company law,PROSPECTUS AND COMMENCEMENT OF BUSINESS, Lecture notes of Law

Download company law,PROSPECTUS AND COMMENCEMENT OF BUSINESS and more Lecture notes Law in PDF only on Docsity!

RANI DURGAVATI

VISHWAVIDAYALA

YA JABALPUR

BY:- NIKHIL KUMAR

PATHAK

PROSPECTUS AND

COMMENCEMENT OF

BUSINESS

COMPANY LAW

PROSPECTUS AND COMMENCEMENT OF

BUSINESS

STRUCTURE

TOPIC PAGE NO.

3.0 Objective…………………………………………………..

3.1 Introduction………………………………………………. 01

3.2 Definition of Prospectus…………………………………...

3.3 Objects of Prospectus……………………………………...

3.4 Requirements regarding issue of Prospectus………………

3.5 Contents of Prospectus……………………………………..

3.6 Miss-statement in Prospectus……………………………....

3.7 Statement in lieu of Prospectus…………………………….

3.8 Minimum Subscription……………………………………..

3.9 Commencement of Business……………………………….

3.10 Summary………………………………………………….

3.11 Keywords…………………………………………………

3.12 Self Assessment Questions……………………………….

3.13 Suggested Readings………………………………………

3. OBJECTIVE

After reading this lesson, you should be able to (a) Define a prospectus and explain the requirement regarding issue

A document will be treated as a prospectus only when it invites offers from a public. According to Section 67 the term “public” is defined as, “It includes any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner”. It further provides that no offer of invitation shall be treated as mode to the public if, (i) the same is not calculated to result in the shares or debentures becoming available other than those receiving the offer or invitation; (ii) it appears to be a domestic concern of the person making and receiving the offer or invitation. The ‘public’ is a general word. No particular numbers are prescribed. The point is that the offer makes the shares and debentures available for subscription to any one who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not. A private communication does not satisfy the above point. Where directors make an offer to a few of their friends, relatives or customers by sending them a copy of the prospectus marked “not for publication” it is not considered an offer to the public. The provisions of the Act relating to prospectus are not attracted unless the prospectus is issued to the public. Issued means issued to the public. Whether the prospectus has been issued to the public or not is a matter of fact. The leading case of this point is Nash v Lynde (1929) A.C. 158. In this case the managing director of a company prepared a document that was marked “strictly private and confidential” and did not contain the particulars required to be disclosed in a prospectus. A copy of the document along with application forms was sent to a solicitor who in turn sent it to the plaintiff. The document was held not be prospectus and as such the claim of the plaintiff for compensation was dismissed. In the case Re South of England Natural Gas and Petroleum Co. Ltd. (1911) 1 Ch. 573, the distribution of 3,000 copies of a prospectus among the members of certain gas companies was held to be an offer to the public because person other than those receiving the offer could also accept it. One may note that under Section 67 an offer or invitation to any section of the public, whether selected as members or debenture holders of the company or as clients of the person making the invitation, will be deemed to be an invitation to the public. The term “subscription of purchase of shares” means taking or agreeing to take shares for cash. Any document to be called a prospectus must have the following ingredients:- I)There must be an invitation offering to the public.

II) The invitation must be or on behalf of the company or in relation to an intended company. III) The invitation must be to subscribe or purchase. IV) The invitation must relate to shares or debentures.

3.3 OBJECTS OF PROSPECTUS

The main objects of a prospectus are as follows:-

1. To bring to the notice of public that a new company has been formed.
2. To preserve an authentic record of the terms of allotment on which the public have been invited to but its shares or debentures.
3. The secure that the directors of the company accept responsibility of the statement in the prospectus.

