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Illegal Association under Companies Act 2013

Updated: Apr 6, 2023

INTRODUCTION:

Illegal association is an organisation which hides its status from the Companies Act 2013, and continues with its business to make profit. This has been listed under Companies Act, usually they are associations or partnerships which have more than the approved number of persons, still carry business without registering under Companies Act.

ILLEGAL ASSOCIATION:

Meaning of an illegal association

According to section 464 of the Indian Companies Act, 2013, any association of persons or partnership in which the number of members is more than 50 and it carries on business for profit, it is said to be an illegal association unless it is registered as a company under the Act or is formed under any other law for the time being in force. It is important under section 464 that to call an association illegal, the business must be carried on for profit. If the motive of the organisation is not to earn profit but to serve the society, it can work as a legal association even if the number of members is more than 50. It means that this section doesn't apply to not for profit organisation such charitable institutions such as clubs, society, and charitable organisation, research institutions etc. An illegal association remains illegal in spite of the subsequent reduction in its membership till it gets registered.

In South West Atlantic Steamship Company, the plaintiff here prayed for winding up of an unregistered company, which is termed as an illegal association. James LJ held that “Even if there were such a winding up, it could not, as it appears to me, go beyond dealing with existing assets and providing for existing liabilities and could not be made the means of enforcing contribution from some members who had not paid in order to reimburse other members who had paid, there being, as it seems to me, no right or contribution whatever either at law or in equity as between the members of such an illegal association as this was.” Here, the existence of the association is not accepted.

Further in Seth Badri Prasad and Others Vs Seth Nagarmal and Others, This case fact comprise of an association formed by cloth vendors, when there was a regulation passed in cloth control in Rewa State, with a President and Pioneer as the head of the Association. When there was a sudden dispute, on accounts, it was taken to the Trial Court. Then, on an appeal, the Supreme Court of India held that “As to the last contention of learned counsel for the appellants, based on the analogy of s. 69(3)(a) of the Partnership Act, it is enough to point out that under the Indian Partnership Act, 1932, an unregistered firm is not illegal; there is no direct compulsion that a partnership firm must be registered, though the disabilities consequent on non-registration may be extremely inconvenient.

Moreover, the suit before us was not one for accounts of a dissolved firm, but for accounts of an illegal association which was in existence at the relevant period for which accounts were asked. We do not think that the argument by analogy is of any help to the appellants; in our opinion, the analogy does not really apply.”

In Appa Dada Patil vs Ramkrishna Vasudev Joshi, the plaintiff sued to recover the balance of an account with the defendant company having its head office at Dudhgaon. The branch office conducted business in Sangli, a Native State. The plaintiff’s suit is resisted first on the ground that the defendant company was formed in an illegal manner and therefore the suit was not maintainable against it, and secondly, on the ground of limitation. The learned Subordinate Judge held that the defendant company was an illegal association within the meaning of Section 4 of the Indian Companies Act.

Lord Justice Hellish in In re South Wales Atlantic Steamship Co. There it was held that a winding-up order could not be obtained against an illegal company. But Vice-Chancellor Malins, at the end of his judgment, says  “The result will be that having given credit, they must recover the money from those to whom they gave credit. If they make out a case against them all and establish liability, they will get it at law, but it is impossible for them to do so under the machinery of this Act (namely, the Companies Act)”.

Consequences of illegal association

  1. No legal existence: An illegal association does not have anh legal existence and it cannot sue and be sued.

  2. Cannot enter into contracts: An illegal association or its members cannot enter into binding contracts in the name of the association.

  3. Dissolution not possible: An illegal association cannot be dissolved under the act either at the instance of a creditor, a member or association itself.

  4. Unlimited liability: Third parties can sue each member of such association to recover their dues. All the members of illegal association are personally liable for all the liabilities incurred in the business.

  5. Penalty: Every member of an illegal association have to pay a penalty of Rs. 1 lakh if prosecuted.

  6. Members have no remedy against each other.

  7. Subsequent registration of illegal association does not alter the position with regard to past acts.

EXEMPTION:

There are certain kinds of associations, which are exempted to consider illegal association. They are,

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 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.

Conclusion:

It was in 1875, illegal associations are first prohibited. Since then it is unlawful to create an illegal association and run it for profit making. It is well understood that a successful organisation improves not just stakeholders status, it also have an impact on the economy of the country. So an illegal association is just a sham, which will not file accounts, will not pay taxes etc, may affect the economy as well the stake holders. The intention of section 464 of Companies act, is prohibit the creation of such illegal associations.

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