Page 103 - DCOM106_COMPANY_LAW

Company Law

Notes allottee may avoid it within two months after the statutory meeting, or where no such meeting
is to be held, within two months of the allotment. Contravention also renders the company and
every director liable to a fine up to 10,000.
A prospectus issued by a company contained a promise of subscription of a substantial amount
by some persons so as to induce the public to subscribe. The plaintiff who was allotted 10 shares
alleges material misrepresentation. Decide upon the case. [Hint: Those responsible for making
such a statement in the prospectus shall be held liable. See Ss.62, 63, 68 and 69 of the Companies
Act, 1956.]

7.8 Underwriting Commission and Brokerage

In the event of the issuing company or the underwriters to the issue who have invited or
received advance subscription by way of cash or post-dated cheques or stock-invest, the company
or such underwriters or bankers to the issue shall not encash such subscription moneys or post-
dated cheques or stock invests before the date of opening of the issue, without having individually
intimated the prospective subscribers of the variation and, without having offered an opportunity
to such prospective subscribers to withdraw their application and cancel their post-dated cheques
or stock-invest or return of subscription paid.
The applicant or proposed subscriber can exercise his right to withdraw from the application, on
any intimation of variation within seven days from the date of such intimation and, shall
indicate such withdrawal in writing to the company and the underwriters.
Any application for subscription, which is acted upon by the company or underwriters or
bankers to the issue, without having given enough information of any variations, or the
particulars of withdrawing the offer or an opportunity for cancelling the post-dated cheques or
stock-invest or stop payments for such payments shall be void. Further, the applicants shall be
entitled to receive a refund or return of its post-dated cheques or stock-invest or subscription
moneys on cancellation of its application, as if the said application had never been made and, the
applicants are entitled to receive back their original application and interest at 15%, from the
date of encashment till payment of realisation.
Brokerage Contracts: In addition to underwriters, a company may also enter into brokerage
contracts with brokers. A broker is a person who undertakes to ‘place’ shares, i.e., find persons
who will buy shares, in consideration of an agreed brokerage and if he fails to place any of the
shares, he is not personally liable to take them, nor is he entitled to any brokerage in respect of
shares not placed. The underwriter, on the other hand, is bound to take up the shares, which the
public has not taken and is entitled to the whole of the agreed commission.
It may be noted that there must be authority in the articles to pay brokerage, and the brokerage
must be disclosed in the prospectus, or statement in lieu of prospectus, as the case may be and it
should pay a reasonable brokerage (s.76).

Self Assessment

State whether the following statements are true or false:

15. A person can avoid the contract to purchase shares in the company even if he has purchased
shares in the open market and has not gone through the prospectus containing untrue
statements.
16. An allottee of shares can retain the shares and can sue the company for damages in case he
finds that the prospectus contained untrue statements.

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