Prospectus: Definition, Golden Rule of Framing and Liability on Mis-statement - Companies Act 2013

Prospectus under Companies Act 2013

Section 2(70) of the Companies Act 2013 defines prospectus‖ means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate.

Golden Rule of Framing Prospectus

1. The prospectus must be an honest statement of the company’s profile; there must be no misleading, ambiguous or erroneous reference to the company in its prospectus.

2. Every important aspect of a contract of the company should be clarified.

3. The contents of the prospectus should conform to the provision of the Companies Act.

4. The restrictions on the appointment of directors must be kept in mind.

5. The conditions of civil liability as laid down must have strictly adhered to issue and registration of prospectus or legal requirement regarding the issue of the prospectus.

Liability on mis-statement in a Prospectus

Criminal Liability on mis-statement in a Prospectus

Section 34 of the Companies Act fixes criminal liability on mis-statement in a prospectus to every person who have authorised such wrong or untrue or misleading information on the prospectus.

Civil Liability on mis-statement in a Prospectus

Section 35 of the Act fixes the civil liability on wrong or untrue or misleading information on a prospectus to the directors, including acting directors and the promoters of the company at the time of publication of the prospectus

Leading Case Law: Rex v. Kylsant (1932)

This case is the classic example of how a "truth" can still be a "lie" if it is a half-truth.

• Facts: The prospectus of Royal Mail Steam Packet Co. stated that the company had paid dividends every year between 1921 and 1927, implying it was highly profitable.

• The Reality: While the statement was technically true, the dividends were actually paid out of old tax reserves and non-recurring items, not from current trading profits. The company was actually losing money.

• Ruling: Lord Kylsant (the Chairman) was held liable. The court ruled that the prospectus was misleading because it suppressed the material fact that the company was making trading losses.