ILLEGAL ASSOCIATIONS UNDER COMPANIES ACT 2013

BACKGROUND

Combination of persons for achievement of common objects is called an ‘association’. In order to protect public from the mischief of large trading associations, whose membership may go on constantly changing, there is a need for compulsory registration of such large association. The Companies Act, 2013, lists certain associations to be illegal, when that association/ partnership hides from Companies Act 2013, by non-registration, and carries on profit gaining business. This article deals with the following issues

  1. Whether illegal associations come under the ambit of the Companies Act, 2013.
  2. Whether there are exceptions to illegal associations?
  3. Whether there is a maximum limit on the number of persons in an Association? 
  4. Whether there is a specific rule and procedureto determine the number of persons in an association? 
  5. Whether there would be any consequences if the Association has more members than the prescribed limit? 
  6. Whether there is a penalty for the formation of an illegal association.
  7. Whether an illegal Association is liable to be taxed under Income Tax Return? In case of an illegal association, whether any relief will be granted to its associates or members as the contractual relationship on which it is founded is void ab-initio?

Response to Issue 1

Section 464[1] of the Companies Act governs illegal associations. No corporation, association, or partnership with more than 50 members may be established to carry on any business for profit, unless it is registered under the Companies Act or any another Indian law. According to Section 464 of the Act, it is not mandatory to register such an organisation under the Indian Companies Act. Currently, the Companies Act of 2013 expressly forbids the creation of an association,and any association created would be considered as illegal.This oversees businesses and other economic practises in accordance with current laws.

There are certain kinds of associations, which are exempted from being considered as an illegal association. They are as follows:

  • Undivided Hindu Family Engaged in Any Business: A Hindu Undivided Family,made up of all lineal descendants of a single ancestor, as well as the wives and daughters of the male descendants, is not required to register as an organisation because they are considered a unit or have the capability of a single business[2].
  • Special Acts-Governed Partnerships or Associations: Any partnership or association which is governed by special acts,do not have to be registered under the Companies Act, 2013.
  • Chit funds and Stock Exchange: Any association of persons dealing with chit funds and stock exchange are not entitled to register under the Companies Act.
  • Non-Profit Organisations: Non-Profit Organisation such as charitable organisation, government hospitals, research institutes etc, are also not considered as illegal associations.

Response to Issue 2

According to Section 464 of the Companies Act of 2013, no association or partnership of more than specified persons may be established for the purpose of carrying on any business unless it is registered as a company or is formed under any other law in force at the time. The maximum number of people in an association as prescribed under this provision is 100. Although, Rule 10[3] of the Companies (Miscellaneous) Rules, 2014 specifies the maximum limit for associations to be 50 people.

Response to Issue 3

  • A person, natural or artificial, would be treated as one person. Therefore, a company is treated as a single person. Similarly, a joint Hindu Family managed by Karta is also treated as a single person.[4]
  • If two or more Joint Hindu Families form an association, in that case, all the adult members of the family would be taken into consideration while counting the number of members.
  • A partnership firm is not a separate legal entity. All the partners would be treated as different persons.
  • If two or more persons hold a share jointly, they would be treated as one single person.

Response to Issue 4

  • No legal life:An illegal association has no legal existence, and it is thus unable to sue or be sued in a court of law.
  • Unable to enter into contracts: An unlawful organisation or its members would be unable to enter into legally binding contracts under the association’s name.
  • Cannot be dissolved under this Act: Under this Act, an unlawful association cannot be dissolved at the request of a creditor, a member, or the association itself. As there was no legal association, there is no ability to dissolve it legally.
  • Members have unlimited liability: All members of the unlawful association would have unlimited liability. To recover dues, a third party may sue each member of such an organisation. An illegal association’s members are individually responsible for any and all liabilities incurred in the company.
  • No legal recourse for its members: Its members have no legal recourse against one another for contributions in dealings and transactions.

Registration does not affect retrospectively:The fact that an unlawful association is re-registered does not change the outcome of the previous actions. Contracts made before the registration of an illegal association are void.

Response to Issue 5

Any association established in violation of Section 464(1), which forbids the creation of unlawful associations, is subject to Section 464(3) of the Companies Act 2013. In case of illegal association every member who is involved shall be punishable with a fine which may extend to 1 lakh rupees and shall be personally held liable for all the liabilities.  It also imposes a fine on all who form an illegal association, as well as all liability associated with such a company.

Under section 453[5],if a group of people operate as a private or public company without being recorded as a private or public company, they face a fine of not less than Rs.500 per day and up to Rs.2000 for the duration of default, as well as unlimited liability for all the people who work for them,plus unlimited burden shall be cast on all the people who comprise of such illegal association.

Response to Issue 6

An illegal Association is liable to be taxed under Income Tax Return.

Members of an illegal association are individually responsible for any action or contracts performed on behalf of the organisation.They cannot bring an action to enforce any such contract or to recover any debt owed to the organisation, either individually or collectively.In the Case- Gokuldas v. KikabhaiAbdulali, (1958),[6]the Bombay High Court’s learned Judges held that when a firm is assessed, its partners would come under the definition of “other persons liable to pay such tax” as mentioned in Section 29[7], and that it was therefore necessary to serve a notice of demand on such a person under Section 29.

Response to Issue 7

Similarly, if an unregistered company, is assessed, then its partners would fall under the definition of “other persons liable to pay such tax” in Section 29. If liability is sought to be enforced against any such individual, the court will have to dismiss the case

In Badri Prasad v. Nagarmal[8]the Supreme Court ruled that in the case of an illegal association, no relief will be given to its partners or members because the contractual relationship on which it is based is illegal, but subscribers will have the right to sue for the recovery of their subscriptions and have the assets realised for that reason.

Conclusion

Since 1875, eminent jurists and judges around the world have not promoted illegal associations, as it not only affects the persons in the association but also affects the economy of the country.Illegal Associations cause damage and contribute toillicit practises such as non-payment of taxes, etc., which may impact other businesses and the country’s revenue in the long run. Therefore, S. 464 of the Companies Act, 2013 forbids the formation of associations on a wide scale in order to prevent this.

CREDITS: Anamika Singh, BBA LL.B (Hons.), Jagran Lakecity University


[1]Companies Act 2013, No, 121-C, S. 464.

[2]ShushmaSwami,Section 464 of Companies Act 2013,https://whitecode.legal/more/nzm=/section-464-of-companies-act-2013( last visited 12 May,2021 17:15)

[3]Companies (Miscellaneous) rules,2014, Rule 10.

[4]Subha Mohan, Illegal Association under Company Law, Law Corner, Dec 2, 2020 https://lawcorner.in/illegal-association-under-company-law/ (last visited on 12 May 2021).

[5]Companies Act 2013, No, 121-C, S. 453.

[6]Gokuldas v. KikabhaiAbdulali, (1958) AIR 1958 Bom 385(India).

[7]Income Tax Act,1961, No. 43,S. 29.

[8]Seth Badri Prasad and ors.Vs.  Seth Nagarwal and ors. 1958,AIR 559(India).

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