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

Meridian Textiles Ltd. issued a prospectus. Rakesh subscribed to shares relying on a statement in it that the company held a valid export licence. The statement was untrue, and Rakesh suffered loss. Dinesh, a director who signed the prospectus, proves that he had reasonable ground to believe, and did believe up to the time of allotment, that the statement was true. What is the position of Dinesh under the Companies Act, 2013?

Dinesh is not liable, because a director who proves he had reasonable ground to believe, and did believe up to the time of allotment, that the prospectus statement was true is protected from liability for the misstatement. Directors are not strictly liable regardless of their belief.

  1. AHe is liable for the loss because every director who signs a prospectus is strictly liable regardless of belief
  2. BHe is not liable for civil liability for misstatement in the prospectus, since he proves reasonable belief up to allotmentCorrect
  3. CHe is liable only for criminal liability but not for compensation
  4. DHe is liable only if he was a promoter of the company

Explanation

Directors who authorise a prospectus are liable to compensate for loss from untrue statements, but a person is not liable if he proves that he had reasonable ground to believe, and did up to the time of allotment believe, the statement to be true. Dinesh proves this, so he escapes the liability. Strict liability irrespective of belief is not the rule.

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