Section 11 is a self-regulating provision in law because the government has not appointed any specific agency to enforce the prohibition laid down by this section.
Moreover, the offence is non-cognizable; it cannot be investigated by the police under the criminal law. The consequences are:
1. No legal existence:
The consequence of the illegality of the association/partnership is that its members have no remedy against each other for contribution or apportionment in respect of partnership dealings and transactions. An illegal association:
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ADVERTISEMENTS:
(a) Cannot enter into binding contracts
(b) Cannot sue any member or an outsider if the illegality becomes apparent.
(c) Cannot be sued by a member or an outsider for it cannot contract any debts.
ADVERTISEMENTS:
(d) Cannot be wound up under the Act either at the instance of a creditor, a member or the association itself. Members individually or collectively of an illegal association cannot bring about a valid suit against another member or any other persons for any contract made by them.
Subsequent registration will not alter the position with regard to the past acts. Contracts made before registration cannot be validated and sued upon by subsequent registration. No cause of action can arise on the basis of an illegal association.
Illustration:
Three partnership firms of 8, 8, and 10 partners, respectively, entered into a joint venture for sale of biscuits for a period of one year. After the expiry of one year, dispute arose amongst them as regards distribution of common property.
ADVERTISEMENTS:
The court cannot interfere. Section 11 of the companies Act provides that an association of more than 20 persons (except banking business where the limit is 10 members) cannot carry on any business unless it gets itself registered as a company.
In the present case the number of members is 26. Besides that sale of biscuits for one year is a business, for even though biscuits may be purchased once, their sale will go on and profits will have to be realized. It, therefore, involves a series of transactions.
The registration of the association as a company was compulsory in the present case. Since it had not been done, it is an illegal association. The court will not order for its winding up as it implies recognition of its existence by the court.
2. Unlimited personal liability:
Every member of an illegal association shall be personally liable for all the liabilities incurred by such business. It will be immaterial if the creditors had knowledge of the illegality of the association, or not.
3. Penalty:
Every member of an illegal association shall be punishable with a fine which may extend to? 10,000. The penal provisions will apply only where a company is formed in contravention of this section and not where the illegality supervenes at a subsequent stage.
However, the court may provide relief to a member of illegal association by granting a return of contribution paid provided such money has not been applied for the business by such an illegal association.
In Badri Prasad v. Nagarmal the Supreme Court held that in the case of an illegal association no relief will be granted to its associates or members as the contractual relationship on which it is founded is illegal, but subscribers will be entitled to sue for recovery of their subscriptions and for this purpose have the assets realize. This is because it does not result in enforcement of illegal contract but it will prevent continuance of illegality.
The members of an illegal association have a beneficial interest in the property belonging to such association.
In conclusion, the provisions of section 11 of the Companies Act are both prohibitive and imperative. “The object is to prevent the mischief arising from large trading undertakings being carried on by large fluctuating bodies involving sundry outsiders, who do not really know with whom they deal and contract and so they may be put to great difficulty and expense, which is a public mischief to be repressed.”