Illegal Association | Consequences and Exemptions | Provisions of Companies Act' 2013 | Company Law Notes for BCom, BBA and MBA | CBCS Pattern

 Illegal Association

Consequences and Exemptions

Under Companies Act' 2013

Company Law Notes for BCom, BBA and MBA

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.

Consequences of an illegal association

1.    No legal existence: An Illegal Association does not have any legal existence and it cannot sue and be sued in the court of Law.

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

3.    Cannot be dissolve under this Act: An illegal association cannot be dissolved under the Act either at the instance of a creditor, a member or association itself. It cannot be dissolved because there is nothing to dissolve.

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

5.    Penalty: Every member of an illegal association is liable to pay a fine of Rs. 1 lakh.

6.    No remedy to its members: Its member has any remedy against each other for contribution in respect of dealings and transactions.

7.    Subsequent registration of an illegal association will not alter the position with regard to the past acts. Contracts made before registration of an illegal association cannot be validated.

Exceptions of Section 464:

1.    This section is not applicable to the associations which carry on business but not with the object to earn profit even though number of persons is more than 50. Not for profit organisation such as clubs, society, and charitable organisation, research institutions, government hospital and school etc. are not covered under this section.

2.    This section does not apply to a Hindu Undivided Family carrying on business even though the number of members is more than 50.

3.    Section 464 doesn't apply to chit funds and stock exchanges.