Useful Notes on the Meaning of “Illegal Association”–Indian Companies Act, 1956

An association will be termed as an illegal association, when:

(i) The association consists of more than 20 members (10 in case of banking business);

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(ii) The association is formed for carrying on a business with the objective of earning of profits; and

(iii) The association is not registered as a company under the Companies Act or not formed according to the provisions of some other Indian law.

Exceptions:

The provisions of illegal association are not applicable in the following cases:

(i) Joint Hindu Family:

Such a family can carry on family business with more than 20 members without getting itself registered as a company under the Companies Act or any other law.

(ii) Associations not for Profit:

Literary, scientific or religious associations, clubs, welfare, charitable and traders associations, or formation of a common fund for investment by trustees in certain securities, etc.

(iii) Foreign Companies:

Rules for counting number of persons:

For counting the number of 10 or 20, as the case may be, the word ‘person’ includes both natural and artificial juristic persons. A company is a separate legal entity and therefore, it will be counted only as one person.

A partnership firm does not have a separate existence and, therefore, if it is a member of an association, each partner of the firm will be counted as a separate person. A Joint Hindu Family carrying on family business or trade shall be counted as only ‘one’ person. In case two Joint Hindu families combine and form a partnership, minors shall be excluded in computing the number of persons.

All the adults of both the joint families shall be counted as members of the association. But if the ‘Karta’ of a family enters into partnership with another family in his representative capacity on behalf of his family, he shall be treated as an individual only.

Illustration:

A Hindu joint family, consisting of a father and five major sons and another such family consisting of a father and five major sons and one minor son carried on banking business, as owners thereof. Discuss if the organization requires registration under the Companies Act.

An association of more than 10 persons engaged in earning profit from a banking business must be registered under the Companies Act; otherwise it shall be treated as an illegal association. Where two joint families combine to carry on business for profit, all major persons shall be counted as persons. In the above case each of the families have six major persons.

The number of persons engaged in banking business, therefore, comes to be 12 and for such an association, registration under Companies Act is compulsory in order to avoid the consequences of an illegal association.

Illegality of an association, however, can in no case be cured by subsequent reduction in the number of its members to below 20. Subsequent registration cannot legalize contracts made earlier.