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

Sunrise Agro Ltd., an unlisted public company, issued a prospectus in which the directors, honestly and after due inquiry, stated a projected yield figure that later proved wrong because of an unforeseen drought. Which statement best reflects the legal position on the directors' liability for the statement in the prospectus?

Directors are not liable for a misstatement in the prospectus if they prove they had reasonable grounds to believe, and actually believed up to allotment, that the statement was true. Liability is not automatic, and the defence applies equally to listed and unlisted public companies.

  1. AThey are liable automatically because every incorrect statement in a prospectus attracts liability regardless of the circumstances
  2. BThey are not liable if they prove that they had reasonable ground to believe, and did believe up to the time of allotment, that the statement was trueCorrect
  3. CThey are not liable only if the statement was made by an expert and not by the directors
  4. DThey are liable only if the company is a listed company

Explanation

A person authorising a prospectus escapes liability for a misstatement if he proves that he had reasonable ground to believe, and did believe until allotment, that the statement was true. Option A is wrong because liability is not automatic when this defence is established. Experts have their own separate position, and the rule applies to listed and unlisted companies alike.

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