Misrepresentation on bond issues:
liability in the secondary market
The authors are concerned only with
bonds which on issue were offered
to the public. The Financial Services and
Markets Act 2000 (‘FSMA’) provides the
principal statutory basis for regulation,
but much of the relevant material is to be
found in the Financial Services Authority
(‘FSA’) Handbook, in the Prospectus Rules,
and in the Disclosure and Transparency
Rules, which govern offers to the public and
admission to trading on a regulated market.
The Listing Rules apply to securities admitted
to the Official List. The Prospectus Rules
apply to transferable securities as defined in
FSMA s 102A (3) by reference to Directive
2004/39/EC, namely ‘those classes of
securities which are negotiable on the capital
market’, which include shares and bonds.
THE INFORMATION TO BE DISCLOSED
Pursuant to FSMA s 75, an application
for listing must be made to the competent
authority, the FSA. Section 80(1) requires
that submitted listing particulars ‘must
contain all such information as investors and
their professional advisers would reasonably
require, and reasonably expect to find there,
for the purposes of making an informed
assessment of:
 the assets and liabilities, financial
position, profits and losses, and prospects
of the issuer of the securities; and
 the rights attaching to the securities.’
Specifically, by s 80(2) this information
is necessary in addition to information
required by the Listing Rules or the FSA.
Any significant changes in information or
any significant new matters arising since
the submission of particulars and before
commencement of dealings in the securities
must be dealt with in supplementary approved
and published listing particulars; FSMA s 81.
MISREPRESENTATION ON BOND ISSUES
Feature
KEY POINTS
 The common law has developed sufficiently to allow a secondary market purchaser of a
bond who has suffered loss as a result of fraudulent or negligent misstatements in listing
particulars or a prospectus to be able to recover damages.
 Compensation is likely to be more readily recoverable if the claim can be brought under
Financial Services and Markets Act (‘FSMA’) 2000, s 90. But the claimant is still likely to
need to prove reliance on the defective documentation.
 Any claim under the FSMA in respect of loss is likely to be confined to the direct
consequences of errors in, or omissions of information from, what is required to be in the
listing particulars or prospectus.
Authors Jeremy Cousins QC and Andrew Charman
This article is concerned with the potential liability at common law or under statute
for negligent or fraudulent misrepresentation by issuers of bonds to persons
who acquire the bonds in a secondary market, and thus who have no contractual
relationship with the issuer.
However, even where admission to the
Official List is not being sought, subject
to specified exemptions, it is unlawful
for transferable securities to be offered to
the public in the UK unless an approved
prospectus has been made available before the
offer is made; FSMA s 85(1). The exemptions
are set out in FSMA s 86 and include offers
directed at ‘qualified investors’ and/or fewer
than 100 persons. The prospectus must be
approved by the FSA, and contain in substance
the same ‘informed assessment’ information as
is required in respect of the listing particulars
under s 80. A breach of s 85 is actionable
apply and (b) has suffered loss as a result
of ‘(i) any untrue or misleading statement
in the particulars; or (ii) the omission from
the particulars of any matter required to
be included by section 80 or 81'. Equivalent
liability, with appropriate modifications,
is imposed by s 90(11) in respect of noncompliance with requirements relating to a
prospectus or supplementary prospectus.
Section 90(6) provides that liabilities that
arise under s 90 do not affect any other
liabilities in respect of the same matters
arising under other sections of the FSMA or
any other causes of action.
"As to what must be disclosed in order for an
investor to make an ‘informed assessment’, there is
little case law on the relevant statutory provisions."
at the suit of a person who ‘suffers loss as a
result of the contravention’. A supplementary
prospectus must be approved and published
in circumstances equivalent to those where
supplementary listing particulars are required.
STATUTORY LIABILITY IN RESPECT
OF INACCURATE OR INADEQUATE
INFORMATION
FSMA s 90 provides that any person
responsible for listing particulars (the
issuer, the sponsor and others provided
for in the Prospectus Rules) is liable to
pay compensation to a person who has (a)
acquired securities to which the particulars
Butterworths Journal of International Banking and Financial Law
As to what must be disclosed in order for
an investor to make an ‘informed assessment’,
there is little case law on the relevant statutory
provisions. The decision of Arden J in Eagle
Trust v SBC Securities Limited (No.2) [1995]
BCC 231, on similar wording in s 146 of the
Financial Services Act 1986, suggests that
evidence as to any marketplace consensus as
to the extent of relevant information would
be admissible. Some useful guidance can be
derived from the judgment of Norris J in
Secretary of State for BERR v Sullman [2009] 1
BCLC 297, where issues as to disclosure in a
prospectus arose in the context of a director’s
disqualification for unfitness. Norris J held
January 2011
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MISREPRESENTATION ON BOND ISSUES
Feature
that commercial realities as to likely adverse
movements in insurance costs, rather than an
insurer’s legal entitlement to increased costs
required disclosure, as did the precarious
nature of insurance arrangements, and
potential funding problems where all of these
matters directly affected the viability of the
business model of the issuer. Interestingly, but
more controversially, he held that anticipated
gains, arising from flotation, by a director
under discretionary trusts arrangements,
in respect of which the director concerned
was not even a beneficiary at the material
time, amounted to information concerning
the prospects of the company, and therefore
should have been disclosed.
