Section 38 of the Companies Act 1867 provides that every prospectus of a company shall specify certain particulars of any contract entered into by the company before the issue of the prospectus, and that any prospectus which does not do so ‘shall be deemed fraudulent’ on the part of the directors ‘knowingly issuing the same as regards any person taking shares in the company on the faith of such prospectus, unless he shall have had notice of such contract.’
In an action for damages for fraud brought against the directors of a company who had issued a fraudulent certificate within the meaning of the above section, by a person who had taken shares on the faith of the certificate, held (1) that to succeed he must prove (a) that had he known of the omitted contract he would not have become a shareholder; (6) that he had suffered damage; (2) that the omission having been due to an innocent mistake of the directors they were in any case protected by a clause of waiver waiving any fuller compliance with sec. 38 than that contained in the prospectus.
Per Lord Lindley-‘The language of the statute in terms applies to directors and others who knowingly issue a prospectus which does not disclose such a contract as is mentioned in the first part of the section, whether they knew of its existence or not. But it can hardly be supposed that the Legislature meant to brand with fraud a director who knowingly issued a prospectus but never knew of the existence of a contract which ought to have been disclosed. I cannot, however, think that the section can be properly restricted so as not to apply to a director who knew of a contract such as is described in the first part of the section but forgot all about it when he issued a prospectus not referring to it.’
Judges:
Lord Chancellor (Halsbury), Lords Robertson and Lindley
Citations:
[1905] UKHL 581, 43 SLR 581
Links:
Jurisdiction:
England and Wales
Company
Updated: 26 April 2022; Ref: scu.621197