dividend

Dividend and Prospectus

Assignment - 8

Company Law

Date of Submission: 2 November,2015

Submitted by: Sonali

Class: BBA

Roll No: BBA/13/913

Email:[email protected]


1 What is misstatement in a prospectus? Discuss the civil & criminal

liabilities of persons responsible for misstatements in a prospectus. INTRODUCTION:

When prospectus is issued by any company, it is mainly to invite public to take shares or debentures of

the company or to deposit money with the company. It is the duty of the company to see that the

statements made in the prospectus are of true nature. But if there is any false information given in the

prospectus and the public acts upon that, the Companies Act provides for provisions for the persons that

who would be held liable for misleading the public.

PROSPECTUS:

The definition of prospectus in the Indian Companies Act 1956 was based on the definition found in the

English Companies Act and after undergoing an amendment in 1960, it is read as

“ A prospectus means any document described or issued as prospectus and includes any notice, circular,

advertisement or other document inviting deposits from the public or inviting offers from the public for

the subscription or purchase of any shares in or debentures of a body corporate. ”

Hence any advertisement that intends to offer to the public shares or debentures of the company for sale is

a prospectus. According to the general clauses Act 1956,

“Document shall include any matter written, expressed or described upon any substance by means of

letters, figures or marks, or by more than one of those means which is intended to be used, or which may

be used, for the purpose or recording that matter.”

In Pramatha Nath Sanyal v Kali Kumar Dutt [1] an advertisement in a newspaper read as “ Some shares

are still available for sale according to the terms of the prospectus of the company which can be obtained

on application.” It was held to be a prospectus as it invited public to purchase shares.

CONTENTS OF PROSPECTUS:

Prospectus is one of the means by which he is informed of the soundness of the company’s venture [2] .

This is the basic function of the prospectus. It is the duty of the company to see that information given in

the prospectus is true. Some of the essentials in the making of the prospectus are:

Prospectus should be dated. This gives prima facie knowledge about the date of its publication.

Prospectus to be registered. The registration of the prospectus has to be done with the Registrar of

Companies and the copy sent for the registration must be signed every person who is named in the

prospectus as a director or a proposed director of the company. It serves as a record of the terms and

conditions of the capital issue.

Expert’s Consent: Consent of the expert in writing must be obtained and it should be stated in the

prospectus if there is any statement in the prospectus purported to be made by the expert.


Disclosures in the prospectus: According to the sec – 56 every prospectus is required to disclose the

matters specified in Schedule II of the Act.

SHELF PROSPECTUS:

Self Prospectus is discussed in Sec-60(A) of the Companies Act. It is made compulsory for any public

financial institution, public sector bank whose main object is financing to file a shelf prospectus. Shelf

prospectus means a prospectus issued by any financial institution or bank for one or more issues of the

securities or class of securities specified in that prospectus. For the purpose of this section “financing”

means making loans to, or subscribing in the capital of, a private industrial enterprise engaged in

infrastructural financing or such other company as the central government may notify in this behalf.

The advantage of filing is that the company who has filed the self prospectus with the Registrar shall not

be required to file prospectus afresh at every stage of offer of securities within a period of validity of such

self prospectus.

INFORMATION MEMORANDUM AND RED – HERRING PROSPECTUS:

A public company making an issue of securities may circulate information memorandum to the public

prior to filing of a prospectus. Information Memorandum has been defined in sec 2 (19-B) by the

Amendment Act 2000 which is as follows:

“Information memorandum means a process undertaken prior to the filing of a prospectus by which a

demand for the securities proposed to be issued by a company is elicited, and the price and the terms of

issue for such securities are assessed by means of a notice, circular, advertisement or document. ”

According to the sec 60B(2), a company inviting subscription by an information memorandum shall be

bound to file a prospectus prior to the opening of the subscription lists and the offer as red- herring

prospectus, at least three days before the opening of the offer.

For the purpose of this section “red – herring” prospectus means a prospectus which does not have

complete particulars on the price of the securities offered and the quantum of securities offered.


DEEMED PROSPECTUS:

The Act according to the sec 64 deals with the concept of deemed prospectus. This is an exception to the

issue of prospectus. As provisions relating to prospectus are most stringent and the duty of preparing and

filing it is very onerous, a company can evade this by allotting the whole capital to an intermediary

known as an “Issuing House”. The shares are then offered to the public by the “House” by means of an

advertisement of their own which cannot be called as the prospectus of that company but since the

advertisement is an “offer for sale” it is deemed to be the prospectus of that company.