3.4 REQUIREMENTS REGARDING ISSUE OF PROSPECTUS

The relevant requirements regarding issue of prospectus are given below:

1. Issue after Incorporation Section 55 of the Act permits the issue of prospectus in relation to an intended company. A prospectus may be issued by or on behalf of the company. a) by a person interested or engaged in the formation company or b) through an offer for sale by a person to whom the company has allotted shares. 2. Dating of Prospectus A prospectus issued by a company shall be dated and that date shall be taken as the date of publication of the prospectus (Section 55). Date of issue of the prospectus may be different from the date of publication. 3. Registration of Prospectus A copy of every prospectus must be delivered to the Registrar for registration before it is issued to the public. Registration must be made on or before the date of its publication. The copy sent for registration must be signed by every person who is named in the prospectus as a director or proposed director of the company or by his agent authorized in writing. Where the prospectus is issued in more than one language, a copy of its as issued in each language

the public [(Section 56(3)]. Section 56(5) provides that the prospectus need not contain all the details required by the Act where the offer is made to exiting members or debenture holders of the company or if such shares or debentures are in all respect uniform with shares or debentures already issued and quoted on a recognize stock exchange.

7. Personation for Acquisition etc. of Shares The provision, consequences of applying for shares in fictitious names to be prominently displayed must be reproduced in every prospectus and every application form issued by the company to any person. A person who makes in a fictitious name to a company for acquiring shares or subscribing any shares or subscribing any shares shall be liable to imprisonment which may extend to five years similarly, a person who induces a company to allot any shares or to register any transfer of shares in a fictitious name is also liable to the same punishment. [Section 68(a)]. 8. Contents as per Schedule II Every prospectus must disclose the matters as required in Schedule II of the Act. It is to be noted that if any condition binding on the applicant for shares or debentures in a company to waive compliance with any requirements of the Act as to disclosure in the prospectus or purporting to affect him with notice of any contract, document or matter not specifically referred to in the prospectus shall be void [Section 56(2)]. If a prospectus is issued without a copy thereof, the necessary documents or the consent of the experts the company and every person, who is knowingly a part to the issue of the prospectus, shall be punishable with fine which may extend to Rs. 5,000/-.

3.5 CONTENTS OF PROSPECTUS

We know that a prospectus is issued to the public to purchase the shares or debentures of the company. Every person wants to invest his money in some sound undertaking. The soundness of a company can be known from the prospectus of a company. Thus, the prospectus must disclose the true nature of company's activities which enable the public to decide whether or not to invest money in the company. In fact, the public invest money in the company on the faith of the representation contained in the prospectus. Therefore, everything should be stated with strict accuracy, and the complete and true position of the company should be disclosed to the public. Section 56 lays down that every prospectus issued (a) by or on behalf of a company, or (b) by on behalf of any person engaged or interested in the formation of a company, shall:-

1. State the matters specified in Part I of Schedule II, and.
2. Set out the reports specified in Part II or Schedule II both Part I and II shall have effect subject to the provisions contained in Part III of that Schedule II. Part I of Schedule II
3. The main objects of the company with names, descriptions, occupations and addresses of the signatories to the Memorandum of association, and number of shares subscriber by them.
4. The number and classes of shares, and the nature and extent of the interests of the shareholders in the property and profits of the company.
5. The number of redeemable preference shares intended to be issued with particulars as regards their redemption.
6. The number of shares fixed by the articles of company as the qualification of a director.
7. The names, addresses, description and occupation of directors, managing director or manager or any of those proposed person.
8. Any provisions in the articles or any contract relating to appointment, remuneration and compensation for loss of office of directors, managing director or manager.
9. The amount of minimum subscription.
10. The time of the opening of the subscription list cannot be earlier than the beginning of the fifth day after the publication of prospectus.

the company in respect of their powers of management, the nature and extent of these restrictions.

