Illegal Association under Companies Act 2013

ILLEGAL ASSOCIATION UNDER COMPANIES ACT 2013

The Section 464 of the Companies act 2013 deals and states that how would an association would be considered under the companies act 2013, it states that any no association, company or partnership could carry on their business for a purpose of earning profits unless it is registered under the companies act 2013 or is formed under any other law for the time being in force.

The section 464 of the companies act 2013 does not apply to Not for profits organizations or charitable organizations or any other organization whose aim is not to earn profit but if formed for other purposes. There are several other organizations or associations to which the section 464 of the companies act 2013 does not apply, the sub-section (2) of section 464 states that it is not applicable to a Hindu undivided family carrying on any business, or any association or organization that are formed by professionals and are formed under special acts, and are governed under those special acts. An example to that is that of a Limited Liability Partnership (LLP), a limited liability partnership which is formed for the purpose of gains and profits, which is registered under the Limited Liability Partnership Act 2008, is a legal body corporate, and there is no maximum limit for the number of members of such a limited liability partnership.

There are certain rules which are defined and set to count the number of members of an association or organization:

(a) Whether it is a natural or an artificial person (for example, a company) would be treated as one person, therefore whether it is a company or a human being both are considered and counted as one person each. Similarly in the case of Hindu undivided family, the family managed by the Karta of the family is also considered as a single person.
(b) In case if two or more joint hindu family forms an association, all the adult members of the family are take into consideration and are counted each as a single person.
(c) A partnership firm or company is not considered as a separate legal entity and hence is not counted as a member, but all the members or partners of that company would considered as different persons and would be counted individually.
(d) In case if two or more person in a company jointly hold a share in the company, then both of them or all of them would be considered as one and a single person.

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As now we know that what and how an association or organization is considered illegal under the companies act 2013 and what all are considered as exceptions to it, we must know that what all consequences does an illegal association or organization have to face:

(a) No Legal Existence or Identity: An association or company which is considered illegal under the companies act 2013, does not have a legal existence under the law, the company or association could not file a case against any person or company, the association or company could not enter into any contracts with anybody. Even the members of the company or the association could not sue each other in any matter relating to the organization or association.

(b) Unlimited Liability of the Partners or Members : The liability of the members or the partners of the company is unlimited, which simply means that each and every member of the company or association is personally liable for all the liabilities that has been incurred relating to the company or association, and the third party to whom the liabilities are due could directly sue the members or partners of the association or company.

(c) Fine : Each and every partner or member of the company or association is considered punishable with a fine which could even extend to one lakh rupees.

Even if the number of members or partners of an illegal association or company comes within the statutory limit set under the section 464 of the companies act 2013, then also the illegal company or association would become or be considered legal just by the virtue of such reduction as it needs to get registered under the companies act first to be able to become a legal company or association.

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Under section 453 of the companies act 2013, if any association or a company works as a private or public company, using “Limited” or “Private Limited” or any contraction or imitation thereof is or are the last word or words, without being registered as a private or public company under the companies act 2013 , then there is a fine of not less than Rs.500 per day and may extend to Rs.2000 for the period of default plus there is unlimited liability of all the persons who work under such association.

As the companies and associations which are considered illegal under the companies act 2013 work for the motive of earning profits and earn profits from their courses of business, the profit made by the company or association is subject to income tax.

At last I would like to conclude that illegal company or association are those associations whose aim is to generate profits and have a member count of more than 50. There are several consequences and limitations that an illegal association has to face like it is not considered a legal entity and could not enter into ant business with any other organization or business, the members of the illegal association has to pay certain fines and are liable to unlimited liabilities relating to the association, an illegal association is liable for a fine which it has to pay to the central government as it is not registered and creates losses for the economy as correct taxes are not paid and default in all these things leads to losses in the economy and hence the illegal associations or organizations are liable to all these things until it gets converted to a legal association.

Author: Harsh Chaudhary,
LLOYD LAW COLLEGE 1st year

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