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.

Salomon vs Salomon and Company Ltd

Mr.Salomon was a leather merchant carrying on a sole proprietorship business of shoe manufacturing. He sold this business to a company called as Salomon and company Ltd for purchase consideration of 40000 pounds. The Company consisted of Mr.Salomon, his wife, his daughter and his four sons. The company paid this purchase consideration of 40000 pounds by allotting him 20000 fully paid shares of 1 pound each, 10000 pounds of secured debenture(having a floating charge over the assets of the company) and 10000 pounds in cash. Remaining members held one share each just to fulfill the legal requirement. Mr.Salomon is the majority shareholder of the company and also the managing director of the company. After one year, the company became insolvent and the winding up process started. The balance sheet of the company stood as follows:
Secured Debentures - 10000 pounds
Unsecured Creditors - 7000 pounds
Assets - 600

Thus the assets were short to pay liabilities by 11000 pounds. The unsecured creditors said that their claims  of 7000 pounds must be satisfied first because there is no difference between Mr.Salomon and Salomon and company Ltd, and they further said that how a person can owe to oneself.

Decision of the Court
However, the court said that Salomon and company Ltd was totally different from Mr.Salomon because company is a separate legal existence of its own. So Mr.Salomon must be paid first out of the company assets because he is secured debenture holder of the company.

Company and its Features

Definition of Company

Company is an incorporated or registered association, an artificial legal person having separate legal entity, perpetual succession, common seal, limited liability and transferability of shares.


Features or Characteristic of a Company

1) Incorporated or Registered Association
   a)Every company whether public or private must be compulsorily registered under the companies act 2013 or any previous ACT.
  b) After registration every company gets Certificate of Incorporation (COI).
  c) Certificate of Incorporation is no more final and conclusive and it can be challenged in the court of law.
  d)Any association or partnership firm having more than 50 members and it is carry on business for profit, has to be compulsorily registered under Companies Act 2013 or any other law of the land otherwise it will be called as an illegal association under Companies Act 2013.
  e)After getting Certificate of Incorporation the company is born and acquired separate legal existence.

2) Artificial Legal Person
  a)A company is created by a process other than natural birth.It has no body, no soul, no conscience and physical existence like natural human being.
  b)It is invisible, intangible, cannot sent to jail, cannot take oath, cannot marry, etc.
  c) It is a legal person because it is created by law and ended by law only.
  d)It cannot sign contracts like natural human being that is why every company have a common seal.
  e)But still a company is a person because like normal human beings, a company can enter into contracts.it can purchase and sell property.

3) Separate Legal Entity
  a) Separate Legal Entity is the entire bedrock of the Companies Act
  b)It can sue and be sure in the court of law.
  c)The asset and the property of the company belong to the company and nobody is the owner of the asset or property of the company.
  d) The creditors of the are creditors of the company alone and they cannot proceed directly against the members or directors.
  e)No one has any insurable interest in the property of the company.

4) Perpetual Succession
  a) Company is a stable form of business organisation.
  b)It existence is not affected by death, retirement or luancy of any member or directors
  c) In the case of "Meat Supplier Ltd" all members were killed in a hydrogen bomb while they were in the general meeting of the company but still the company continues to exist.
  d) Company can be compared to a flowing river whose water keeps on changing but the identity of the river remain same.
  e)The provision of transfer and transmission of shares has helped in keeping up the feature of perpetual succession.

5) Common Seal
  a) Company is an artificial person,so it can sign contracts like natural human beings.
  b)Every company has a separate common seal with the name of the company engraved on it.
  c)Any document which bears the seal of the company and signed by atleast two director make that document as a liability of the company.

6) Limited Liability
  a) Company Limited By Shares-In this type of company the liability of the member is limited to the amount unpaid on the held by them.  This type of liability arise at anytime.
  b) Company Limited By Guarantee-In this type of company the liability of the member is limited to the amount of guarantee given by them. This type of liability arise only at the time of winding up.
  c) Unlimited Liability-These type of company is very rare in which liability of the member is unlimited.

7) Transferability Of Shares
 a)In public company shares are freely transferable.
  b)In private company shares are transferable with some restrictions.