Compliances

Analyzing Section 464 of the Companies Act 2013

An illegal association causes loss and encourages unlawful activities such as non-payment of taxes, thus affecting the company and the economy negatively. Section 464 of Companies Act 2013 has defined the term “Illegal Association”. In this article, we shall have a detailed review of this section of the Companies Act.

What is Illegal Association as per Section 464 of the Companies Act 2013?

As per this section, if any association or a partnership firm consists of more than such number of persons as prescribed by law and engages in a profit-generating business without registering itself as a company under the Companies Act or is formed under any other law. Previously, Section 464 was recognised as section 11 of the Companies Act 1956.

Legal Meaning– An association contravening the provision of this section will be termed as an Illegal Association. Under this section, an illegal association may not mean an association for illegal purpose. It means that if any association is unregistered under the law and termed as an illegal association, that doesn’t imply that the business is illegal or unlawful.

So to summarize it for you, illegal association means:

• Having more than prescribed persons under the law;
• Engaged in profit-generating business;
• Not registered under any law.

Maximum number of persons

As per rule 10 of Companies (Miscellaneous) Rules, 2014, no association/partnership, can be formed of more than 50 persons for carrying on any business that is engaged in profit-generating business provided it is registered as a company under the Act or is formed under any other law.

Moreover, section 464 of the Act prescribes that Central Government has the power to raise such number of persons, maximum to 100.

Non-applicability of Section 464 of the Companies Act 2013

It is worth mentioning here that this section will not apply to:

• An association or partnership if it’s formed by professionals governed under Special Acts. For instance- members of ICAI and ICSI starting a partnership firm comprising of persons as may have been prescribed under this section, then such a partnership firm is not illegal.
• Chit funds, stock exchanges, and Non-Profit Organizations. 
• A Hindu Undivided Family comprising more than such number of persons prescribed under law and carrying on business for generating profit will not be termed as an illegal association.

It may be noted here that in case 2 or more HUF carries on any profit-generating business jointly and forms a firm of more than 50 people, then it would be covered under Section 464 of the Act. While calculating the number of members under HUF minor members, that means persons below 18 years of age, won’t be counted.

Consequences and Penalty for Non-compliance

In case any partnership form or association fails to comply with the provisions of this section, then the following consequences shall follow:

• It will have no legal existence;
• It cannot enter into contracts;
• It cannot be wound up;
• It cannot sue.

Each member associated with such an illegal association or partnership firm would be liable for a fine of up to 1 lakh rupees. Further, he shall be personally liable for all liabilities incurred in such business.

Essential points to know about Section 464 of the Companies Act

There are certain essential points that one should be aware of in this section. They are as follows:

• Compounding of offence

It is worth to note here that offences committed under this section of the Companies Act 2013 is compoundable for officers by the Regional Director.

• Liability of the Director

The Directors’ Liability of an Illegal Association is unlimited. Third-party can sue every director personally for recovery of their due.

• Shares of Illegal Association

Selling the shares of such association shall be an illegal activity. In case the shares are sold through brokers, then such broker can’t ask for commission. The buyer also can’t recover its money paid to the broker as commission.

• Winding up of Illegal Association

Such illegal association not existing under the law cannot be wound up by a tribunal.

Case Law

Here we look at a case law related to illegal association-

Case of Seth Badri Prasad and Otrs. Vs. Seth Nagarmal

In this case, an association was formed by cloth vendors when a regulation was passed in cloth control in Rewa state with a President and Pioneer. However, there was a sudden dispute on accounts, and the matter was taken to the trial court. On appeal, it was held by the apex court that as to the last contention of the learned counsel for the appellants, it was pointed out that under Indian Partnership Act 1932¹, an unregistered firm is not illegal, and there is no compulsion for a partnership firm to be registered, though the disabilities consequent on non-registration can be inconvenient.

Conclusion

With an illegal association comes loss and rises unlawful activities such as non-payment of taxes and such other issues. Therefore, it can be concluded that every company or association should comply with section 464 of the Companies Act 2013 as illegal association can affect the growth of the nation. Therefore its compliance is indispensable.

Read our article:Essential Post Incorporation Compliances for Companies

1. https://incometaxindia.gov.in/pages/indian-partnership-act.aspx