Legal Proceedings Against Unregistered Companies in India

It is crucial to understand the legal status and the consequences of doing business with an unregistered entity in India. The Companies Act 2013 mandates specific conditions for the formation and registration of companies, including the requirement for a minimum of two directors and a minimum capital of 1 lakh Indian Rupees. Compliance with these formalities is essential before declaring a business a 'Company.'

What Constitutes a Company?

To form a valid company under the Companies Act 2013, specific conditions must be met. These include:

A minimum of two directors A minimum paid-up capital of 1 lakh Indian Rupees Fulfillment of other registered requirements

Only after meeting these requirements can the entity be legally recognized as a 'Company.' Absent these formalities, the business merely consists of a group of individuals conducting business together. Such entities do not have the legal standing of a company and therefore do not enjoy the benefits and protections associated with company status.

Legal Protection and Liability

Due to the lack of official recognition, unregistered companies do not offer the same legal protections and liabilities as registered companies. In the event of legal disputes, claiming damages or initiating legal proceedings against such entities can be challenging.

Direct Litigation Against Individuals

In cases where business relationships exist with unregistered entities, legal actions may not be directed against the company itself but rather against the individuals involved. Since unregistered companies lack the formal structure, the individuals who run the business are personally liable for any actions of the company.

The Companies Act 2013 stipulates that if a company is not registered, the individuals, typically the directors and entrepreneurs, bear unlimited liability. This means that if the company engages in any illegal or harmful activities, the individuals can be held personally responsible, including for any damages incurred.

Practical Challenges in Legal Proceedings

Filing legal proceedings against unregistered companies in India can present significant challenges. One common issue is the complaint that unregistered companies often use to avoid legal liabilities:

Claims of non-transaction can be easily made by unregistered companies, often without any concrete evidence. In the case of unregistered companies, there might be no formal documentation like bills or agreements, making it difficult to substantiate claims for damages.

Legal actions can be initiated against the individual responsible for the unregistered entity, and they can be held personally liable for any damages. However, proof of transaction and evidence of the individual's involvement are critical for successful legal proceedings.

Conclusion

While it is important to recognize the benefits of working with registered companies, the challenge of dealing with unregistered entities must not be underestimated. Individuals and businesses must be aware of the legal protections they are foregoing and the potential liabilities they may face. It is advisable to demand proper documentation and follow the proper legal procedures to safeguard one's interests.

Our legal system in India offers some avenues for seeking relief, but the effectiveness of these mechanisms is often limited by the nature of unregistered entities. For individuals and businesses, choosing to work with registered companies is typically the safer and more reliable option.