Key Takeaways
- Section 464 of the Companies Act, 2013 provides that no company, association, or partnership consisting of more than 50 persons, for carrying on profitable business, can be formed unless it is registered under the Companies Act, 2013 or under some other law. (Formerly it was 20 persons)
- An illegal association does not have legal existence and it cannot sue or be sued.
- Persons entering into agreements with an illegal association cannot ask for their share of profits or cannot demand winding up of the company.
Date Of Judgement:
14 April, 1950
Parties:
Petitioner – S.N.T. Kumaraswami Chettiar
Respondent – M.S.M. Chinnathambi Chettiar.
Bench:
Justice Balakrishna Ayyar &. Justice P V Rajamannar
Subject
This case dealt with the concept of illegal association. The Madras High Court, while dismissing the petition of the plaintiff, stated that entering into a business with an illegal association renders no remedy to the plaintiff. It also cited that the limitation period for filing a suit for recovery of share subscription was barred by limitation.
Legal Provisions
- As per Section 464 of Companies, 2013 no business or association can be formed consisting of more than such number of persons as may be prescribed for the purpose of carrying on any profitable business unless it is registered as a company under Companies Act, 2013.
- This Section specifies the number of persons to not be more than 100. However, Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard. This Section is not applicable in case of HUF carrying on any business, whatever may be the number of its members and an association or partnership formed by professionals who are governed under the Special Acts.
Overview
- The two partnerships carried on in the name of Sri Krishna & Co., (Boiler) and Krishna & Co. (Bice Mill). The former partnership firm had 60 persons and the latter 37 persons carrying on the business, respectively.
- The first plaintiff and his paternal grand uncle, Narayanan Chettiar, were members of an undivided Hindu family, which contributed a total capital of Rs. 1,800 to the two businesses and owned three shares out of total 59 shares. At a partition between the first plaintiff and his grand uncle, the first plaintiff got 1½ shares and his grand uncle got 1½ shares.
- Though both the businesses were distinct, but the profits were pooled together and divided among total number of shareholders.
- The shareholders decided to dissolve the concern and incorporate a private company in the name of Manachanallur Sri Krishna Rice Mills Ltd., with the object of acquiring and taking over the business of the two firms. The partnerships was sold for a consideration of Rupees 5000 to the newly formed company.
- The plaintiffs filed a suit for share in the new company and a permanent injunction against the defendants directing them to issue shares and if that is not possible, then to pay the sums due to them with interest.
- However, the suit was dismissed in the court on the ground of illegal association and on the ground of limitation.
Issues
- Whether a suit for share in the profits of an illegal association is tenable?
- Do the plaintiffs have any remedy for enforcing their share in the company’s property?
Judgement Analysis
- In the case of Kumar Swami Chettiar v. M.S.M Chinnathambi Chettiar, the plaintiffs were seeking their share in the newly formed company by the virtue of them being the shareholders in the partnership firms.
- The counsel for the plaintiff contended that as per Section 4(2) of the Indian Companies Act, 1913; the partnership containing more than 20 persons were illegal associations and therefore the partnership should be dissolved. The court, rejecting the contention of the counsel for plaintiff, stated that the member of an illegal partnership cannot sue for dissolution just so that he can have his share in the newly formed company.
- The court further stated that the consequence of an illegal association is that the members cannot sue for dissolution as the partnership is void-ab-initio.
- The court remarked that the suit for dissolution or winding up cannot be advanced, as this would result in to numerous such illegal associations and may give legality to such illegal association.
- The court observed that refund of subscription money could not be granted as it was not only barred by limitation but also because the plaintiff and his predecessors had received considerable profits from the partnership.
Conclusion
Section 464 of the Companies Act, 2013 seeks to prevent mischief as a result of large, unregistered associations. The main purpose of this Section is to prevent frauds because of illegal associations. It is to be noted that the illegal association shall remain illegal despite reduction in its membership till it gets registered.
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