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CA Intermediate · Corporate and Other Laws · Prospectus and Allotment of Securities

Himalaya Organics Ltd, an unlisted public company, issued a prospectus for its public offer. After the issue opened, the company discovered that the prospectus omitted an important fact about a pending litigation. Which of the following is the correct legal position regarding a person who subscribed on the basis of this prospectus?

A subscriber who suffers loss because a prospectus contains a misstatement or omits material facts can claim compensation from every person who authorised the issue of the prospectus, including directors and promoters, unless they prove a statutory defence. The remedy is not limited to refund or to the company.

  1. AThe subscriber has no remedy because a prospectus is only an invitation to offer and carries no liability
  2. BThe subscriber may claim compensation from persons who authorised the issue of the prospectus for loss caused by the misstatement or omission, subject to the statutory defencesCorrect
  3. COnly the company is liable, and directors cannot be made personally liable in any circumstances
  4. DThe subscriber can only seek refund of the application money and cannot claim any compensation

Explanation

Under the Companies Act, 2013, every person who authorised the issue of a prospectus containing an untrue or misleading statement or omission is liable to compensate persons who subscribed and suffered loss, unless a statutory defence is proved. Option D is wrong because compensation is available in addition to other consequences. Option C is wrong because directors and promoters can be personally liable.

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