Dear Friends,
I have a technical question. My company (an IT Company) was newly formed on 8th June 2021. The company started hiring before it was officially incorporated.
So my question is, can offers and appointments be given before the company is incorporated? Or should official offers and appointments only be given after the company's incorporation?
Thank you.
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I have a technical question. My company (an IT Company) was newly formed on 8th June 2021. The company started hiring before it was officially incorporated.
So my question is, can offers and appointments be given before the company is incorporated? Or should official offers and appointments only be given after the company's incorporation?
Thank you.
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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 authorizes to employ the labor (employees). The employees can be employed thereafter.
Thanks,
Dinesh Divekar
From India, Bangalore
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8032An 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 authorizes to employ the labor (employees). The employees can be employed thereafter.
Thanks,
Dinesh Divekar
From India, Bangalore
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At times, company formation takes time. In the meantime, many things need to be done for which human resources are necessary. Everything cannot wait until the company is formed. Promoters are given authority and have certain powers. They can select human resources and, to ensure their joining, can issue offer letters. The actions of promoters are binding on the Board of Directors. Setting the offer letter aside, there are many formalities to be completed, all of which are handled by the Promoter. The Promoter signs on behalf of the future company. It is important to note that the issuance of offer letters may not be extensive, perhaps only for roles such as Manager, Secretary, Security, etc. To that extent, it is valid.
Vibhakar Ramtirthkar. Pune.
From India, Pune
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Vibhakar Ramtirthkar. Pune.
From India, Pune
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Dear Omprakash,
Any company that is to be formed under the Companies Act, 2013 has two phases in its formation - one is the pre-incorporation stage, and the other is the post-incorporation stage. During the pre-incorporation stage, the promoters decide every aspect of the company to be incorporated. As the process of incorporation may take some time, things like the 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 manpower mobilization, 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, a company becomes a legal entity only after its incorporation under the Companies Act. Therefore, it is not possible for a non-existent entity to enter into any contract with anyone. Similarly, it would not be possible for a company to ratify an act done or a contract entered into before its incorporation under the act because such act or contract might be against the objectives of the company that comes into existence later.
However, this legal impediment is removed by the provisions of the Specific Relief Act, 1963. According to sec.15(h) of the Specific Relief Act, 1963, the specific performance of a contract may be obtained by the company when the promoters 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 analyze the appointment of employees made before the incorporation of your company in the backdrop of the above legal provision, you would admit the fact 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
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Any company that is to be formed under the Companies Act, 2013 has two phases in its formation - one is the pre-incorporation stage, and the other is the post-incorporation stage. During the pre-incorporation stage, the promoters decide every aspect of the company to be incorporated. As the process of incorporation may take some time, things like the 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 manpower mobilization, 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, a company becomes a legal entity only after its incorporation under the Companies Act. Therefore, it is not possible for a non-existent entity to enter into any contract with anyone. Similarly, it would not be possible for a company to ratify an act done or a contract entered into before its incorporation under the act because such act or contract might be against the objectives of the company that comes into existence later.
However, this legal impediment is removed by the provisions of the Specific Relief Act, 1963. According to sec.15(h) of the Specific Relief Act, 1963, the specific performance of a contract may be obtained by the company when the promoters 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 analyze the appointment of employees made before the incorporation of your company in the backdrop of the above legal provision, you would admit the fact 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
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Dear colleague,
The views expressed by the learned colleague, Mr. Umakanthan, are founded on a legally sound basis. The validity or otherwise of the contract pre-incorporation and post-incorporation stage of any company by the promoters/board of directors is explained with cogent reasons.
Therefore, other views expressed that lack legal standing and are misleading deserve to be ignored.
Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant
From India, Mumbai
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The views expressed by the learned colleague, Mr. Umakanthan, are founded on a legally sound basis. The validity or otherwise of the contract pre-incorporation and post-incorporation stage of any company by the promoters/board of directors is explained with cogent reasons.
Therefore, other views expressed that lack legal standing and are misleading deserve to be ignored.
Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant
From India, Mumbai
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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 the 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 as well. 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
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Once it has been decided to incorporate the company, then how much time does it take to register and to do the registration under the 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 as well. 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
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Dear colleague,
The learned colleague is advised to study the registration procedure and 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 the address of the premises, the number of employees (as the fee is based on the number of employees), as well as the names and addresses of Directors. It will certainly require a good amount of time during the pre-incorporation stage to organize everything, right from recruiting to locating the premises and obtaining the certificate of incorporation, etc.
When the promoters are empowered to issue an offer letter at this early stage as an interim arrangement and firm it up with the appointment letter later in the 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-gritty of the law by posing as a "know-all" person.
Earlier, this learned colleague had to withdraw his misleading views on legality but does not seem to have learned from it.
Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant
From India, Mumbai
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The learned colleague is advised to study the registration procedure and 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 the address of the premises, the number of employees (as the fee is based on the number of employees), as well as the names and addresses of Directors. It will certainly require a good amount of time during the pre-incorporation stage to organize everything, right from recruiting to locating the premises and obtaining the certificate of incorporation, etc.
When the promoters are empowered to issue an offer letter at this early stage as an interim arrangement and firm it up with the appointment letter later in the 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-gritty of the law by posing as a "know-all" person.
Earlier, this learned colleague had to withdraw his misleading views on legality but does not seem to have learned from it.
Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant
From India, Mumbai
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