R v. Kylsant (1931)
Prospectus misrepresentation through half-truths: when “truthful lines” make a false picture.
Secondary Keywords: Royal Mail Steam Packet; half-truth; securities law; investor protection; company law.
Quick Summary
The company’s prospectus used true statements about averages and dividends. Still, it hid a big truth: the business had heavy losses across many years. The court said that telling selective truths that create a false overall picture is misrepresentation and can be a crime. Leaders who publish such material can be held liable.
Issues
- Can action lie when a prospectus is literally true but hides material losses?
- Is the company chairman criminally liable for creating a misleading impression?
Rules
- Fraud can arise from misrepresentation or from breach of an absolute duty to disclose material facts.
- Fiduciary or trust-based settings heighten the duty to disclose, especially where one side holds superior knowledge.
- Half-truths that create a false overall impression = misrepresentation in fact.
Facts (Timeline)
Timeline Image1928 Royal Mail Steam Packet Co. offers £2,000,000 in debenture stock to fund shipbuilding and general needs.
Prospectus claims audited accounts show ten-year averages that could cover interest more than five times.
Schedule shows regular dividends (except one year). All lines are literally true.
But the company had operated at a loss for seven years, which the prospectus did not disclose.
An investor buys relying on the prospectus. Lord Kylsant, the chairman, faces action for deceit and for publishing a misleading document to induce investment.
Arguments
Appellant (Prosecution/Investor)
- Prospectus hid sustained losses; investors were misled.
- Selective truths built a false overall picture.
- Statutory duty: publishing a misleading statement to induce investment is a crime.
Respondent (Lord Kylsant)
- Every statement was literally true and audited.
- Dividends and averages were correctly reported.
- No explicit falsehood; investors had access to accounts.
Judgment
Judgment ImageThe Court of Criminal Appeal held that the prospectus, though literally true in parts, was misleading as a whole because it hid the continuing losses.
Ratio
A prospectus must present a fair and complete picture of material facts. Half-truths that hide major losses amount to misrepresentation. Where a duty to disclose exists, silence or selection can be fraudulent.
Why It Matters
- Protects investors from polished half-truths.
- Sets a high honesty bar for corporate disclosures.
- Guides drafting of offer documents and risk sections.
Key Takeaways
Mnemonic + 3-Step Hook
“KYL = Keep Your Lies out”
- Show all: Give the full material picture.
- Don’t polish: Averages and dividends are not shields.
- Think impact: Would a student-investor be misled?
IRAC Outline
Issue: Can selective truths in a prospectus be criminally misleading?
Rule: Misrepresentation can arise from half-truths where there is a duty to disclose material facts.
Application: Prospectus highlighted averages and dividends but hid seven years of losses, creating a false overall impression.
Conclusion: Yes. Liability can follow even without an express false statement.
Glossary
- Prospectus
- A public document inviting investment in a company.
- Material Fact
- A fact that would influence a reasonable investor’s decision.
- Half-truth
- A statement that is true in parts but hides key context, making the whole misleading.
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