Companies Act Section 464

Companies Act, Section 464: Prohibition on Formation of Large Associations or Partnerships Without Registration

Section 464 of the Companies Act, 2013 sets an important restriction on the formation of associations or partnerships for the purpose of conducting business and earning profits. 

The intention behind this section is to ensure that large groups of individuals engaged in a profit-oriented business activity must operate under a regulated legal structure, such as a company or a body established under any special law. 

This promotes transparency, accountability, and legal compliance.

1. Restriction on Maximum Number of Members

The Act prohibits the formation of any association or partnership consisting of more than a prescribed number of persons if the objective of the business is to earn profit for the group or its members.

Such an association must be registered as a company under the Companies Act, or it must be formed under some other law currently in force.

The Central Government has the authority to prescribe the maximum number of persons for this purpose, but the law places a fixed upper limit that:

The number of persons cannot exceed one hundred.

This ensures that only small-scale partnerships operate informally, while larger business groups come under formal corporate regulation.

2. Exceptions to the Restriction

The prohibition does not apply to the following:

a) Hindu Undivided Families (HUFs)

A HUF carrying on a business is exempt, regardless of the number of its members. This recognizes the traditional joint family business system in India.

b) Certain Professional Groups

Associations or partnerships formed by professionals governed by special laws may exceed the prescribed limit. Examples include:

Chartered accountants (regulated by the ICAI Act), Advocates (regulated by the Advocates Act), Company Secretaries, Cost Accountants, Doctors, etc., are governed by respective statutory frameworks.

This allows expert-driven professional firms to function without needing company registration.

3. Penalties for Violation of the Section

If an association or partnership operates in contravention of Section 464:

Each member of such illegal association is guilty of an offence. The penalty may be:

A fine up to ?1,00,000. Additionally, each member becomes:

Personally liable for all liabilities of the business. This personal liability ensures that individuals cannot hide behind the unregistered association to escape legal and financial accountability.

Purpose and Significance of Section 464

Preventing large, informal, and unregulated business groups from functioning outside corporate law. Ensuring public interest protection through regulatory oversight. 

Encouraging businesses with large membership to adopt formal and legally recognized corporate structures.

Promoting transparency in ownership, control, and financial reporting.