There is, however, a clear limit to the
FSMA Sch 10 provides for a number
of exemptions from liability. These include
that an untrue or misleading statement
was reasonably believed to be true and not
misleading or that a matter was properly
omitted. Other grounds of exemption
include reliance on statements by experts,
the fact that published corrections were
made, inclusion of official statements, and a
prospective claimant’s knowledge of false or
misleading information.
Whilst the authors consider (see
below) that a common law claim could now
successfully be brought in respect of losses
arising from a purchase in the secondary
market, where available a claim brought
under the statutory provisions should be
"A claim brought under the statutory provisions
should be more easily proved."
scope of liability under s 90, which is confined
to particulars issued prior to listing and
supplementary listing particulars; Hall v
Cable & Wireless plc [2010] Bus LR D40
(Teare J). Since in that case the statements
concerned did not form part of the listing or
supplementary particulars, they were held
not to be actionable under s 90. In the course
of his judgment in Hall, Teare J referred to
Possfund Custodian Trustee Ltd v Diamond
[1996] 1 WLR 1351 (Lightman J) and said at
para 20:
‘That case concerned the question whether
those who issued a prospectus in connection
with the flotation of shares on the unlisted
securities market owed a duty of care not only
to subscribers at the time of the placing of the
shares but also to “after-market” purchasers.
In the course of his judgment Lightman
J referred to section 150 of the Financial
Services Act 1986 and noted, at p 1360, that
protection was afforded by it to “all purchasers
of listed securities (whether placees or aftermarket purchasers) relying on the continuing
and updated representations in the listing
particulars and the updates”. I assume that the
cause of action created by section 90 of FMSA
is likewise for the benefit of all purchasers of
listed securities.’
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January 2011
more easily proved, since there is no need to
establish proximity, and issues of whether it
is fair, just and reasonable to impose a duty
of care do not arise. Further, the fact of loss
will be sufficient and forseeability need not
be shown.
LIABILITY AT COMMON LAW
Fraud
A duty of care does not need to be
established in fraud claims because the
action is founded on the fraudulent
representation. It is well established that
someone who has relied upon a fraudulent
misrepresentation may recover his loss,
provided that the representor realised
that such reliance would be placed on the
representation; Shinhan Bank Ltd v Sea
Containers Ltd [2000] 2 Lloyds Rep. 406.
Fraudulent statements in issue documents
are therefore likely to give rise to liabilities to
secondary market purchasers.
Negligence
In negligence claims the position is less
straightforward because of the need to
establish a duty of care. In Al-Nakib
Investments (Jersey) Ltd v Longcroft [1990]
1 WLR 1390 Mervyn-Davies J held,
based on Caparo Industries Plc v Dickman
[1990] 2 A.C. 605, HL, that no duty was
owed to purchasers of shares in an aftermarket, since information contained in
the prospectus had been directed to initial
subscribers only. Intended listing on the
USM (Unlisted Securities Market) was held
to be insufficient to give rise to any duty to
subsequent purchasers.
This decision was not followed by
Lightman J in Possfund (above) where the
issue was whether claims in respect of losses
arising from after-market purchases of shares
should be struck out under RSC Order
18 r 19 as disclosing no reasonable cause
of action. Lightman J undertook a careful
review of developments at common law since
the decision of the House of Lords in Peek v
Gurney (1873) LR 6 HL 377. In that case it
was held that liability on a prospectus would
only arise if it was relied on for the purpose
for which it was issued, namely deciding
whether to subscribe for shares, and not
for deciding whether to buy such shares
in an after-market. The judge considered
the evolution of relevant statutory liability,
beginning with the Directors’ Liability Act
1890, and continued at pp 1359-360:
‘It is clearly established (and indeed
common ground on these applications) that
in a case such as the present, where the
defendants have put a document into more
or less general circulation and there is no
special relationship alleged between the
plaintiffs and the defendants, foreseeability
by the defendants that the plaintiffs would
rely on the prospectus for the purpose of
deciding whether to make aftermarket
purchases is not sufficient to impose upon
the defendants a duty of care to the plaintiffs
in respect of such purchases: see Caparo
... The imposition of a duty of care in such
a situation requires a closer relationship
between representor and representee, and its
imposition must be fair, just and reasonable.
I shall come back to consider whether in this
context the existence of an intention on the
part of the defendants that investors should
rely on the prospectus for this purpose
is sufficient to establish the necessary
proximity, for that is the crux of the present
applications.’
Butterworths Journal of International Banking and Financial Law
Feature
Andrew Charman practises in company and financial law and trusts from St Philips
Chambers, Birmingham. He was previously a solicitor in the corporate department at Freshfields.
Email: ac@st-philips.com Both counsel were in Secretary of State for BERR v Sulman.
