Golden Rule

Golden Rule:

It is the duty of those who issue the prospectus to be truthful in all respects. This golden rule was enunciated by Kinderseley, V.C. And has come to be known as the “golden legacy”. 

According to the ‘Golden Rule’ the followings must be kept in mind when preparing the prospectus of a company:

1.The prospectus must be an honest statement of the company’s profile; there must be no misleading, ambiguous or erroneous reference to the company in its prospectus.

2.Every important aspect of a contract of the company should be clarified.

3.The contents of the prospectus should conform to the provision of the Companies Act.

4.The restrictions on the appointment of directors must be kept in mind.

5.The conditions of civil liability as laid down must have strictly adhered to issue and registration of prospectus or legal requirement regarding the issue of the prospectus.

As per the Section 64 of the Companies Act:

(a) A company alters its share capital in any manner specified in sub-section (1) of section 61;

(b) An order made by the Government under sub-section (4) read with sub-section (6) of section 62 has the effect of increasing authorized capital of a company; or

(c) A company redeems any redeemable preference shares,

The company shall file a notice in the prescribed form with the Registrar within a period of thirty days of such alteration or increase or redemption, as the case may be, along with an altered memorandum.

(2) Where any company fails to comply with the provisions of sub-section (1), such company and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues, or five lakh rupees whichever is less.”

Golden rule of disclosure was laid down in New Brunswick and Canada railway case and described as golden legacy in “Henderson vs lackon” case:

Everything in the prospectus must be stated with strict scrupulous accuracy. In other words the true nature of Company venture should be disclosed.

Under section 64(2) it will be presumed, unless the contrary is proved, that an allotment of shares or debentures was made with a view to their being offered for sale to the public if:

The offer to the public by the issue house was made within 6 months of allotment or agreement to allot (to the issue house); or

The whole consideration was not received by the company at the time when the offer was made by the issue house.

Here Misstatement refers to:

a.Statement deemed to be untrue, if misleading in the form and context in which included; and

b.Omission calculated to mislead, the prospectus in which an untrue statement included.

The 'Golden Rule' for framing of a prospectus was laid down by Justice Kindersley in New Brunswick & Canada Rly. & Land Co. v. Muggeridge (1860). Briefly, the rule is:

Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representation contained in the prospectus. The public is at the mercy of company promoters. Everything must, therefore, be stated with strict and scrupulous accuracy. 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 principles and advantages which the prospectus holds out as inducement to take shares. In a word, the true nature of the company’s venture should be disclosed.

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