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What would it be deceit or false statement, if prospectus is based on incorrect statement

Gaurav Parashar ,
  11 June 2020       Share Bookmark

Court :
House of Lords
Brief :
The court held that the act of directors was only in good faith and they issued the prospectus, as they were fully aware that they will get the approval of the Board of Trade for rams. Hence, the claim of shareholders was rejected.
Citation :
Appellant: Derry Respondent: Peek Citation: (1889) 14 AC 337

Bench:

Lord Halsbury L.C., Lord Watson, Lord Bramwell, Lord Fitzgerald, Lord Herschell

Issue:

Does publishing a false statement in the prospectus of a company accounts to deceit or false statement? What will happen if a statement is published in the prospectus that was supposed to be true but, due to some event came to be false?

Facts:

  • Plaintiff received prospectus of newly formed company of defendant that was in the business of trams and those trams according to the prospectus were to be powered by steam or mechanical power.
  • The plaintiff keeping in mind that the directors had taken the permission to use steam or mechanical powers bought shares in the company.
  • But, the board of trade refused to give permission to the directors as a result the company was wound up leading to loss of plaintiff.
  • The Plaintiff filed a plaint for misrepresentation.

Argument raised by Appellant:

The Plaintiff contended that the defendant is at fault, as the statement published in prospectus was to deceive the investors and in order to gain profits.

Argument raised by Respondent:

The defendant argued that on their part they knew that the statement was false, but there was no intention on part of defendant to use the statement to deceive the plaintiff. They argued if the Board of Trade had not denied the permission to use steam power instead of horses which is a common practice to give permission; the plaintiff shall not have suffered any damages and their was no malice or ill intention on their part in order to cause damage or cause loss to plaintiff or any other investor.

Judgment:

The court held that the act of directors was only in good faith and they issued the prospectus, as they were fully aware that they will get the approval of the Board of Trade for rams. Hence, the claim of shareholders was rejected. The court defined fraud as follows:

  1. In order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice;
  2. Fraud is proved when it is shown that a false representation has been made
  • Knowingly;
  • Without belief in its truth and
  • Recklessly, careless whether it be true or false.
 
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