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

Meera Textiles Ltd issued a prospectus containing a statement that its plant capacity was 50,000 units, though the directors knew the real capacity was only 20,000 units. Ravi subscribed to shares relying on this statement and suffered loss. Which is the correct legal position?

Persons who authorised the prospectus, such as the directors, are liable to compensate Ravi for the loss from the misstatement, and a knowing misstatement may amount to fraud with criminal consequences. Registration with the Registrar does not shield them, and the company is not the only party liable.

  1. AOnly the company is liable, and no director can be held liable
  2. BRavi has no remedy because the prospectus was registered with the Registrar
  3. CPersons who authorised the issue of the prospectus may be liable for loss caused by the misstatement, and fraud can attract criminal liabilityCorrect
  4. DRavi can only claim a refund after the company is wound up

Explanation

Every person who authorises the issue of a prospectus containing a misstatement is liable to compensate those who subscribed and suffered loss, and knowing misstatement amounts to fraud with punishment under the Act. Registration does not cure a false statement. Option A is wrong because directors who authorised it are liable too. Remedies are not limited to winding up.

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