DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

2019-20

CORPORATE LAW PROJECT

On

Mere Silence Cannot Be a Sufficient Foundation For Setting Aside The

Allotment Of Shares

SUBMITTED TO, SUBMITTED BY,

Dr. VISALAKSHI VEGESENA SUSHIL KUMAR JINDAL,

ASSISTANT PROFESSOR (LAW), ENROLMENT NO. 170101149,

RMLNLU SEMESTER – VI
 ACKNOWLEDGEMENT

I express my gratitude and deep regards to my teacher Dr. VISALAKSHI VEGESENA for
her exemplary guidance, monitoring and constant encouragement throughout the course of
this project.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.

Lastly, I thank almighty, my family and friends for their constant encouragement without
which this assignment would not have been possible.

SUSHIL KUMAR JINDAL

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 Contents

Acknowledgment…………………………………………………………………………… 2

Introduction………………………….……………………………………………………... 4

Prospectus of a Company………………………………………….…………………….….. 5

Mis-statement in Prospectus……………….……………..………………………………….. 7

Mere Silence is not Fraud…………………………………………………………………….8

Conclusion…………………………………………………………………………………. 10

Bibliography……………………………………………………………………………….. 11

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 Introduction

When any prospectus is issued by the company, then it is basically to invite people to
purchase their share. The persons issuing the prospectus must not only include in the
prospectus all the relevant particulars, which are required to be stated compulsorily but
should also voluntarily disclose any other information within their knowledge which might in
any way affect the decision of the prospective investor to invest in the company.

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 company 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 situations in which person is liable and in which
person is not liable.

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 Prospectus of a Company

The word company has no strictly any technical or legal meaning. It may be described to
imply an association of persons for some common object or objects, but still, this can’t be
regarded as an accurate definition of a company. The Companies Act, 2013, does not define a
company in terms of its features. Section 2(20) of the Act defines a Company as “a Company
incorporated under this act or under any previous company law.” Here previous company law
means the Indian Companies Act, 1913, the Companies Act, 1956 etc.

A prospectus as per Section 2(70) of the Act of 2013 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 a body
corporate.
1.1 Contents of a Prospectus- As per the requirement of Section 26 of the Act, contents of a
prospectus shall comprise of :-
1. Statutory Information- it contains information like name, address, whereabouts of
directors etc.
2. Financial Information- it contains information like number of shares to be issued,
value of shares, type of shares to be issued, date of opening and closing of issuance
etc.
3. Other information- it contains information like salary of directors, accountants and
some other details.

1.2 Golden rule for Framing of Prospectus- The golden rule while framing the prospectus
that must be observed was laid down by KINDERSELY VC in New Brunswick and
Canada Rly and Land Co v. Muggeridge.1 In brief the rule says that since the public is
invited to take shares on the faith of the representations made in the prospectus,
everything must be stated with strict and scrupulous accuracy. The public is at the mercy
of the company promoters, hence nothing should be stated as fact which is not so, and no
fact should be omitted the existence of which might in any degree affect the nature or
quality of the privileges and advantages which acted as an inducement to take shares.
Thus the true nature of the company’s venture should be disclosed.

1
(1860) 1 Dr. & Sm. 363, 381.

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1.3 Types of Prospectus-
 Prospectus issued generally or general prospectus- A General Prospectus is made
by following the form of prospectus, given in Schedule 2 of the Act, or by any other
form similar to that given in Schedule 2, as to facilitate convenience. The forms so
given are not compulsory to comply by the company; they can make their own form.
 Deemed Prospectus (Section 25) - Section 25 covers documents issued by issue
houses (Stock Exchanges). Accordingly, such offer document is essentially treated as
prospectus issued by the Company.
Section 25(1) provides that where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the
public, any document by which the offer for sale to the public is made shall, for all
purposes, be deemed to be a prospectus issued by the company.2
Further, Sub-section (2) of Section 25 provides that unless the contrary is proved, an
allotment of, or an agreement to allot, securities was made with a view to the
securities being offered for sale to the public if it is shown—
 that an offer of the securities or of any of them for sale to the public
was made within six months after the allotment or agreement to allot;
or
 that at the date when the offer was made, the whole consideration to be
received by the company in respect of the securities had not been
received by it.
 Shelf Prospectus (Section 31) - Shelf prospectus means a prospectus in respect of
which the securities or class of securities included therein are issued for subscription
in one or more issues over a certain period without the issue of a further prospectus
(Explanation to Section 31).
Sub-section (1) of Section 31 provides that a ‘Shelf Prospectus’ may be issued by any
class or classes of companies as the Securities and Exchange Board (SEBI) may
provide by regulation in this behalf.
 Red- herring Prospectus (Section 32) - red herring prospectus means a prospectus
which does not include complete particulars of the quantum or price of the securities
included therein.

2
Dr. G. K. Kapoor, Sanjay Dhamija, Company Law, p. 134 (18th ed. 2015).

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 Mis-statement in Prospectus

The Prospective shareholders are entitled to true and faithful disclosures in the prospectus.
The persons issuing the prospectus are bound to state everything accurately and not omit
material facts. According to Section 34(1) of the Act, a statement included in a Prospectus
shall be deemed to be untrue-

1. If the statement is misleading in the form or content in which it is included (Error of

Commission).
2. Where any inclusion or omission from a prospectus of any matter is likely to mislead
(Error of Omission).