Later, at pages 1365-1366 he referred to
the plaintiffs’ submissions which he found to
be arguable in refusing to strike out the claim:
‘... the prospectus must be examined
in the light of changed market practice
and philosophy current at its date of
preparation and circulation. The plaintiffs
claim that there has developed and
been generally recognised an additional
purpose, an additional perceived
intention on the part of the issuer and
other parties to a prospectus, namely
to inform and encourage aftermarket
purchasers, and that this is the basis for
the pleaded purpose attributed by the
plaintiffs to the prospectus. If this is
established, then it does seem to me to
be at least arguable that a duty of care is
assumed and owed to those investors who,
as intended, rely on the contents of the
prospectus in making such purchases. No
doubt the court should think carefully
before recognising a duty, in the case
of unlisted securities, which has been
withheld by the legislature.’
Professor Alastair Hudson suggests in
The Law of Finance (2010) at p 1067 that the
approach of Lightman J is to be preferred over
that in Al-Nakib, and the authors respectfully
agree. In modern market conditions, issuers
of securities rely upon the availability of a
secondary market as enhancing the value
of the securities which they offer, and will
readily appreciate that the information
provided by them will be often relied upon
in that market. It is therefore appropriate
to impose upon them some responsibility
to purchasers in secondary markets for the
accuracy of that information.
Issue documentation may attempt by
a disclaimer notice to exclude liability to
secondary market purchasers. However,
depending on the circumstances, the court
may hold that such a notice is ineffective
pursuant to ss 2 and 13 of the Unfair Contract
Terms Act 1977. This is so despite the absence
of a contractual link with those responsible for
the misrepresentation; see the decision of the
House of Lords in Smith v Eric S Bush [1990]
1 AC 831.
CAUSATION
Principles of causation at common law are
well established and outside the scope of this
article.
FSMA s 90 provides for compensation to
be paid to a person who has suffered loss ‘as a
result of ’ any ‘untrue or misleading statement’
in the listing particulars, or omission from
the particulars of matters required to be
included by ss 80 or 81, or failures to comply
with requirements as to supplementary listing
particulars. Equivalent provision is made in
respect of non-compliance with requirements
as to a prospectus.
Liabilities under s 90 are subject to an
‘exemption’ provided at Sch 10 para 6 of the
FSMA, that a person does not incur any
liability under the section ‘if he satisfies the
court that the person suffering the loss acquired
the securities in question with knowledge:
authors consider that this would limit liability
in damages to the measure described in South
Australia Asset Management Corp v York
Montague Ltd [1997] AC 191, considered
below. Further the burden of proving a prima
facie claim under the section is with the
claimant. Therefore he must prove that the
loss was suffered as a result of the relevant
non-compliance. If he fails to demonstrate
that he relied on the documents concerned
at all, or that the relevant aspect of noncompliance had any material bearing on his
decision to acquire the security, the authors
consider it to be at least arguable that he will
not have made out a case that his loss resulted
from the relevant breach.
MISREPRESENTATION ON BOND ISSUES
Biog box
Jeremy Cousins QC specialises in commercial and Chancery litigation. He practises from 11,
Stone Buildings, Lincoln’s Inn. He sits as a Deputy High Court Judge in the Chancery Division.
Email: cousins@11sb.com
RECOVERABLE LOSS
If fraud is established, damages will be
awarded so as to make reparation for
"The court may hold that a [disclaimer] notice is
ineffective ... despite the absence of a contractual link."
 that the statement was false or
misleading;
 of the omitted matter; or
 of the change or new matter
as the case may be.’
At first sight it seems that the intention
behind these provisions is to impose liability
for loss without proof of causation in the
manner normally required, particularly as the
schedule provides for exemptions from liability,
suggesting that a prospective defendant will
otherwise be liable to someone who has,
following a breach, acquired a security and
suffered loss. The wording of the schedule
undoubtedly imposes upon the defendant the
burden of proving entitlement to the benefit of
the exemption. Further, the exemption does not
provide that a claimant must demonstrate that
he relied on the relevant documents, as would
be the case with a common law claim. However,
the authors consider that that reliance needs
to be established; the loss in question must be
suffered ‘as a result’ of the failure to comply
with the provisions. At the very least the
Butterworths Journal of International Banking and Financial Law
all damage flowing directly from the
transaction; see Smith Newcourt Securities
Ltd v Scrimgeour Vickers Asset Management
Ltd [1997] AC 254.
Common law damages for negligent
misstatement are confined to the consequences
of the information provided being wrong; see
per Lord Hoffmann in South Australia at p 214,
unless the person making the misstatement was
advising as to a course of action, rather than
merely providing information (in which case
all foreseeable loss is potentially recoverable).
The latter will usually be an unrealistic case
to advance in the context of publicly offered
securities. It follows that in the case of a bond
issue, compensation will exclude any element of
loss caused by factors other than the inaccuracy
or inadequacy of information provided;
consequences of a collapse in the general
market for bonds arising from widespread
adverse conditions in financial markets will not
form part of recoverable damages. The measure
of loss which courts would be likely to adopt
in respect of liability under s 90 would be the
same as in respect of a common law claim. 
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