Liability For Misstatement Or Misrepresentation:
This will be governed by the general principles of the law of contract, depending on whether the misstatement was:-
a)A FRAUDULENT MISREPRESENTATION because the company made it—
ii)recklessly, careless whether it be true or false, or
iii)without belief in its truth: DERRY v PEEK (42)
b) AN INNOCENT MISREPRESENTATION because the company made it honestly, believing what was stated to be true: DERRY v PEEK (42)
If the statement amounted to a fraudulent misrepresentation, the allottee may sue for damages; DERRY v PEEK. But the House of Lords held in HOULDSWORTH v CITY OF GLASGOW BANK that the allottee can only get damages if he is also in a position to rescind the contract of allotment. If the rescission is no longer possible, there will be no remedy. This is an exception to the general principle of the law of contract that a person who has been induced to enter in a contract by a fraudulent misrepresentation has the option of affirming the contract but suing for damages.
If the statement amounted to an INNOCENT misrepresentation, the allottee CAN ONLY SUE FOR RESCISSION (i.e. asking the court to order the company to remove his name from the members' register and refund the money he paid for the shares and he in turn returning the shares to the company). Damages cannot be awarded for an innocent misrepresentation. This was held by the House of Lords in DERRY v PEEK (42).
However, the allottee's right of rescission (whether for innocent or fraudulent misrepresentation) will be lost if—
a)He did not institute rectification proceedings within a reasonable time after becoming aware of the misrepresentation: FIRST NATIONAL REINSURANCE CO. V. GREENFIELD (43). in seven months' delay was held to be unreasonable delay.
b)He affirmed, or is deemed to have affirmed the contract after discovering the truth (e.g. by accepting dividends, attending and voting at meetings, selling or attempting to sell the shares).
c)Third party rights acquired in the meantime would be interferred with, or
d)The company has gone into liquidation and so the rights of creditors have crystallized and precede other claims: HOULDSWORTH Vs CITY OF GLASGOW BANK.