A Note About Illegal Association

1) According to section 464 any company or association of persons or partnership in which the number of members is more than 50 and if it carries on business for profit if it's not registered under any act then it will be called as an illegal association.

2) Illegal Association does not have any legal existence which means the following things;
    a) It cannot sue and be sued in the court of Law.
    b)It cannot be wound up because there is nothing to wind up.
    c) It cannot be dissolved because there is nothing to dissolve.

3)The liability of all the members of the illegal association is unlimited for all the liabilities of the association.

4) Penalty or Fine - Every person who is a member of an illegal association is liable to pay a fine of Rs.100k.

5) Under section 453 if any association of person works as a private or public company without being registered as a private or public company then there is a fine of not less than Rs.500 per day and may extend to Rs.2000 for the period of default plus unlimited liability of all the persons who work under such association.

6) It is important under section 464 that to call an association illegal, the business must be carried on for profit. If the profit motive is not there then the association can work as a legal association even if the number of members is more than 50. This implies that section doesn't apply to charitable, literally, religious, and scientific association, clubs association.

7) Moreover, section 464 doesn't apply to chit funds, joint Hindu families, and stock exchanges.

8) The profit off illegal association is subject to income tax.

9) An illegal association remains illegal in spite of the subsequent reduction in its membership till it gets registered.

When Liability Become Unlimited of Members

There are two circumstances

 1) Under Section 2(55) when the number of members in a public are reduced below 7 and in a private company are reduced below 2 and if the company carries on business for more than 6 months then all the members who knew of this reduced membership are liable to an unlimited extent for all the debts of the company taken after the term of 6 months.

 2) Under Section 339 if during winding up of the company it is found that business of the company was carried on to defraud the creditors or for a fraudulent purpose, the liability of all the members automatically becomes unlimited for all the debts incurred by the company.

Kondoli Tea Company Limited

A Corporate Law Case

The Certain person transferred a tea estate to a company and claimed compensation from ad valorem duty (An ad valorem tax (Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT)) on the ground that it was a transfer from themselves to themselves under another name. The court rejected their plea and observed that is a separate person altogether different from shareholders and transfer was much a conveyance a transfer of a property.

Bachaa F Guzdar vs CIT Bombay

A Corporate Law Case

According to income tax act then enforced 60% of agriculture income was totally exempted from tax liability and rest 40% was taxable. Bachaa was the shareholder of a tea manufacturing company. Bachaa receive dividend income for his share and he said that 60% should be regarded as agriculture income and should be exempted from the tax liability but the court held that his dividend income fully taxable because tea company is a separate legal entity from Bachaa and the income of the company is totally different from income of Bachaa.

Lee vs Lee Air Farming Company Ltd

A Corporate Law Case

In this case, Mr.Lee held 2999 shares of Lee Air Farming Company Ltd and the remaining one share was held by his wife. He was the chief pilot of the company and died in an air crash. His wife claimed compensation from the company but the company refused to pay anything saying that there is no difference between the company and Mr.Lee but the court gave the decision that full compensation must be paid to Mrs.Lee by the because the company is a separate legal entity different from Mr.Lee. Moreover, Mr.Lee also insured under Workmen Compensation Act.

Macaura vs Northern Assurance Co. Ltd

In this case, Mr.Macaura was the Managing director of the company and he was also the chief creditor of the company. He insured the timber of the company on his personal name. After some time the timber was destroyed by the case was filed against the insurance company to recover the claim by Mr.Macaura. The insurance company refused to pay anything and it was correct because the court said that the timber is the property of the company and it should be insured in the name of the company because the company is a separate legal entity different from Mr.Macaura this means that no one has any insurable interest in the property of the company.

Abdul Haq vs Das Mal

In this case, the employee of a company was not paid his salary for few months. So he filed a case against the director and secretary of the company to recover his salary but he was not successful. The court said that he must file a case against the company to recover his salary because the company is a separate legal entity.