Civil liability will arise primarily in relation to misrepresentations in the prospectus or the omission to state material facts. The remedies in respect of these may be contractual, tortious or statutory.
Contractual remedies would be available both to a subscriber or a purchaser (called ‘investor’). The remedies may be obtained against the other party to the contract of allotment.
- Firstly, if the terms of the prospectus have become incorporated into the subsequent contract, the investor may sue the other party to the contract for damages in respect of breach of contract. It is necessary to distinguish between a situation where there has been an incorporation of the terms of the prospectus and a situation where a new contract independent of the prospectus has sprung up. A question of fact.
- A subscriber may not sue the company for damages if he does not rescind the contract of allotment. The reason for this rule is that a company cannot return assets to its members while it is a going concern and to allow such a suit would be tantamount to allowing a return of assets to the members at the expense of the company’s creditors.
- Rescission is available where the contract was induced by a misrepresentation, whether the misrepresentation is fraudulent, innocent or negligent.
- In the case of contracts for the allotment or sale of shares to the public, a non-disclosure of a material fact would also entitle the innocent party to rescind.
In order to obtain rescission of the contract of allotment or sale, three things must be shown:
(a) that the representation was made to the Plaintif by the Company or some person for whose action they are responsible.
(b) that the misrepresentation was material as an inducement to enter into the contract;
(c) that the plaintiff was induced by that representation to apply for the shares.
