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 is known as Illegal Association.
Section 464 of the Companies Act, 2013, states that any association or partnership formed exceeding fifty members for a profit gaining business, without registering it as a company under Companies Act, 2013, is said to be known as Illegal Association.
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 but defendants Nos. 1, 2 and 3 were liable to the plaintiff’s claim on the analogy of Sections 245 and 246 of the Indian Contract Act. This appeal is filed by defendants Nos. 2 and 8, Defendant No. 1 has not appealed.
In a case between members of an illegal association it was held by Justice Tomlin in Greenberg v. Cooperstein, that notwithstanding that the association may be illegal, the Court is not debarred from affording relief to the members asking for the return of money paid into the hands of agents for application for an illegal purpose, by granting an account, The learned Judge says (p. 665) “I do not myself believe that the law is as powerless that when money is in the hands of persons who have received it for application for an illegal purpose, it cannot protect the contributors or enable them to recover it before it has been applied for this illegal purpose”.
Then on page 666 he says “I am happy to think that the law is not as feeble that it cannot protect the subscribers by ordering au account; but in saying this, I am expressing no opinion as (so what will take place after the account has been taken and by what means if any the defendants may discharge themselves of the money they have received”.
This is how courts had a swing from law and justice prevailed in the society when there is a dispute relating to illegal Association arose. And now presently, Companies Act, 2013, explicitly prohibits the formation of the association, which is if formed is unlawful. This regulates the Companies and other commercial activities in compliance with the laws present.
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 (p. 772) “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)”.
And then Lord Justice Mellish says (p. 781) “I should be very unwilling to hold, unless I find myself absolutely compelled to do so, that a purely innocent person who employs a partnership of this kind can be prevented from maintaining an action against all the members of it who are practically interested in it, because, without his knowing it, they happen to be more than twenty. Suppose a common ordinary partnership was carrying on this business, it seems to me a very extraordinary thing that a creditor should have any obligation put upon him to inquire whether the partners were more than twenty or not.”
Here above, Justices observes the situation of an innocent and an unlawful act cannot be allowed even if being a part of another unlawful act. The point of justice to an individual extends and impel judges to bring justice, to prevent similar acts carried by some other person. Thus illegal association is prohibited and any disputes relating to accounts of the unregistered association are tested for Illegal Association, in the first place, for further proceedings.
Section 464(3) of the Companies Act 2013, provides that, any association formed in contravention to Section 464(1), which prohibits the formation of illegal association. It also imposes a fine on persons of illegal association and also all liabilities incurred on such type of business.
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.
Since 1875, Illegal Association is not encouraged by eminent Jurists and Judges around the world, as a company adds profit not only to the individual who runs the business it also gains the economy of the Country. Thus an Illegal Association, through an eagle’s eye, creates loss and involves unlawful activities like non-payment of Taxes, etc., which, may affect other companies and the country’s income in long run. In order to avoid that in a large scale, S. 464 of the Companies Act, 2013 prohibits the Formation of Association.
This Article is Authored by Subha Mohan S, 5th Year B.A.LL.B. (Hons.) Student at VELS Institute of Science Technology and Advanced Studies.