23. Where the company carries on business, the length of time during which it has been carried on. If the company proposes to acquire a business which has been carried on for less than three years, the length of time during which the business had been conducted.
24. If any reserves or profits of the company or any of its subsidiaries have been capitalized, particulars of the capitalization and particulars of the surplus arising from any revaluation on the assets of the company.
25. A reasonable time and place at which copies of all balance sheets and profits and loss accounts, if any, on which the report of the auditors under part II below is based, may be inspected. Part II of Schedule II I General Information
26. Names and address of the Company Secretary, Legal Adviser, Lead Managers, Co-managers, Auditors, Bankers to the company. Bankers to the issue and Brokers to the issue.
27. Consent of Directors, Auditors, Solicitors/Advocates, Managers to issue, Registrar of Issue, Bankers to the company, Bankers to the issue and Experts.
28. Expert’s opinion obtained, if any.
29. Change, if any, in directors and auditors during the last 3 years, and reasons thereof.
30. Authority for the issue and details of resolution passed for the issue.
31. Procedure and time schedule for allotment and issue of certificates. **II. Financial Information
32. Report by the Auditors** A report by the auditors of the company as regards (a) its profits and losses and assets and liabilities of the company and (b) the rates of dividend, if paid by the company during the preceding 5 financial years.

If no accounts have been made up in respect of any part of the period of 5 years ending on a date 3 months before the issue of the prospectus, the report shall, in addition, deal with either the combined profits and losses and assets and liabilities of its subsidiaries or each of the subsidiary, so far as they concern the members of the company.

2. Reports by the Accountants

(a) A report by the accountants on the profits or losses of the business for the preceding 5 financial years, and on the assets and liabilities of the business on a date which shall not be more than 120 days before the date of the issue of the prospectus. This report is required to be given, if the proceeds of the issue of the shares or debentures are to be applied directly on the purchase of any business. (b) A similar report on the account of a body corporate by an accountant if the proceeds of the issue are to be applied in the purchase of shares of a body corporate so that body corporate becomes a subsidiary of the acquiring company. (c) Principal terms of loans and assets charged as security.

3. Statutory and other Information Statutory and other information minimum subscription, underwriting commission and brokerage; date of allotment, closing date, date of refund, option to subscribe, material contracts and inspection of documents, etc. are required to set out in the prospectus. Part III of Schedule II Part III of the schedule consists of provisions applying to Part I and II of the said schedule. A. Every person shall, for the purpose of this schedule, be deemed to be a vendor who has entered into any contract, absolute or conditional, for the sale or purchase of any property to be acquired by the company, in any case where (a) the purchase money is not fully paid at the date of the issue of the prospectus (b) the purchase money is to be paid or satisfied, wholly or in part, out of the proceeds of the issue offered for subscription by the prospectus; (c) the contract depends for its validity or fulfillment on the result of that issue. B. In the case of a company which has been carrying on business for less than 5 financial years, reference to 5 financial years means reference to that number of financial years for which business has been carried on. C. Reasonable time and place at which copies of all balance sheets and profit and loss accounts on which the report of the auditors is based, and material contracts and other documents may be respected. “Term year” wherever used herein earlier means financial year. Declaration

3.6 MIS-STATEMENT IN THE PROSPECTUS

A prospectus is an invitation to the public to subscribe to the shares or debentures of a company. Every person authorizing the issue of prospectus has a primary responsibility to seed that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. People invest in the company on the basis of the information published in the prospectus. They have to be safeguarded against all wrongs or false statements in prospectus. Prospectus must give a full, accurate and a fair picture of material facts without concealing or omitting any relevant fact. This is known as the ‘Golden Rule’ for framing prospectus as laid down in New Brunswick etc. Co. V. Muggeridge [(1860) 3 LT 651]. The true nature of company’s venture should be disclosed. The statements which do not qualify to the particulars mentioned in the prospectus or any information is intentionally and willfully concealed by the directors of the company, would be considered as mis-statement. Thus, the term ‘venture statement’ as ‘mis- statement’ is used in a broader sense. It includes not only false statements which produce a impression of actual facts. Concealment of a material fact also comes within the category of misstatement. 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; and
• the omission from a prospectus of any matter is calculated to mislead (Section 65). If there is any misstatement of a material fact in a prospectus as if the prospectus is wanting in any material fact, this may arise-

