Illegal Association- The Companies Act, 2013

Illegal Association- The Companies Act, 2013
22 April 2022

Illegal Association- The Companies Act, 2013


ILLEGAL ASSOCIATION:


As per Section 464 of the Companies Act, 2013, no association or partnership consisting of more than 50 persons shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force.


Every member of an association or partnership carrying on business in contravention of Section 464(1) shall be punishable with fine which may extend to Rs. 1 lakh and shall also be personally liable for all liabilities incurred in such business.


RELEVANT CASE LAW


In a leading case, the plaintiff company, South West Atlantic Steamship Company, was an unregistered company, which was an illegal association. It prayed for its winding up. James LJ pronounced his judgment that- "Even if there were such a winding up, it could not, it seems to me, go beyond dealing with existing assets and cover existing liabilities, and could not become a means of enforcing the contribution of some members who did not pay have to compensate other members who have paid, as I do not believe there is any right or contribution, either in law or in equity, among the members of such an illegal association as this.” Here the existence of the
Association is not accepted.”


In another prominent case, Seth Badri Prasad and Others Vs Seth Nagarmal and Others, as per the facts of this case, there is an association formed by cloth vendors, when a cloth control regulation was passed in Rewa State, with a President and pioneer at the top of the association. When an account dispute suddenly arose, he was brought before the Trail court. Later, an appeal was made to the Supreme Court of India which ruled that “Pursuant to Section 69(3)(a) of the Indian Partnership Act 1932, it is suffice to say that under this Act an unregistered company is not illegal; There is no immediate obligation to register a partnership, although impediments resulting from a lack of registration can be very inconvenient.


EXCEPTION TO BE CONSIDERED AS ILLEGAL ASSOCIATION


Following are the kind of associations which are not considered to be ‘illegal association’.


1. Hindu Undivided Family carrying on any business:


A Hindu Undivided Family is a family that consists of all persons lineally descended from a common ancestor, and also the wives and daughters of the male descendants. It consists of the Karta, who is typically the eldest person or head of the family, while other family members are coparceners. As they are considered as a unit or holds the capacity of the individual business, it isn’t necessary for the Hindu Undivided family to register themselves as an association.


2. Partnership or Association if it is formed by professionals who are governed by any Special Acts:


Any partnership or Association, which is governed by special acts is always within the purview of the Special Act and it isn’t necessary for that association to register themselves, under the Companies Act, 2013.


EFFECT OF ILLEGAL ASSOCIATION


a.
The members of an illegal association shall be personally liable for all the acts and dealings made in the name of such association.


b.
The association cannot enter into any contract in its own name.


c.
The association cannot sue or be sued in its own name.


d.
Every member of illegal association shall be liable to a penalty of up to Rs. 10,000.