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

Kaveri Infra Ltd, a public company, issued a prospectus to the public. A statement in it was untrue, and Mr. Anand, who subscribed on the basis of it, suffered loss. Mr. Rajan, a director, proves that he had reasonable ground to believe, up to the time of allotment, that the statement was true. What is the position of Rajan's liability?

Rajan is not liable, because a person authorising a prospectus can escape civil and criminal liability by proving that he had reasonable ground to believe, and did believe up to allotment, that the statement was true. Liability for misstatement is therefore not strict.

  1. ARajan is not liable for civil and criminal liability, because he proved reasonable belief in the truth of the statement up to allotmentCorrect
  2. BRajan is liable automatically because every director is strictly liable for any misstatement
  3. CRajan is liable only for criminal liability and not for civil liability
  4. DRajan is liable because belief in truth is not a defence in any circumstance

Explanation

Directors and others who authorised the prospectus are liable for misstatements, but the Act provides defences. One defence is proving that he had reasonable ground to believe, and did believe up to the time of allotment, that the statement was true. Option B ignores this defence.

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