Section 464(1) of the Companies Act, 2013 read with Rule 10 of the Companies(Miscellaneous) Rules, 2014 deals with the provisions relating to an illegal association.

An association or partnership will be termed as an illegal association when the following conditions are satisfied:

• The association or partnership consists of more than 50 persons.,
• The association or partnership is formed for carrying on a business.
• The objectives of carrying on a business must be the acquisition of gain.
• The association or partnership is not registered as a company under this Act or is not formed under any other law for the time being in force.

Exceptions:  The aforesaid provisions are not applicable in the following cases:

• HUF: A Hindu Undivided Family carrying on any business (Section 464(2))
• Associations governed by other Acts: An association or partnership, if it is formed by professionals who are governed by special Acts (Section 464(2)). For example, the Limited Liability Partnership was formed by chartered accountants.
• Associations ‘not for profit-making’: All charitable, religious, scientific, literary, social, and other associations not having as their object the acquisition of gain is not illegal associations as per Section 464(1).

Rules for counting the number of persons

• The word ‘person’ includes both natural persons and artificial juristic persons.
• A company has a separate legal entity. It has been held that, if a company is one of the partners, it will be counted not as a single person, and not as a group of individuals comprising its shareholders (Shri Murugan Oil Industries (P) Ltd. v. A.V. Suryanarayanan Chattier 1963).
• The separate legal entity concept is not applicable to a partnership firm and therefore, it does not have an entity separate from its partners. Therefore, if a partnership firm is a member of an association, each partner of the firm will be counted as a separate person.
• A joint Hindu family managed by a Karta is treated as a separate entity under Hindu law. Therefore, it will be counted as one person. If two joint Hindu families form a partnership, adult members of both the joint Hindu families will be counted as members of the partnership. Where two Kartas of two joint Hindu families enter into a partnership, it will be a partnership between two Kartas each being counted as one person, and other members of the family do not become partners, ipso facto.

Consequences of an illegal association:

• Personal liability (Section 464(3)): Every member of an illegal association is personally liable for liabilities incurred in the business.
• Fine (Section 4646(3)): Every member of an illegal association shall be punishable with a fine which may extend up to 100000 rupees.
• No binding contract: An illegal association cannot enter into any contract.
• No suit: An illegal association cannot sue any member or an outsider. It cannot be sued by a member or an outsider for a trade debt.
• Liable for paying income tax: An illegal association is liable to pay income tax on the profits earned by it.
• No accounts: In Seth Badri Prasad v. Seth Nagar Mal (1959), it was held that in case of an illegal association, a court cannot assist the plaintiff in getting accounts made so that they may have in the profits made by the illegal association, their full share. But the members will be entitled to sue for recovery of their subscriptions and for this purpose to have the assets realized. Thus, the continuance of illegality is prevented.

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.