In Rex v. Kylsant3, all the statements included in the prospectus issued by the company were
literary true. One of the statements disclosed rates of dividends paid for a number of years.
But, dividends had not been paid out of trading profits, but out of realised capital profits. This
material fact was not disclosed. It was held that the prospectus was false in material
particulars and Lord Klysant, the managing director and chairman, who knew it was false,
was held guilty of fraud.

In M. K. Sreenivasan, In re4, the prospectus gave an estimate of the profits to be earned by

the company from acquisition of interest of the accused in T Ltd. And it did not disclose that
under the agreement with T Ltd. the accused had no interest in T Ltd. that could be assigned,
and also suppressed the fact that the accused were in arrears in making payment of instalment
to T Ltd. and for this default the company could cancel their contract.

The Madras High Court held that this was a case of suppression of material facts. The
reference to the assignment of the interest in the agreement with T Ltd. was on the face of the
prospectus itself a half truth intended to deceive and no better than a downright falsehood. In
the light of the circumstances, the failure to disclose that the accused were in arrears with
their payment and that the agreement might be cancelled for that reason, was also intended to
deceive and amounted to a deliberate suppression of material facts.

3
[1932] 1 K. B. 422.
4
[1944] 14 Comp. Cas. 193 (Mad.).

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Mere Silence is not a Fraud

Section 17 of Indian Contract Act 1870 describes fraud and lists the acts that amount to fraud,
which are a false claim, active concealment, promise without the intention of carrying it out,
any other deceptive act, or any act declared fraudulent. To constitute fraud, the contracting
party, or any other individual with his connivance, or his agent, or to induce him to enter into
the agreement, should have performed such acts. The parties have no duty to speak about
facts likely to affect the consent of the other party to the contract, and mere silence does not
amount to fraud unless the circumstance of the case shows that there is a duty to speak or
silence equivalent to speech.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is
not fraud, unless the circumstance of the case is such that, regard being had to them, it is the
duty of the person keeping silence to speak, or unless his silence, in itself is, equivalent to
speech.

This Principle also applies in case of company law in case of allotment of shares mere silence
cannot be a sufficient foundation for setting aside the allotment of shares.It was proved in
case of Peek v. Gurney5.

Brief Facts of case- A prospectus for an intended company was issued by promoters who
were aware of the disastrous liabilities of the business of Overend and Gurney which the
company was to purchase. The prospectus made no mention of a deed of arrangement under
which those liabilities were, in effect, to be transferred to the company. The appellant bought
shares in the company and, when it was wound up, he was declared liable as a contributory
and had to pay almost andpound;100,000. He sought an indemnity against the directors,
alleging misrepresentation and concealment of facts by the directors in the prospectus.

Held - The action failed because he had not in fact relied on the prospectus but had purchased
the shares in the market. Lord Cairns expressed his agreement with the observations of Lord
Chelmsford and Lord Colonsay that mere silence could not be a sufficient foundation for the
proceedings: ‘Mere non-disclosure of material facts, however morally censurable, however

5
(1873) LR 6 HL 377

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that non-disclosure might be a ground in a proper proceeding at a proper time for setting
aside an allotment or a purchase of share, would in my opinion form no ground for an action
in the nature of an action for misrepresentation. There must, in my opinion, be some active
misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that
the withholding of that which is not stated makes that which is stated absolutely false.’

So this case established that mere silence cannot be a sufficient foundation for setting aside
the allotment of shares.

But in Derry v. Peek6 it was held that if a person responsible for making such Mis-statement
honestly believes it to be true, then he is not guilty of fraud, even if the statement is not true.

6
(1889) 14 AG 337.

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 Conclusion

One thing which is clear is that the person so responsible for Mis-statement is liable to the
shareholders if any misleading information is given or any relevant information is omitted to
be given in the prospectus by the person so responsible. The Companies Act, 2013 provides
for civil as well as criminal liabilities for the person or persons, who are responsible for such
misstatement in prospectus.

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
company not to do any illegal act which may affect the shareholder. The new act has
guaranteed much safety and rights to shareholder against Mis-statement in prospectus. People
can now take relief that even if their money goes into wrong hands, they will be compensated
and the person so liable for inducing them to invest their money by way of Mis-statement in
prospectus of a company will be punished.

But people should also take care before purchasing shares because company cannot be held
liable for their ignorance. They should take all the knowledge about the company as to that
things which need not to mention in the prospectus.

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Bibliography
Books Referred:

 Avtar Singh, Company Law, Eastern Book Company.

 Dr. G. K. Kapoor, Sanjay Dhamija, Company Law, Taxmann.

Web Sources:

 https://enterslice.com/learning/mis-statements-in-prospectus-criminal-
civil-liabilities/
 https://www.lawteacher.net/free-law-essays/contract-law/statement-
which-induces-a-person-into-contract-contract-law-essay.php
 https://advocatespedia.com/MERE_SILENCE_IS_NO_FRAUD
 https://blog.ipleaders.in/fraud-in-contracts-section-17-of-the-indian-
contract-act/

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