ILLEGAL ASSOCIATION UNDER COMPANIES ACT 2013
There are certain provisions of the Indian companies act, 2013 where certain association of persons will not be considered legal for carrying out their business activities. The act requires strong compliance of its provisions which otherwise lead to imposition of penalties. Associations will be considered as illegal if they are not registered under the companies act, 2013. To be registered under the act, there are certain requirements that have to be fulfilled and there are provisions under the act which prohibits the formation of associations that does not have a legal purpose and engages in unlawful activities.
Under section 464 of the Indian companies act 2013, an association of persons of more than 50 in number sharing profits among them will be called as an illegal association of persons unless it is registered under any other act at that point of time. It is important to note that the business carried on by them should be for the purpose of earning profits and if it is undertaken with a view to serve the society or for any other social purpose, it can be considered as a legal association even though it comprises of more than 50 members.
EFFECTS OF ILLEGAL ASSOCIATION
• Right to sue: An illegal association will not have any legal existence and thus, it loses the right to sue and be sued in courts.
• Contracts: It cannot enter into any kinds of contracts as it is not registered under the companies act, 2013.
• Unlimited liability: The liability for an illegal association will be unlimited. All the members will be personally liable for the losses incurred by the association. Each member of the association will become vulnerable and can be sued individually.
In the case of Appa Dada Patil vs Ramkrishna Vasudev Joshi, the plaintiff sued to recover an amount due by the defendant company. The suit was not encouraged as the company was an illegal association. The judge held that the suit is not maintainable but the defendants will still be individually liable to pay back the amount to the plaintiff.
In Kumara Swamy Chattiar vs. Income Tax Officer, it was held that an illegal association will be liable to pay income tax.
• Penalty: All the members of the association have to pay a penalty of Rs. 1 Lakh.
Under section 453 of the companies act, if associations of persons work as private or public company without being registered, then it will be liable to pay a fine of Rs.500 per day which may also extend to Rs. 2000.
• Winding up: An illegal association cannot be wound up as it does not exist under the law, so there is nothing to wind up.
In South West Atlantic Steamship Company, the plaintiff wanted to wind up his company which was unregistered. The court held that as the company was not registered, its existence cannot be accepted.
• Dissolution: This type of an association cannot be dissolved as there is nothing to dissolve due to its non existence.
• Subsequent reduction: The association cannot become legal if it reduces the number of members to less than 50 as it is not registered under the act.
• Remedy: There will be no remedy available for its members for their contribution in the association with respect to transactions and dealings.
• Hindu undivided family: Section 464 of the companies act does not apply to Hindu undivided family. Even if the members of the association are more than 50, it cannot be called illegal. Minor members of the family cannot be taken into consideration and only after attaining majority can they be considered as a member. One more important point to note here is that if 2 or more members carry on their business for profit and if it exceeds 50 members, they will be considered as illegal.
• Associations governed by special acts: The associations formed under any special acts will not be considered as illegal and there is no necessity that it has to be registered under the companies act, 2013.
• Profit motive: This provision will not apply to those associations which do not have profit as their motive. Schools, government hospitals, charitable institutions, etc. come under this category.
• Stock Exchanges: This act will not apply to stock exchanges and chit funds.
RULE FOR COUNTING THE MEMBERS
• A person should be considered as one member. Likewise, a joint Hindu family managed by a Karta would be considered as one member
• If two persons jointly own a single share, they would be considered as a single member.
• If two or more joint Hindu families join to start a business, then all the members who have attained the age of majority will be counted as members.
• In a partnership firm, all the members have to be counted as different persons.
Illegal Associations will always be discouraged as it against the morals and laws of the Land and it has so many disadvantages under the companies act. The members of the illegal association do not get any rights that can be availed like a company or business registered under the act. These kinds of businesses have to be individually liable to pay the third parties in terms of debt occurred during the running of business even though the association as a whole cannot be sued under law. Also, these associations have to pay income tax for the profits earned during its transactions.
Every business entity is expected to be registered under the provisions of the companies act, 2013 and to contribute towards the economy by using the available resources efficiently. An illegal association does not contribute towards the advancement of the economy and it only brings the economy down by encouraging unlawful activities. Therefore, to prevent such illegal activities strong penalties have been laid down under the companies act and section 464 of the act prohibits the formation of such companies.
Author: Ronald Philips,
4th year BA LLB