Criminal Liability for Mis-Statement – Company Registration in Madurai

Companies Act, 1956: Section 63

Section 63 of the 1956 Act provides for criminal liability for mis-statement, which was fine of Rs. 50,000/ or imprisonment of up to two years or both. The penalty was enhanced from Rs.5000 to Rs.50, 000/ vides the Companies (Amendment) Act, 2000. The Companies (Amendment) Act, 2000 also empowered SEBI to administer the provisions of s. 63 of the 1956 Act in relation to listed companies and those which intended to get listed, however, the provisions relating to all other companies were to be administered by the Central Government. The Companies (Amendment) Act, 2000 also vested in SEBI the power to inspect books of account and other books and papers with respect to listed companies and the companies which intended to get listed. SEBI was also authorized to file complaints under s. 621 of the 1956 Act for offences relating to issue and transfer of securities and non-payment of dividend.

Section 63 of the 1956 Act was based on the recommendations of the Company Law Committee-as reproduced below:

“Under the provisions of this section, once the prosecution establishes the falsity of statement in a prospectus signed by a director, etc., the onus is shifted to the defendant of proving either that the statement was immaterial or that he believed it to be true. An expert who has given the consent required .will not be deemed to be ipso Facto a person who authorized the issue of the prospectus.”

Companies Act, 2013: Section 34

Section 34 of the 2013 Act, outlaws mis-statements in prospectuses, and prescribes the criminal sanction for such mis-statements being found in any prospectus issued, circulated or distributed under Chapter 3 of the 2013 Act. The inclusion of any statement that is untrue or misleading in form or in the context in which it is included, and the inclusion or omission of any matter that is likely to mislead the reader of the prospectus would be a criminal offence. Such an offence would attract punishment under s. 447 (Punishment for Fraud) of the 2013 Act. In short, if the ingredients of s. 34 of the 2013 Act are found to exist, an act of fraud shall be deemed to have been committed. Please see Notes under s. 447 of the 2013 Act, which stipulates a punishment of imprisonment of at least six months and a maximum of 10 years, as also a liability to a fine of at least the amount involved in the fraud, subject to a maximum of three times the amount involved. It is noteworthy that if the fraud in question involves “public interest” the minimum imprisonment shall be at least three years. Since s. 34 of the 2013 Act relates to mis-statement in a prospectus, and since a prospectus would be issued only in cases of public offers, it is arguable that invariably a charge of mis-statement in a prospectus would have to be a charge of “fraud involving public interest”. Therefore, every charge of fraudulent mis-statement in prospectus could translate into being a charge of a fraud involving public interest, thereby attracting the higher punishment which is the minimum of three years for a prison sentence.

The proviso to s. 34 of the 2013 Act enables a defense to a person accused of authorizing the issue of a deficient prospectus ie. a prospectus containing misleading or untrue statements, to prove that the statement in question or the omission in question was not a material one. It shall also be open to the person accused to demonstrate that he had reasonable grounds to believe and he did believe right until the time the prospectus was issued that the prospectus was indeed true, or that the inclusion or omission in the prospectus was indeed necessary.

A person who authorizes the issue of the prospectus would essentially be from among the directors of the company which is making the public offer, and persons who are offering existing securities for sale through a public offer. In short, the two directors who sign the prospectus in terms of sub-section (4) of s. 25 of the 2013 Act, and all other directors who sign the prospectus through an authorized agent in terms of sub-section (4) of section 26 of the 2013 Act would be the persons who could be accused for a violation of section 34 of the 2013 Act.

Section 63 of Companies Act, 1956

Materiality of untrue statements

Presumably, a statement would be considered immaterial if it could be shown that, even if the true fact had been disclosed, a prudent investor would still have applied for the shares. The words “untrue statement” have to be construed as explained in s. 65(1(a) of the 1956 Act which says that a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included.

In a prosecution, it was found that every one of the statements as to payment of dividends for the number of years specified was true but during some years preceding to the issue of the prospectus dividends were not paid out of current profits but out of other sources and, therefore, it was held that to the extent to which the prospectus created the impression that the company was in profits, whereas in fact it was in losses, the statements were not true in their context.  In another prosecution for failure to disclose material particulars in a prospectus, the accused who formed a company and issued a prospectus for taking over their own business were convicted for cheating under the Indian Penal Code, because they did not disclose the material particulars of their business which they were going to hand over to the company.

In a proceeding under the section for false statement in prospectus, the complaint was that investments were invited through a document called “project overview” and huge sums of money were obtained from non-resident Indians but no shares were allotted to them in the proposed joint venture company. The moneys were siphoned off to off-shore companies controlled by the accused persons. The company was incorporated in India and had registered office in India. The allegations prima facie made out an offence. It was held that the questions whether the offences were committed in India and whether the accused persons were citizens of India at the relevant time would be determined by evidence at te trial. Prosecution was not to be quashed.

