Section 35 Companies Act: Civil liability for misstatements in prospectus

Section 35 of Companies Act: Civil liability for misstatements in prospectus

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

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.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 35

Section 35 establishes personal civil liability for damages against directors, promoters, experts, and offerors where an investor subscribes for securities based on an untrue or misleading prospectus and suffers financial loss.

Civil Liability for Misstatement: Section 35 creates direct statutory tort liability, requiring directors, proposed directors, promoters, and authorized experts to pay compensation to every person who has subscribed for securities on the faith of a prospectus containing misleading statements.
Sub-Section (2) Provision: Sub-section (2) provides specific statutory defenses: proving that consent to become a director was withdrawn before issue, or that the prospectus was issued without authority or knowledge and prompt public notice was given upon learning of it, or that the statement was a correct representation of an expert's report whom the director had reasonable grounds to believe competent.

Key Landmark Precedents:

Sahara India Real Estate Corp. v. SEBI (2012) 10 SCC 603: The Supreme Court ordered the refund of over twenty-four thousand crore rupees with interest, affirming that investors misled by unauthorized or deceptive securities issuances are entitled to complete financial restitution.
Shiromani Sugar Mills Ltd. v. Debi Prasad AIR 1950 All 508: The court held that a subscriber seeking damages or repudiation of allotment must establish that a material misrepresentation of fact in the prospectus induced him to enter into the share contract.

Legal Commentary:

Section 35 provides civil restitution that operates concurrently with criminal sanctions under Section 34. In investor litigation and class action proceedings before the NCLT under Section 245, Section 35 enables aggrieved subscribers to hold promoters personally liable, piercing through corporate limited liability to satisfy investment losses caused by false prospectus statements.

Section 35: Civil liability for misstatements in prospectus

Section 35 of Companies Act: Civil liability for misstatements in prospectus

Legal Commentary & Landmark Judgments: Section 35