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Illegal Association: 

An illegal Association is governed by Section 464 of the Companies Act. Section 464 of the Act provides that no company, association or partnership consisting of more than 50 persons be formed to carry on any business for gain unless it is registered under Companies Act or any other Indian law. It is not necessary that such an association must be registered under the Indian Companies Act. It may be registered under some other Indian law.

For example, a limited liability partnership formed for carrying on business for gain by professionals, registered under the Limited Liability Partnership Act, 2008 is a legal body corporate. There is no limit to the maximum number of members in such a limited liability partnership.

The objective of such an association must be to carry on a business for gain. Section 464 does not apply to Non-Profit-Organizations or Charitable Associations because the objective is not to earn the profit. Section 464 further provides that the above restriction as to number of persons shall, not apply to a Hindu Undivided Family (HUE) carrying on any business or an association or Partnership formed by Professionals who are governed by special Acts (e.g., Limited Liability Partnership Act, 2008).

Rule for counting the number of persons

  • A person, natural or artificial, would be treated as one person. Therefore, a company is treated as a single person. Similarly, a joint Hindu Family managed by Karta is also treated as a single person.
  • If two or more Joint Hindu Families form an association, in that case, all the adult members of the family would be taken into consideration while counting the number of members.
  • A partnership firm is not a separate legal entity. All the partners would be treated as different persons.
  • If two or more persons hold a share jointly, they would be treated as one single person.

Consequences of an Illegal Association

No Legal Existence : Such an association cannot enter into binding contracts. Neither the association nor the members can file a suit against the third party who has contracted with it. One member cannot sue other member in respect of any matter connected with the association. Further, a third party or a member cannot file a suit against the association.

Unlimited Personal Liability of the Members : The liability of the members is unlimited. Every member of such an association is personally liable for all liabilities incurred in the business. The third party can take action against the members.

Fine : Every member of such an association will be punishable with a fine which may extend to one lakh.

If the number of members in an illegal association comes within the statutory limit, the illegal association would not become legal by virtue of such reduction.

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