A company’s prospectus carried the statement that the company had the experience of two and a half decades. The experience was, however, that of the partners of a firm which was taken over by the company and not that of the company itself. Thus the statement was not precisely true. The directors apprehended prosecution by the ROC and sought relief against it under s. 633 of the 1956 Act. Granting the relief, the court said that the statement was not made with the mala fide intention of luring people towards investment in the company and the management of the company being also very successful, the statement was not so materially false as to invite prosecution. Where a complaint disclosed an offence under the section and the persons charged were not able to show any ground for quashing the complaint without trial, the court asked the Magistrate not to insist upon the personal appearance of the persons concerned and allow their appearance through counsel.

Particulars of crime (misrepresentation in prospectus)

A notice was issued by the Registrar of Companies after more than ten years of the alleged criminal mis-statements. He did not point out any of the specific instances as to which false statements were deliberately made in the prospectus or that the statements were made to induce the public for subscribing to the shares of the company. The Registrar had not dealt with any of the submissions made by the directors in reply to his notice and, though the company was not a vanishing company the Registrar proceeded on at hypothesis. The prosecution was quashed.

Failure to disclose material information

There was the failure to disclose material information in the prospectus. The compliant was substantially against full time directors and the company. The court allowed relief to nominee directors. Prosecution of other directors was allowed to be continued. The court further said that persons who signed the prospectus would come within section 63(1) 1956 Act.

Private placement memorandum

A private placement memorandum (PPM) floated through merchant bankers containing a  positive invitation to offer was in the nature of a prospectus set out in detail technical suitability, commercial feasibility, risk factors. By a subsequent PPM these original representations and/or warranties and/or assurances were substantially watered down. There were allegations of cheating under section 420 read with section 120B of the Indian Penal Code, 1860. A corporation is virtually in the same position as any individual and may be convicted of common law as well as statutory offences including those requiring mens rea. The criminal liability of a corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons.

Diversion of funds

Where the prospectus stated the objects for which the money was being collected but ultimately it was diverted to other objects without changing the objects of the company and the persons charged took the defense that they were not directors of the company at the material time, it was held that such defense could be established by leading evidence at the trial and the orders summoning the petitioners for proceedings under sections 63 and 628 the 1956 Act could not be interfered with at such stage.

Limitation for filing complaint

A complaint against a false statement in a prospectus was filed after seven years from the date of filing the prospectus. The complaint was held to be not maintainable, Section 468 of the Criminal Procedure Code prescribes the period of three years from the date of knowledge of the offence.  The prospectus was signed by the power of attorney holder of the director. The power of attorney was executed sixty days before the date of prospectus. Form No. 32 showed resignation of the director. Thus, apart from the technical ground of limitation substance also the proceeding against the director had to be quashed.  Limitation starts from the date on which the offence comes to the knowledge of the person aggrieved or any police officer whichever is earlier. Prosecution in this case was not quashed because the complaint was within time and there were specific statements in the complaint that all the directors were responsible. In the matter of limitation for filing complaint for false statement in prospectus, the date from which limitation was to start and the dates on which sanction from competent authority was applied for and obtained were not mentioned in the complaint. The Complaint was held to be barred by limitation.  A complaint filed against misrepresentation in prospectus did not mention the date from which the period of limitation was to start. The Complaint filed after seven years of filing of the prospectus was held to be not justified. It was quashed.

There were mis-statement and false statement in the prospectus. A complaint filed after seven years of publication of the prospectus was held to be not justified. It was barred by limitation. The prospectus gave a forecast of future results but did not promise any definite achievement in future. The court found that there was no intention to defraud public and no false or deliberate mis-statement in the prospectus. The complaint was held as liable to be dismissed.

Limitation-when commences

The period of limitation for initiating prosecution for false statement in the Prospectus begins not from the date of filing of prospectus but from the date of filing of the balance sheet on which a complaint is made.

Prospectus mis-statement-limitation

Limitation for offences under sections 63 and 628 the 1956 Act starts from the date of knowledge of the false statement made and only when the Registrar of Companies learns about the false statement from the Balance sheet filed, limitation would start from the date of filing of balance sheet and not from the date of issuing prospectus.

Deliberate false statement in prospectus

When a company made a statement in the prospectus, that it would undertake the business of leasing and gave projections of profit and business of the company on that basis, but from the very beginning, the directors had no intention to do business as set out in the prospectus, and their intention was to mop up the funds from the public, and then to utilize the same for their own companies and firms in which they were directors or to invest in shares, then it was apparent that the statement made in the prospectus was prima facie a false statement deliberately made knowing fully well that the funds were not going to be utilized for the purpose they were collected and therefore, a petition under s. 482 of Code of Criminal Procedure for quashing proceedings under sections 63 and 628 of the 1956 Act cannot be allowed. For more details about Company Registration in Madurai, kindly visit our site and feel free to contact us.. We are here to help you.. Thanks for reading!!!