Section 36.Punishment for fraudulently inducing persons to invest money.

This query is : Resolved

Shambhavi Sabarish (Querist)
Follow

03 December 2023 As per section 36 of Companies Act 2013,

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into:

c) any agreement for, or with a view to, obtaining credit facilities from any bank or financial institution , shall be liable for action under section 447.

Further as per Section 37, a suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus .

My questions are the following:

1) Does "statement , promise or forecast" mentioned u/s 36 mean the prospectus or can it be any other statement not being a prospectus? As suit can be filed only if misstatement is related to prospectus as per section 37, so should we assume that this statement given to induce an agreement is prospectus only?

2) Further what does "inducing a person to enter into an agreement for or with a view to obtaining credit facility from a bank" mean? Are we making an agreement with another individual to improve our credit worthiness in order to obtain credit?

3) To make someone liable u/s 447 should the suit be filed only by persons mentioned under section 37 ( that is an investor who was affected by the misstatement in the prospectus) ?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

11 July 2024 Let's break down your questions related to Sections 36 and 37 of the Companies Act, 2013 in India, concerning misleading statements and liabilities:

### 1) Meaning of "statement, promise or forecast" under Section 36

- **Prospectus vs. Other Statements**: The term "statement, promise or forecast" mentioned in Section 36 does not exclusively refer to the prospectus. It encompasses any statement, promise, or forecast made knowingly or recklessly, which is false, deceptive, or misleading, and is intended to induce another person to enter into an agreement.

- **Scope of Liability**: While Section 37 specifies that a suit can be filed in relation to misstatements in a prospectus, Section 36 applies more broadly to any misleading statement or concealment of material facts that induce someone to enter into an agreement. Therefore, the liability under Section 36 can arise from statements made outside the prospectus as well, provided they meet the criteria of being false, deceptive, or misleading.

### 2) Meaning of "inducing a person to enter into an agreement for or with a view to obtaining credit facility from a bank"

- **Agreement for Credit Facility**: This phrase refers to situations where someone makes false statements or promises with the intention to persuade another person to enter into an agreement aimed at obtaining credit from a bank or financial institution.

- **Example**: It could involve misrepresentations made to a bank or financial institution regarding the financial health or prospects of a company or individual, with the aim of securing a loan or credit facility. This could include providing false financial statements, inflating revenue projections, or concealing liabilities.

### 3) Suit under Section 447 and Section 37 requirements

- **Liability under Section 447**: Section 447 deals with punishment for fraud, stating that if anyone is found guilty of fraud involving falsification of accounts or financial statements, they can face imprisonment and fines.

- **Suit under Section 37**: According to Section 37, a suit or action can be initiated by persons affected by misleading statements or the omission of any matter in the prospectus. However, this does not restrict the liability under Section 447 to only those mentioned in Section 37. Section 447 can be invoked more broadly, especially for fraud-related offenses.

- **Who can File a Suit**: While Section 37 specifies suits related to prospectuses, Section 447 can be enforced by any aggrieved party affected by fraud or false statements, not necessarily limited to investors affected by a prospectus. This means that individuals or entities impacted by fraudulent statements or actions can initiate legal proceedings under Section 447.

### Conclusion

- Section 36 of the Companies Act, 2013 covers a broad range of misleading statements, not limited to prospectuses.
- "Inducing a person to enter into an agreement for obtaining credit facility from a bank" refers to making false representations to secure credit.
- Section 447 allows for legal action against fraud, including false statements, and is not restricted to those mentioned in Section 37.

For specific legal advice or detailed interpretation, consulting with a qualified legal professional specializing in corporate law in India would be advisable. They can provide tailored guidance based on the specific circumstances and nuances of the case in question.