Om Prakash Mahata
Dear Friends, I have a technical question, my company (IT Company) is newly formed on 8th June 2021.
The company has started hiring before the company was formed officially.

"So my question is whether Offer and Appointments can be given before the company is incorporated ?"
or
"Officially Offer and Appointments can be given only after Incorporation of Company".


PROFESSIONALS AND BUSINESSES PARTICIPATING IN DISCUSSION
Dinesh Divekar
Business Mentor, Consultant And Trainer
Umakanthan53
Labour Law & Hr Consultant
Nagarkar Vinayak L
Hr And Employee Relations Consultant

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Dinesh Divekar
7557

Dear Om Prakash Mahata,

An offer letter may or may not be a "contract" under the provisions of the Indian Contract Act, 1872. It depends on the verbatim of the offer letter. However, an appointment letter is a perfect contract under the said act. However, if you have issued the appointment letters well before the formation of the legal business entity, then your company in the capacity of the employer cannot issue the appointment letter. Even if it were issued then it will be null and void.

In fact, registration of the company under the Indian Companies Act, 1956 is also not sufficient. You must obtain either the Shop and Establishment Act or Factories from your state as applicable. Registration of the company under either act legally authorises to employ the labour (employees). The employees can be employed thereafter.

Thanks,

Dinesh Divekar

From India, Bangalore
vibhakar-ramtirthkar
6

At times company formation takes time. In the meantime, many things are to be done for which human resource is necessary. Everything cannot wait until company is formed. Promoters are given authority. Promoters have some powers. They can select human resource and to ensure their joining, can issue offer letter. The acts of promoters are binding on the Board of Directors. Keep aside offer letter. There are many formalities to be completed. They are done by Promoter only. Promoter signs on behalf of the future company. One thing to be noted is that it is not that he will issue scores of offer letters. May be a few e.g. Manager, Secretary, Security etc. To that extent, it is valid.
Vibhakar Ramtirthkar. Pune.

From India, Pune
umakanthan53
5922

Dear Omprakash,

Any Company which is to be formed under the Companies Act,2013 has got two phases in its formation - one is pre-incorporation stage and the other is post incorporation stage. During the pre-incorporation stage, the promoters decide every aspect of the Company to be incorporated and as the process of incorporation may take some time, things like appointment of managers and other members of staff for the purpose of its formation are normally decided by the promoters as per the pre-incorporation agreement. Thus, in the matter of man power mobilisation, they enter into employment contracts with the employees required for the pre-incorporation period under the power vested in the pre-incorporation agreement.

As you are aware of, a Company becomes a legal entity only after its incorporation under the Companies Act and as such it is not possible for a non-existent entity to enter into any contract with anyone. Similarly, it would not also be possible for a Company to ratify an act done or a contract entered into prior to its incorporation under the Act for the reason that such act or contract might be against the objectives of the Company which comes into existence later.

However, this legal impediment stands removed by the provisions of the Specific Relief Act,1963. As per sec.15(h) of the Specific Relief Act,1963, the specific performance of a contract may be obtained by the Company when the promotors of the Company have entered into a contract before its incorporation for the purposes of the Company and such contract is warranted by the terms of the incorporation provided that the Company has accepted the contract and has communicated such acceptance to the other party to the contract.

If you analyse the appointment of employees made before the incorporation of your Company in the back drop of the above legal provision, you would admit the facts that the appointments were made by the promoters as per the powers vested in them under the pre-incorporation agreement and such appointments are warranted for the purposes of the Company before its incorporation.

Therefore, the answer to your query is that such appointments made prior to incorporation have to be ratified by the Board of Directors by means of a resolution and the same shall be communicated to all such employees.

From India, Salem
Nagarkar Vinayak L
616

Dear colleague,

The views expressed by the learned colleague Mr Umakanthan are founded on legally sound basis . The validity or otherwise of the contract preincorporation and post incorporation stage of any company by the promoters/ board of directors is explained with cogent reasons.

Therefore , other views expressed which lack legal teeth and are misleading deserve to be ignored.

Regards,

Vinayak Nagarkar
HR and Employee Relations Consultant

From India, Mumbai
Dinesh Divekar
7557

Dear Om Prakash Mahata,

Once it has been decided to incorporate the company, then how much time does it take to register and to do the registration under Shop and Establishment Act? It does not take more than a week. When the investors decide to invest, they also start interviewing the top management personnel. Till the time the selected candidates join, the process of registration can be completed. Therefore, all the appointments will become valid and the issue of appointment letters before the formation of the company will not arise at all.

An appointment letter has dual validity. It is a valid contract between an employer and an employee under the provisions of the Indian Contract, Act, 1872. Because of a small mistake, courts have given a verdict to treat the contract as null and void. Therefore, why take risks? We should do our job only once but it has to be done perfectly also. It is this perfection that takes us to the level of excellence. The erstwhile personnel managers may not understand the gravity of doing the right things the first time.

Thanks,

Dinesh Divekar

From India, Bangalore
Nagarkar Vinayak L
616

Dear colleague,,

The learned colleague, is advised to study the registration procedure, forms required for registering an establishment under the Shops Act. There are certain prerequisites in place before applying for registration. Among other things, it requires address of the premises and number of employees as the fee is based on the number of employees as well as names and addresses of Directors. It will certainly require good time during preincorporation stage to organise, right from recruiting to locate the premises and obtaining certificare of incorporation etc .


When the promoters are empowered to issue offer letter at this early stage as an interim arrangement and firming it up with the appointment letter later in post incorporation stage with Board approval, I don't believe, it has any legal infirmity.

One should refrain from giving misleading advice without knowing the nitty- grittys of law by posing as "know all" person.

Earlier also this learned colleague, had to withdraw his misleading views on legality but does not seem to have learnt from it.

Regards,

Vinayak Nagarkar
HR and Employee Relations Consultant

From India, Mumbai

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