# Remedies against the Company for Misrepresentation in Prospectus

## Setting

If a prospectus contains an untrue or misleading statement and a person subscribes shares relying on it, that person (the allottee) has three civil remedies against the company plus rights against directors/promoters/experts (covered separately).

## Remedies against the COMPANY

### 1. Rescind the contract of allotment

The allottee may apply to the Court to:

have the allotment contract set aside, and
get the name struck off the register of members.

### 2. Claim refund of money

Upon rescission, the allottee may claim his money back.

### 3. Sue the company for damages for deceit

The allottee may sue for damages, in addition to or instead of rescission, where the misrepresentation amounts to deceit.

## Conditions / Limitations

### Act within reasonable time

The allottee must rescind:

within a reasonable time, AND
before any winding-up proceedings have commenced.

### Loss of right to rescind

The right is lost (i.e., conduct evidencing affirmation) if the allottee:

Attempts to sell the shares, OR
Attends a general meeting of the company, OR
Receives dividends.

### Only direct subscribers can sue

Available only to persons who subscribed the shares.
"Subscribed" = acquired directly from the company by allotment.
A subsequent purchaser in the open market has no remedy against the company, directors, or promoters under prospectus liability.

## Logic Behind the Restriction

Prospectus liability exists because the prospectus induced the first allotment. Once shares are traded in the secondary market, the inducement chain is broken — secondary buyers rely on market price, not the prospectus.

Worked example

### Example 1

Example 1 — Allottee loses right to rescind

R was allotted 1,000 shares of Q Ltd. relying on a misleading prospectus. Two weeks later, before discovering the misrepresentation, R attended Q Ltd.'s AGM and received a dividend. R now wants to rescind.

Treatment: R cannot rescind. By attending the meeting and accepting dividends, R has affirmed the contract.

### Example 2

Example 2 — Secondary market buyer

S bought 500 shares of Q Ltd. from the stock exchange three months after the IPO, relying on the prospectus. The prospectus contained misstatements.

Treatment: S has no remedy against the company, directors or promoters under prospectus liability provisions because S is not a direct subscriber. (Other remedies under SEBI / general law may exist, but not under these provisions.)

### Example 3

Example 3 — Rescission after winding up

T, an allottee misled by the prospectus, tried to file for rescission after winding-up proceedings against the company had commenced.

Treatment: The right to rescind is lost once winding-up has begun. T must prove claim in the winding-up, not rescind.

⚠️ Common exam mistakes

Treating market purchasers as eligible to claim — only allottees (direct subscribers) qualify.
Ignoring the 'reasonable time' requirement and assuming the right to rescind is indefinite.
Forgetting that attending a general meeting or accepting dividends constitutes affirmation and bars rescission.
Confusing rescission (a contract remedy) with damages for deceit (a tort remedy) — both may be available but on different conditions.

Reference: Common-law remedies referenced alongside Section 35 — Companies Act, 2013 (principles drawn from common-law remedies preserved alongside Sections 34, 35, 37)

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Remedies against the Company for Misrepresentation in Prospectus — Rescission, Damages, Limits

Worked example

⚠️ Common exam mistakes