What Defences Are There to Prospectus Liability in Papua New Guinea?

Liability for a false or misleading prospectus falls on a wide circle of people, from the trustee’s directors to the valuer whose report is quoted. The Capital Market Act 2015 balances that reach with a set of defences. The defendant must prove each, and each is tied to honest and careful conduct. For the liability itself see who is liable.

Due diligence

Three elements must all be shown. The enquiries must have been made, and must have been reasonable for someone in the defendant’s position; a director of a licensed trustee is expected to do more than a part-time adviser. The belief must have been objectively reasonable on the information those enquiries produced. And the belief must have been actually held, right up to the time the statement was made. A director who approved a property valuation without asking when it was done will struggle. A documented verification process, recording who checked each statement and against what, is the practical foundation of this defence.

Reliance on an expert’s statement

Section 147 protects a person whose only fault was to repeat an expert. It applies where the false or misleading statement, or the omission, is or is based on a statement by a person who gave a section 140 consent, or is in a copy or extract of that person’s report or valuation. The defendant must prove that the statement accurately represented what the expert said, or that the copy or extract was correct, and that after reasonable enquiries the defendant reasonably believed, and did believe until the securities were allotted or offered, that the expert was competent to make the statement, had given the required consent and had not withdrawn it. The same defence applies to misleading or deceptive conduct under section 145 where the conduct consisted of a representation made in reliance on the expert (section 148). The expert remains liable for the statement under section 144(1)(e).

Reliance on a public official statement

Section 149 covers statements by public officers made in the course of their duties, and copies or extracts of public official documents, such as a Bank of Papua New Guinea bulletin, a Gazette notice or a Registrar’s certificate. The defendant must prove that the defective statement accurately represented the official statement, “including the context and form in which it was originally made”, and that the defendant reasonably believed, and did believe until allotment, that it was true and complete (section 149(1)). An equivalent defence applies to section 145 conduct (section 149(2)). Selective quotation that changes the sense of an official document loses the protection.

Withdrawal of consent, and form and context

Section 150 protects people who are named in a prospectus as a director or proposed director, as the principal adviser, or as the maker of a statement included in or underlying the document. Two situations are covered:

• Withdrawal. A director or proposed director who, having consented to act, withdrew that consent before the prospectus was issued, is not liable if it was issued despite the withdrawal. Anyone else who is named is not liable if the prospectus was issued without the person’s knowledge or consent and the person “gave reasonable public notice thereof forthwith after he became aware of its issue” (section 150(1)).
• Form and context. A named person is not liable if it is proved that the statement “was not included in, or was not included substantially in, the form and context that the person had consented to” (section 150(2)). A valuer who valued a building on stated assumptions, only to find the figure quoted without the assumptions, has this defence.

Other protections

Two further provisions narrow who can be blamed. Section 143(1) provides that neither the Commission nor the Registrar of Companies is taken to have authorised, caused or been involved in preparing a prospectus merely because it approved, registered or received it. An investor cannot sue the regulator for approving a bad prospectus. Section 143(2) adds that giving a section 140 consent does not, by itself, make a person one who “authorised or caused” the issue for the purposes of the section 142 offence; the consenting expert’s exposure is instead through section 144(1)(e), limited to loss caused by their own statement.

A parallel defence covers statements made to the Commission during approval. Section 120(1) makes it an offence to submit false or misleading information or material omissions to the Commission, but section 120(2) provides a defence where the defendant proves that, after reasonable enquiries, the defendant had reasonable grounds to believe and did believe that the statement was true, the omission immaterial and the conduct not misleading. It mirrors the section 146 due diligence test.

These defences do not formally apply to administrative action under section 443, which turns on breach rather than fault; but the person must be heard (section 443(4)) and any penalty must be proportionate (section 443(3)(b)), so good faith and reasonable care still count.