Even after allotting the shares and debentures to an issuing house there might not be any intention on the

part of the company to make available the shares and debentures to the public unless any contrary

intention is shown and the following conditions are proved:

(a) that an offer of the shares or debentures or of any of them for sale to the public was made within six

months after the allotment or agreement to allot; or

(b) that at the date when the offer was made, the whole consideration to be received by the company in

respect of the shares or debentures had not been received by it.

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. 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.

MISSTATEMENT:

As per Sec-65, 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. Where there is any omission of a matter from

the prospectus and this is made to mislead, the prospectus is deemed to be called as a prospectus in which

an untrue statement is included. Not only in prospectus, but a statement can be said to mislead even if it is

present in any report or memorandum by reference incorporated therein or issued therewith. The liability

accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any

loss or damage he may have sustained by reason of untrue statement included therein.


CASE: DERRY vs. PEEK

The directors of a tramway company issued a prospectus stating that they had the right to run tram cars

with steam power instead of with horses as before. The Act incorporating the company provided that such

power might be used with the sanction of the Board of Trade. But, the Board of Trade refused to give

permission and the company had to be wound up. One of the shareholders sued the directors for damages

for fraud. Now, the House of Lords held that the directors were not liable in fraud because they honestly

believed what they said in the prospectus to be true. Lord Herschel in this case observed that “Fraud is

proved when it is shown that false representation has been made (a) knowingly, (b) without belief in its

truth, or, (c) recklessly, carelessly whether it be false or true.

CIVIL LIABILITY FOR MISSTATEMENT:

Section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every person

who subscribes for any shares of debentures on the faith of the prospectus for any loss or damage he may

have suffered due to any untrue statement made in the prospectus. These would include Directors of the

company, Promoters, or even the company. Thus, this section deals with the cases of misstatements of

facts in a prospectus. It is immaterial for the purpose of this section whether the Director sees the

prospectus or not; it is enough that he authorizes its issue.

The provision of the section is to protect the rights of the deceived shareholders who acted upon the

wrong statement given in the prospectus. This tightens up the duties of the directors and others who are

related to the issue of the prospectus. So this section provides for the statutory civil liability for untrue

statement.

Conditions for invoking Section 62:

1) The company had issued a prospectus inviting persons to subscribe for its shares or debentures.

2) An untrue statement was included in the prospectus.

3) The person who is claiming for the compensation had subscribed for the shares or debentures

offered by the prospectus.

4) Such person has subscribed for the shares or debentures relying upon the untrue statement contained

in the prospectus.

5) Such person has sustained a loss or damage after having subscribed for the shares or debentures.


Persons liable under Sec- 62:

Every person who is a director of the company at the time of the issue of the prospectus;

every person who has authorised himself to be named and is named in the prospectus as the

director or agreed to become a director, either immediately or after an interval of time;

every person who is a promoter of the company;

every person who has authorised the issue of the prospectus

CASE: Edington vs. Fitzmaurice

A company issued a prospectus inviting subscriptions for debentures. The prospectus contained a

statement that “the objects of the issue of debentures are (a) to complete alterations in the buildings of the

co., (b) to purchase horses and vans and, (c) to develop the trade of the co.” However, the real object

raised by debenture was to payoff the liabilities. Relying upon the statement in the prospectus, a person

advanced money to the co. and purchased its debentures. The co. became insolvent, and that person filed

a suit against the directors for fraud . It was held that the directors were liable for fraud. Here, the

statement made was of existing fact as the director has misrepresented their state of mind and the

statement made in the prospectus was material to the contract of purchasing debentures.

Here, the Court is right in judging the case as the object of the debentures mentioned in the

prospectus is totally contradictory to the actual purpose. The company is rightly liable for fraud.

CRIMINAL LIABILITY:

Sec-63 incorporates the provision for the criminal liability for misstatement in the prospectus. According

to this section every person who has authorised the issue of the prospectus shall be punishable with

imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand

rupees, or with both. The offence is compoundable under sec 621A. It has to be noted that under such

cases, 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 will not be deemed to be ipso facto a person who

authorized the issue of prospectus.


