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

Meridian Infra Ltd issued a prospectus inviting subscriptions. A statement in it about the company's order book was untrue, and Rohan subscribed to shares relying on it and suffered loss. Which of the following is the correct position regarding a director who authorised the issue of the prospectus?

A director who authorised the prospectus escapes liability if he proves the misstatement was immaterial, or that he had reasonable grounds to believe and did believe it was true until allotment. Liability is not automatic, and it is not limited to the person who made the statement, nor to criminal punishment.

  1. AThe director is liable only if he personally made the statement
  2. BThe director is not liable if he proves the statement was immaterial or that he had reasonable grounds to believe, and did believe, it to be true until allotmentCorrect
  3. CThe director is automatically liable and has no defence available
  4. DThe director is liable only to criminal punishment and not to pay compensation to Rohan

Explanation

Every person who authorised the issue of a prospectus is liable for misstatements, but the Act gives defences, such as proving the statement was immaterial or that he had reasonable ground to believe and did believe it true until allotment. So liability is not automatic. Liability also extends to compensation to affected subscribers, besides criminal consequences, so the last option is wrong.

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