Illegal Association in India

Every business set up in a country provides an economic boost to it. Thus, the Governments of almost every country endeavor to provide freedom to manufacture or render a series of goods and services to the business sector. Unlike ancient times, Governments have, to a large extent, transferred the control of business activities to private individuals and entities to create a healthy business ecosystem within their respective territories.

By doing this, it encourages the masses towards self-employment through setting up new businesses. These businesses are started either in the form of small traders like sole proprietors, associations, partnerships, or traditional family-owned ventures. The same structure of business organizations can be seen in India as well.

It is always advisable to get such organizations registered as it provides recognition to them in the eyes of the Government and the law. While such a requirement of registration is optional for some organizations, it is compulsory for a company form of business. In spite of enough awareness about the benefits of registration is created, there are many businessmen who still run their businesses without adequately registering them.

To enjoy these benefits and rather not to face severe consequences, it important that the concept of ‘Illegal Association’ is brought to people’s notice, especially those who have already set up or plan to set up their businesses.

When can an organization be declared as an Illegal Association?

An association or a partnership formed with more than the prescribed number of members for carrying on any business with an aim to acquire any gain for such association or partnership or its members shall be considered as an illegal association if it is not registered either as a company under the Indian company law or is formed under any other law.

In simple words, if an association or a partnership has members beyond the prescribed limit it shall get itself registered either under the company law or any other prevailing law, else it will be declared as an illegal association in the eyes of law.

The prescribed number of members by law as of now is 50. It means an association or a partnership carrying on business with more than 50 members without registering itself shall not be recognized by law as a legal association.

The prescribed limit of 50 can be increased to not more than 100 members.  

Are there any organizations that are exempted from the above rule?

(i) A Hindu Undivided Family carrying on any business irrespective of the number of members is exempt from registering itself. It shall still be considered as a legal association unless the State laws if any provide otherwise.

(ii) Also, any associations or partnerships formed under special Acts and governed by them are not required to comply with the above provisions. This is because they shall abide by the provisions of such special Acts.

What would be the consequences of being an illegal association?

(i) Such an association would not be eligible to enter into any contracts. It means it would not be competent to contract.

(ii) It cannot sue any of its members or outsiders even if the organization seeks registration subsequently.

(iii) No member or outsider can sue such an illegal association with respect to the recovery of any debts.

(iv) It cannot even be wound up by the order of the Court as there is no proof of the association’s existence as it is not granted any recognition granted by law.

(v) The members of an illegal association shall be individually liable with respect to any contracts entered by the association.

(vi) The members cannot initiate any action for enforcing the contracts of an illegal association involving debt recovery or otherwise, whether individually or collectively.

(vii) It must be important to note that though not granted legal status by law, the tax liability of an illegal association shall in no case be waived off or reduced.

What is the penalty applicable to the members of an illegal association?

Every member of an illegal association shall be punishable with a fine of up to 1 lakh and shall also be liable personally for all the liabilities incurred on behalf of the illegal association.

The above provisions shall not apply to LLPs as well since they are bodies corporate which are validly incorporated under LLP law of India.

Conclusion:

It can therefore be concluded that it is always for its own good if an association/partnership is duly registered under the laws applicable. Carrying on any business legally may involve a few formalities and compliances but it is always less burdensome than doing such business illegally and facing penal consequences for the same.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.