1. Civil Liability
2. Criminal Liability 1. Civil Liability A person who has induced to subscribe for shares (or debentures) on the faith of a misleading prospects has remedies against the company, directors,

promoters, and experts. Every person who is a director and promoter of the company, and who has authorized the issue of the prospectus [Section (2)]. a) Compensation The above persons shall be liable to pay compensation to every person who subscribes for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein [Section 62(1)]. In McConnel V. Wright (1903 1 Ch 5460 it has been held that the measure of the damages is the loss suffered by reason of the untrue statement, omissions, etc. the difference between the value which the shares would have had and the true value of the shares at the time of the allotment. b) Recession of the Contract for Misrepresentation Avoiding the contract is recession. Any person can apply to the court for recession of the contract if the statements on which he has taken the shares are false or caused by misrepresentation whether innocent or fraudulent. The contract can be rescinded if the following conditions are satisfied:-

1. The statement must be a material misrepresentation of fact
2. It must have induced the shareholder to take the shares.
3. The deceived shareholder is an allottee and he must have relied on the statement in the prospectus.
4. The omission of material fact must be misleading before recession is granted.
5. The proceedings for recession must be started as soon as the allottee comes to know of a misleading statement. c) Damages for Deceit as Fraud Any person induced to invest in the company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The share should be first surrendered to company before the company is used for damages. Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made with knowledge that it is false, will constitute fraud or deceit. In the leading case on the point - Derry V. Peek (1889 14 AG 337). It has been held that if the person making the statement honesty believes it to be true, he is not guilty of fraud even if the statement is not true. The facts of this case were:- The Tramway company had power by special Act to make tramways and to use steam power with the consent of the Board of Trade. The plants of the company are approved honesty. The directors of the company believed that since the plans were approved, permission to use steam power from Board of Trade was only a formality and would be granted. Prospectus was issued

liable. But it is not enough for a director to say that he was honest, he has to show that his honest belief was based on reasonable grounds. V. If statement is a correct and fair representation or extract or copy of the statement made by an expert who is competent to make it and had given his consent and had not withdrawn it, the director, etc., is not liable. Likewise, if the statement is a correct and fair representation or extract or copy of an official document or is based on the authority of an official person, no liability attaches to the director etc.

2. Criminal Liability Every person who authorized the issue of prospectus shall be punishable for untrue statement with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 5,000/- or with both [Section 63(1)]. Penalty for Fraudulently inducing Persons to Invest Money [Section 68] Any person who either knowingly or recklessly makes any statement, promises or forecast which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into;

• Any agreement with a view to acquiring, disposing of, subscribing for, or underwriting shares or debentures;
• An agreement to secure to any of the parties from the yield of shares or debentures; or by reference to fluctuation in the value of shares or debentures; shall be punishable for a term which may extend to 5 years of with fine which may extend to Rs. 10,000/- or with both. Defence against Criminal Liability Any person made criminally liable can escape the same as proving that
• the statement was true [Section 63(i)]. statement was immaterial; or
• he had a reasonable ground to believe and did upto the time of the issue of prospectus that the statement was true [Section 63(i)].

