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CA Foundation · Business Laws · The Companies Act, 2013

Arjun, a promoter of Bharat Agro Ltd, issued a prospectus which contained a false statement about the company's existing contracts. Priya bought shares relying on it and suffered a loss. Which of the following is the correct legal position?

Priya can claim compensation from the persons who authorised the prospectus, including the promoter, because it contained a misleading statement and she subscribed relying on it. The Act imposes civil and criminal liability for misstatements, so she is not left without a remedy or limited to suing the company.

  1. APriya has no remedy because a prospectus is only an invitation to offer
  2. BPriya can claim compensation from persons who authorised the issue of the prospectus, as it contained a misstatementCorrect
  3. COnly the company can be sued, not the promoter
  4. DPriya can only rescind the contract but never claim damages

Explanation

Under the Act, every person who authorised the issue of a prospectus containing a misleading statement is liable to compensate those who subscribed on the faith of it, and may face civil and criminal liability. A promoter is among those who may be liable, so limiting the claim to the company is wrong. Priya is not restricted to rescission.

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