CA Intermediate · Corporate and Other Laws · Prospectus and Allotment of Securities
Meridian Textiles Ltd issued a prospectus that stated its plant had a capacity of 50,000 metres a day, though the directors knew actual capacity was only 30,000. Ramesh subscribed to shares relying on this statement and suffered loss. Which statement reflects the correct position under the Companies Act, 2013?
Persons who authorised the prospectus containing a knowingly false statement face liability for fraud, and the subscriber who relied on it can claim compensation for the loss suffered. Liability is not limited to the company, not confined to a refund of money, and does not depend on prior prosecution by the Registrar.
- AOnly the company is liable, and the directors cannot be held liable because the prospectus was issued in the company's name
- BPersons who authorised the issue of the prospectus are liable for fraud for the misstatement, and the person who subscribed can claim compensationCorrect
- CRamesh can only get a refund of the application money and cannot claim damages
- DNo liability arises unless the Registrar has first prosecuted the company
Explanation
Under the Act, a person who authorised the issue of a prospectus containing a misstatement is liable for fraud and also liable to compensate every person who subscribed on the faith of the prospectus for loss or damage sustained. Directors who knew the statement was false cannot shelter behind the company. The claim is not limited to a refund, and a prior Registrar prosecution is not a precondition.
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