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

Neelkanth Infra Ltd, a public company, issues a prospectus on 1 June. Before the issue closes, it discovers that a material fact in the offer document is wrong. Rohit, a director, argues that no one is liable if the prospectus is later corrected by the company's website notice. Pooja, an applicant who subscribed before the correction and suffered loss, claims compensation. Which statement is correct?

Pooja can claim compensation because a later website correction does not remove liability to those who subscribed on the faith of the original misstatement. Directors can escape only by proving a statutory defence, and liability is not confined to promoters or listed companies.

  1. ANo liability arises since the website notice cured the defect for all applicants
  2. BPooja can claim compensation, because a later correction does not extinguish liability for loss suffered by those who subscribed on the faith of the original statement, subject to statutory defencesCorrect
  3. COnly the promoters are liable and directors are always exempt
  4. DLiability exists only if the prospectus was issued by a listed company

Explanation

Liability arises for loss suffered by persons who subscribed relying on the misstatement. A later notice does not undo this for earlier subscribers. Directors are not automatically exempt; they may escape only by proving a statutory defence such as withdrawal of consent or reasonable belief. Liability applies to prospectuses of public companies generally, not only listed ones.

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