This is the penalty clause I referred to prematurely.
SECTION 49.
Question proposed: "That Section 49 stand part of the Bill."
It is perfectly clear that it is proper to provide in the most stringent way against any statement by anybody who knows a statement is wrong up to the publication of the prospectus. I am a little bit worried about the time lag between the publication of the prospectus and allotment. Supposing after you had your prospectus published and before allotment something comes to your notice as a result of which you are not sure whether the statement is right or wrong. The damage, so to speak, has been done by the publication of the prospectus. Is it right that the director must say : " Stop everything until I investigate this " ? Certainly if the prospectus is not published, he must do it.
But can he stop anything once the prospectus is published ?
That is the point, once the applications are in.
There are fixed dates for the applications to be in, for allocation and everything else.
It arises under clause (i) of paragraph (d) of subsection (3) of Section 49 : ". . .and did up to the time of the allotment of the shares. . . ." Certainly he must be covered up to the time of the publication of the prospectus but I am a little bit worried about it afterwards.
It is unlikely but possible.
Yes, and what do you do ?
You have no comeback.
You cannot say : " Hold everything while I investigate further. "
Is this all new ?
No. It is all in the existing law except that parts are extended to experts. Paragraph (c) is more specific : " that after the issue of the prospectus and before allotment thereunder, he, on becoming aware of any untrue statement therein, withdrew his consent thereto. . . ." That puts a specific obligation on him to give notice, if he wants to avoid liability.
If some special circumstance turns up after the prospectus is published but before allotment and the person is not happy about it and wants to inquire, what does he do ?
He can ask to have the applications forms set aside and it would not be unreasonable to expect him to do it.
I do not know how he would do it.
If it had been a prospectus which included, say, a geologist's report and it was found after publication that this man was not honest, the promoters reasonably should be expected to prevent the allotment of the shares being made on foot of the application.
I accept that, if it is discovered that the geologist was a fraud, that he was not a geologist and that was discovered for certain between the publication of the prospectus and allotment but this does not say that. This says " he had reasonable grounds to believe ". Suppose he has a doubt, has not reasonable or positive ground to believe the geologist's report is correct, then he gets the works under this. If he ascertains for certain or if he could have ascertained for certain by taking proper steps to inquire between prospectus and allotment, he must be caught, but where a person says : " I have some doubt about that report from something I heard from Jamaica yesterday ", is it reasonable to bind that man to say to the company: "I heard something from Jamaica which may or may not be right. If it is right, then it is not proper that we should collect money on the geologist's report. If, on the other hand, the information I have is incorrect, then allotment should proceed."? I do not see how you can hold the operation in suspense between prospectus and allotment while a person makes inquiries to verify the truth of something he has read on the Rialto, so to speak.
He can withdraw his own consent, leaving the others to carry on, if he has a reasonable doubt.
Subsection (3) (c) provides that where he becomes aware of any untrue statement but under subsection (3) (d) it is a question whether he had reasonable ground to believe.
" We had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures as the case may be, believe, that the statement was true ;". He had reasonable ground to believe and he did believe up to the issue of the prospectus. Since then, he has heard something and he does not know what to believe.
It is not necessarily untrue but he has a horrible suspicion.
He is shook.
In his own interest, he had better take steps to escape the liability of the section.
What do you suggest ?
If he was not sure whether a statement in the prospectus was true, he could at that stage withdraw his consent and it would relieve him of liability.
Is not withdrawal in that case an incomplete answer ? First of all, the money has come in just the same. If there is damage, the damage is done when the prospectus has been published. Is that not so ?
On the other hand, it is really only a state of mind and he would withdraw his consent if he was not certain.
Supposing a person gets information under a seal of confidence and he is wondering whether he should tell it or not. It may be just the excited beliefs of a friend he has met the day before and there may be nothing in it at all. What does he do then? Does he stop the issue of the prospectus ?
Mr. Lynch
Say the prospectus is issued but the shares have not yet been allotted. If he had reached the state of mind that he had reasonable doubts, I take it he would approach the promoters and ask them to withhold the issue of allotment letters until such time as the doubt could be resolved or the fact established.
Does anybody else do this sort of thing ? It is a short course between the prospectus and the issue of shares. Where did we get this from ?
It is the existing law.
Yes—paragraphs (a), (b) and (c) of Section 84 of the 1908 Act.
Is (d) not in that ?
Paragraph (d) is the same as in Section 84 except——
Subparagraphs (i), (ii) and (iii) of paragraph (d)—that is the existing law ?
Yes. Section 84 (1) (b) of the 1908 Act declared that a person who authorised the issue of a prospectus should be liable to pay compensation for untrue statements if it was proved that he had no reasonable ground to believe that the person making the statement included in the prospectus was competent to make it. This placed the onus on the prosecution of showing that the director had no reasonable ground for holding the belief referred to. Lines 6 to 9 of paragraph (d) (ii) of the present subsection have altered that situation so as to require that the onus of proof is on the accused person, that is, to show he had reasonable grounds for his belief. Under the old law, the prosecution had to prove that he had no reasonable grounds. The onus of proof is now on the person accused.
The only real ground for this is to make it more difficult for people to make statements or to lend themselves to statements which they are not absolutely certain they can stand over indefinitely?
That is the idea.
I can see Deputy Sweetman's point. It might be in certain cases a bit unfair to certain people if something happens between the date of the prospectus and the date of allotment of the shares. I suppose the answer to that is that you should not lend yourself to a promotion of this sort unless you are absolutely certain and have verified everything. If you are not prepared to verify everything, you are a bit irresponsible.
The purpose of it is to protect the public, who must be protected in these circumstances.
Without question. But I am not certain. Having taken every possible step you can take after the issue of the prospectus, somebody's well intentioned friends—the bane of us all—whispers something in our ears by saying: " I am doubtful about this situation now. I think we must suspend. " In fact, we may do the applicant's shareholders more damage than anything else because the mere fact that there is a stay on allotment will wreck everything. We may be doing them more damage in trying to protect them. Let us all think it over. We all agree that the point of this is to protect the investing public, and it is proper that the investing public should be so protected. But it is quite on the cards that we might be doing more damage than good.
It is agreed that Section 49 stand part ?
Subject to second thoughts.
Question put and agreed to.