3.7 STATEMENT IN LIEU OF PROSPECTUS (SECTION 70)

A company having a share capital which does not issue a prospectus or which has issued a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures, unless at least three days before the allotment of shares or debentures, this has been delivered to the Registrar for registration a

‘statement in lieu of prospectus’ signed by every person who is named therein as a director or a proposed director of the company or by his agent authorized in writing, in the form and containing the particulars set out in Part I of Schedule III and setting out the reports specified in Part II of Schedule III subject to the provisions contained in Part III of that Schedule (Section 70). A private company on becoming a public company shall deliver to the Registrar a statement in lieu of prospectus in the form containing the particulars specified in Part I of Schedule IV with report set out in Part II of Schedule IV subject to the provisions contained in Part III of that Schedule [Section 44(2) (b)]. If the company acts in contravention of the provisions, the company and every director who is at fault shall be punishable with fine which may extent to Rs. 1,000/-. If the ‘statement in lieu of prospectus’ include any untrue statement, any person who authorized the delivery of the statement in lieu of prospectus shall be, punishable with imprisonment up to two years or with fine which may extent to Rs. 5,000/- or with both. He can avoid liability if he proves either that the statement was immaterial or that he had reasonable ground to believe that the statement was immaterial or that he had reasonable ground to believe that the statement was true. The civil and criminal liability for mis-statements or misrepresentations is the same as in the case of a prospectus [Section 70(5)].

3.8 MINIMUM SUBSCRIPTION (SECTION 69)

When shares are offered to the public the amount of minimum subscription has to be mentioned in the prospectus. It means the amount which, in the opinion of the directors, is enough to meet the purchase price of any property, preliminary expenses and working capital. No allotment shall be made until at least so much amount has been subscribed for. If the minimum subscription has not been received within 120 days, of the issue of the prospectus, the money received from the applicants must be repaid without interest. If the money is not paid back within 130 days, the directors become personally liable to pay it with interest, unless they can show that default was not due to any negligence or misconduct or their part.

Where a company having a share capital has not issued a prospectus inviting the public subscribe for its shares, it can commence business or exercise any borrowing powers if the following conditions are fulfilled:

• A statement in lieu of prospectus has been filled in the Registrar.
• Every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him for cash, the application and allotment money.
• There has been filed with the Registrar a duly verified declaration by one of the directors or the secretary, a secretary in whole time practice, in the prescribed form, that the above provisions have been complied with. When the company fulfils the above conditions, the Registrar shall certify that it is entitled to commerce business and that the certificate shall be conclusive evidence that the company is so entitled [Section 149(3)]. Any contract made by a public company after incorporation but before the date on which it is entitled to commence business shall be provisional only and shall not be binding on the company until the certificates is obtained [Section 149(4)]. Thus where goods are supplied to the company which never become entitled to commence business not one can sue the company for the price of goods supplied to it. 3. Failure to Commence business It may also be noted that the court has the power to wind up a company, if it does not commence its business within a year of its incorporation [Section 433(3)].

3.10 SUMMARY

A prospectus means any invitation issued to the public inviting it to deposit money with the company or to take share or debentures of the company such invitation may be in the form of a document or a notice, circular, advertisement etc. Section 55 states that every prospectus must be dated, and that date is deemed to be the date of publications of the prospectus, prospectus should neither contain any mis-statement i.e. untrue or misleading nor omit to disclose any material fact. It there is any mis-statement or omission of material facts, then the directions promoters, the persons responsible for the issue of prospectus, and the company incur a liability for the same. The company can also allot shares or debentures without issuing the prospectus. However, in such a case, a statement known as 'Statement in lieu of Prospectus' is required to be prepared and field with the Registrar of Companies.

3.11 KEYWORDS

Prospectus : A document inviting offers from the public for the subscription ofshares in on debentures of a company is known as a prospectus. Minimum Subscription : Minimum subscription is the amount which, in the opinion of the board of directors, must be raised by the issue of share capital. Statement in lieu of Prospectus : If a public company makes a private arrangement for raising capital then it must file a statement in lieu of prospectus with the Registrar three days before any allotment of shares or debentures can be made. Civil Liability : It means the liability to pay damages or compensation. Criminal Liability : Criminal liability means the liability which improve punishment of imprisonment or fine or both.

3.12 SELF ASSESSMENT QUESTIONS

1. What is a prospectus? Explain the requirements regarding issue of prospectus.
2. Is it compulsory for a company to issue prospectus?