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

Nirmal Textiles Ltd, an unlisted public company, issues a prospectus inviting the public to subscribe to its equity shares. A director, Mr. Rao, consented to act as director but did not authorise the issue of the prospectus, and he proves that it was issued without his knowledge or consent. Which statement correctly states his liability for the prospectus?

Mr. Rao is not liable, because the Companies Act allows a director to escape liability for a prospectus by proving it was issued without his knowledge or consent. Liability is not automatic for every director, and the defence does not depend on whether the company is listed.

  1. AHe is liable because every director is automatically liable for any prospectus issued by the company
  2. BHe is not liable for the prospectus if he proves it was issued without his knowledge or consentCorrect
  3. CHe is liable only if the company is a listed company
  4. DHe is liable to pay a fine but cannot be imprisoned in any circumstances

Explanation

Under the Companies Act, a person named as director is not liable for a prospectus misstatement or non-compliance if he proves the prospectus was issued without his knowledge or consent. Option A is wrong because liability is not automatic; the statute gives this defence. Listing status is irrelevant to the defence.

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