Illegal Association

Any company association or partnership carrying on banking business with more than ten members or carrying on any other business with more than twenty members that has for its object the acquisition of gain, without being registered under the Companies act, shall be considered an illegal association.


1) Joint family carrying on a business as such is not illegal association.
2) Stock exchange is not considered an illegal association since it is not formed for the purposes of carrying on any business.

Disabilities of an Illegal association:

1) It cannot enter into any contract, nor can it sue any member or outsider.
2) It cannot contract any debts
3) It has no legal existence. However, it can get registered any time and become legal.
4) Every member shall be personally liable to unlimited extent for all liabilities incurred in such business.
5) Every member shall be punishable with fine which may extend to Rs 10,000.
6) It cannot be wound up under the Act
7) Its members have no remedy against each other for contribution or apportionment in respect of partnership dealings and transactions.

Lifting or piercing the corporate veil:

A company is distinct from its members. It is a separate legal entity. There is thus a veil between a company and its members keeping them both separate from each other. However, sometimes it becomes necessary to lift this veil, disregard the distinct corporate entity of the company and find out the realities of the company. The court may investigate the real affairs, ownership etc of the company. This is called lifting or piercing the corporate veil. In other words the Court investigates into the true state of affairs of the company. It has been observed that though a corporation is a distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate property.

The corporate veil is therefore lifted by the court, when it ignores the company and concerns itself directly with the members or managers. It is largely in the discretion of the Courts and will depend upon the underlying social, economic and moral factors as they operate in and through the corporation.

The corporate veil may be lifted in the following instances:

1) to investigate the relationships between the holding company and subsidiary company;
2) to investigate the number and names of members of the company;
3) to investigate the true ownership of shares and controlling power over the company.
4) to investigate lawful objects of the company;
5) to investigate mismanagement and oppression by the majority
6) to investigate the character of the company where it is trading with an alien enemy or persons managing the affairs of the company are under the control of enemies or see residing in enemy country;
7) to investigate into the affairs where there exists a tendency to create monopoly.
8) to investigate the company affairs where it is used for tax evasion or to circumvent tax obligation;
9) to investigate if the company is acting as an agent for its shareholders.
10) To investigate the affairs where it is formed fro fraudulent purposes, to defeat and circumvent the law or to defraud its creditors or to avoid valid obligations.

Bombay High Court in (2004) 121 Comp. Cas 314 has held that the corporate veil may be lifted to the extent permitted under the statute and no more.

Registration and Certificate of Incorporation:

A company obtains separate legal existence only after it is registered under the Companies Act and is issued a certificate of incorporation by the Registrar of Companies of the State where registered office of the company is situated.

Source: Business law