Page 196 - DMGT407Corporate and Business Laws

Unit 7: Concept of a Company

Self Assessment Notes

Fill in the blanks:
7. Where a company has been formed for some fraudulent purpose, the court will lift the
…………………..to identify the perpetrator of the fraud.

8. Where the company is acting as agent of the shareholders, then the ……………… will be
held liable for its acts.
9. In case of a fraudulent use of the facility of…………………, the law lifts the corporate veil
and identifies the persons who are behind the scene and are responsible for the perpetration
of fraud.
7.4 Illegal Association

Section 11 provides that no company, association or partnership consisting of more than
10 persons for the purpose of carrying on the business of banking and more than 20 persons for
the purpose of carrying on any other business can be formed unless it is registered under the
Companies Act or is formed in pursuance of some other Indian Law. Thus, if such an association
is formed and not registered under the Companies Act, it will be regarded as an ‘Illegal
Association’ although none of the objects for which it may have been formed is illegal.

Effects of an Illegal Association

Following are the effects of an association being illegal:

1. Every member is personally liable for all liabilities incurred in the business.
2. Members are punishable with fine which may extend up to ` 1,000.
3. Such an association cannot enter into any contract.
4. Such an association cannot sue any of its members or any outsider, not even if the association
is subsequently registered as a company.

5. It cannot be sued by a member or an outsider for any debts due to it because it cannot
contract any debt.
6. It cannot be wound up even under the provisions relating to winding up of unregistered
companies.
7. Where an association is illegal and the business had been carried on for some years, none
of its members can sue for partition because partition would involve realisation of the
assets of the company and payment of its debts, the very things which would be done in a
suit for dissolution of partnership or winding up of a company.
8. The illegality of an illegal association cannot be cured by subsequent reduction in the
number of its members.
9. The profits made by an illegal association are, however, liable to assessment to income-tax.

Self Assessment

Fill in the blanks:
10. The profits made by an illegal association are liable to assessment to……………………...
11. Illegal association cannot enter into any…………………….
12. Illegal association cannot sue any of its members or………………………..

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