The ‘Golden Rule’ for Prospectus interpretation The Golden Rule as regards the drafting of the prospectus was laid down in the leading case New Brunswick and Canada Railway and Land Co. v. Muggeridge, as: Only true nature of the company’s venture shall be disclosed; Strict and scrupulous accuracy shall be maintained in drafting prospectus as it invites the public

to take shares on the faith of the representations contained in the prospectus; In addition to the mandatory information required to be given as per Part I and Part II of Schedule

II of the Act, there must be voluntary disclosures of information as would reasonably constitute a fair representation of facts for the public to act upon.

Persons who could be held liable

• every person who is a director of the company at the time of the issue of the prospectus; • every person who has authorised himself to be named and is named in the prospectus either

as a director, or as having agreed to become a director, either immediately or after an interval of time;

• every person who is a promoter of the company; • every person who has authorised the issue of the prospectus;


2 Define the term dividend. Explain the rules of ascertaining the divisible

profits for the purpose of declaration of dividend.

A dividend is defined as a payment made by a corporation to its shareholders. Usually these payouts are

made in cash (called “cash dividends”), but sometimes companies will also distribute stock dividends,

whereby additional stock shares are distributed to shareholders. Stock dividends are also known as stock

splits.

Cash Dividends

Cash dividends are normally paid to shareholders each quarter, or four times per year. However, some

companies pay dividends annually (once per year), semi-annually (twice per year), or even monthly (12

times per year). Each company sets its own payout schedule and determines the dividend dates on which

the dividends will be made. Some companies will even pay a special (one-time) dividend every so often.

These special payouts are separate from the company’s regular payout schedule and are not factored into

the stock’s dividend yield.

Not every company pays dividends, and companies can change their dividend policies at any time. As

investors become increasingly hungry for yield, however, more and more companies are initiating new

dividends and raising their existing dividends.

DIVISIBLE PROFITS

According to black and white publishing company (1901) "Profit available for dividend means net profits

after making any deduction which the directors can duly make."

Profit which can be distributed legally in the form of dividends to the shareholders of the company are

called divisible profits.

There is no any particular rule about the determination of profit. By company law has laid down the

following rules which guides us to determine the divisible profits.


Rules of divisible profit

Following are the important rules of divisible profits :

1. According The Company Rules :-

The articles of association are the rules of the company. The directors are entitled to distribute the profits

under rules. They also follow the company law. The dividend can be paid out of revenue profit.

2. Follow The Court Cases :-

While calculating the divisible profits, the court cases must be kept in mind. The auditors must know the

decisions of the courts announced time to time.

3. Profit Not Out Of Capital :-

The capital can not be used to pay dividend. The revenue profits can be used for the payment of dividend.

4. Approval Of Shareholders :-

In the annual general meeting shareholders may approve the rate of profit recommended by the directors.

So divisible profits can be used to pay as dividend after approval.

5. Right Of Proposal :-

The directors can purpose the rate of dividend out of divisible profits. After completing the legal

formalities the directors can decide the dividend.

6. Undistributed Profit :-

It is the right of the directors to use such profit for the payment of dividend at the end of a year. It is a

revenue of the provision year.

7. Depreciation :-

Before declaring revenue profits the depreciation on fixed assets must be charged. In manufacturing

company it is compulsory to charge depreciation before the declaration of profits.

8. Secrete Reserves :-

If according the articles association it is allowed to create and use the such reserves then these can be used

for the payment of dividends.

9. Capital Profits :-

Under certain conditions the capital profit can be used to pay dividend but articles association should

allow the distribution of capital profit as dividend.


10. Capital Loss :-

Inspite of capital loss the dividend can be paid out of revenue profits. The capital profit must be used to

eliminate capital loss first and then surplus can be used to pay dividends.

11. Loss Of Provision Year :-

If a company suffers a loss in one year but earns profit next year. Such loss can be adjusted by the

company from benefit of the current year.

12. Revaluation Of Assets :-

After the revaluation of asset, if it becomes surplus then it can be used after realization. Profit may be

paid after selling the assets.

13. Revenue Profits :-

According the principle of divisible profit dividend must be paid out of revenue profit. But it is essential

that calculation should be correct.

14. Asset Goodwill Written Down & Up :-

If a company has written down good will out of profits, it may also write up this asset, with the

appreciation. But the value written up should not excess than the true value

dividend

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