Mumbai, Oct 25 (IANS): The Hinduja-led IIHL - the successful resolution applicant of Reliance Capital - cannot extinguish the employees stock options (ESOPs) & other incentive schemes of the Reliance General Insurance Company (RGIC) employees, a subsidiary of Reliance Capital.

This has been stated by legal firm, Khaitan & Co, in their legal opinion.

The legal firm was engaged by RGIC CEO Rakesh Jain.

The legal opinion was necessitated as IIHL, in its resolution plan for Reliance Capital, has sought to extinguish all employees stock option plans, phantom stocks or similar incentive schemes of Reliance Capital & its subsidiaries, including RGIC, so that the IIHL or RCAP do not have to incur additional cost after the takeover of Reliance Capital.

Khaitan & Co, in its legal opinion, submitted to the RGIC has opined that under IBC, treatment of assets & liabilities of the subsidiary companies are not permitted to be prescribed under a resolution plan for the holding company. The IBC recognises the principle of 'separate legal entity', which means that once incorporated, the company becomes a separate legal person and has a personality which is distinct from the person who are responsible for its constitution.

The legal opinion categorically states that since benefits in the form of the ESOPs, phantom stocks, other incentive schemes, statutory benefits such as gratuity, provident fund etc, form part of the liabilities of RGIC towards its employees, the same may not be dealt with or extinguished by IIHL in its resolution plan for Reliance Capital.

According to sources, if Hindujas agree to remove this condition from their resolution plan, then Rakesh Jain himself will receive around Rs100 crore in the form of ESOPs benefits and other incentives.

To support their opinion on the matter, Khaitan & Co has quoted several judgments of the Supreme Court & the NCLT, which have held that even in a group company structure, both the holding and subsidiary company continue to retain their status as separate legal entities, notwithstanding that a substantial part of the subsidiary's capital is held by the holding company.

Khaitan & Co has noted that the resolution plan submitted by the IIHL was under option -1, i.e., submission of resolution plan for Reliance Capital as a going concern.

Quoting the judgement of the Supreme Court in the case of Vodafone International Holdings BV Vs, Union of India & Others, Khaitan & Co has stated that the Supreme Court held that the "legal relationship between a holding company and Wholly Owned Subsidiary (WOS) is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors".

In fact, the insolvency of the holding company per se does not directly affects its subsidiary. A similar conclusion was reached in the case of Bhavik Bhimjyani vs. Uday Vinodchangra Shot, RP of Neelkanth Township & Construction Private Ltd & Others, wherein the NCLAT emphasised the separation of assets of subsidiary companies from those of the corporate debtor.

Furthermore, the Supreme Court in the matter of Municipal Corporation of Greater Mumbai (MCGM) v. Abhilash Lal and Ors. held that a resolution plan should exclusively deal with the "properties and assets of a corporate debtor and not of third parties".

Further, once a resolution plan is approved for the corporate debtor then it is binding on the stakeholders like creditors of the corporate debtor, guarantors, and government authorities who have been involved in the resolution plan. However, the ambit of Section 31(1) of the IBC, does not appear to suggest that once resolution plan is approved for a holding company then it is also binding on all the employees, creditors, etc of its subsidiaries.