director or agreed to become one, immediately or after an interval; who is a promoter; who authorised the issue of the prospectus; and who is an expert referred to in section 26(5).

2. What must the claimant prove? That he subscribed for securities of the company acting on a misleading statement, or on the inclusion or omission of a matter, in the prospectus, and that he sustained loss or damage as a consequence.

3. State the three defences. That, having consented to become a director, he withdrew his consent before the issue and the prospectus was issued without his authority or consent; that it was issued without his knowledge or consent and, on becoming aware, he forthwith gave a reasonable public notice to that effect; and, as regards an expert's statement, that it was correctly and fairly represented and that he had reasonable ground to believe, and did believe up to the time of issue, that the expert was competent and had given and not withdrawn his consent.

4. A director who knew nothing of the prospectus publishes a public notice four months after learning of it. Is he protected? No. Defence (b) requires him to have given the notice forthwith on becoming aware of the issue. A delay of four months is not forthwith, however genuine his ignorance.

5. What is the effect of proving that the prospectus was issued with intent to defraud? Section 35(3) applies notwithstanding anything else in the section: every person referred to in sub-section (1) becomes personally responsible, without any limitation of liability, for all or any of the losses incurred by any person who subscribed on the basis of the prospectus, and the sub-section (2) defences fall away.

6. Can a group of investors act together? Yes. Section 37 permits a suit to be filed or any other action to be taken under sections 34, 35 or 36 by any person, group of persons or association of persons affected.