Kiran Raj

The Supreme Court Division Bench of Justices J.B. Pardiwala and K.V. Viswanathan on Tuesday (October 28) held that holders of Cumulative Redeemable Preference Shares (CRPS) are investors and not financial creditors, and therefore cannot initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC), since non-redemption of such shares does not amount to a “default” under the Code. The Court dismissed an appeal filed by a construction company that had converted part of its dues into CRPS issued by a fertilizer manufacturer, seeking to invoke insolvency over their non-redemption. Upholding the findings of the NCLT and NCLAT, the Bench held that CRPS form part of share capital, not debt, and that redemption is conditional upon profits or a fresh capital issue, leaving no enforceable financial liability due.

The dispute arose from engineering and construction contracts executed between EPC Constructions India Limited, formerly Essar Projects India Limited, and Matix Fertilizers and Chemicals Limited for establishing a fertilizer complex in West Bengal. The appellant claimed that an amount of ₹572.72 crore became due for project works. In 2015, the respondent proposed converting part of the dues into Cumulative Redeemable Preference Shares (CRPS) to maintain its debt-equity ratio and secure further funding. By a board resolution dated July 30, 2015, the appellant approved conversion of ₹400 crore into 8% CRPS. Matix subsequently allotted CRPS worth ₹250 crore, redeemable at par after three years.

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In 2018, insolvency proceedings were initiated against the appellant, and its liquidator later sought recovery of ₹632.71 crore from Matix, including ₹310 crore towards redemption of CRPS. Upon non-payment, the appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), asserting that the CRPS had the commercial effect of borrowing and thus constituted a “financial debt.” Matix denied liability, contending that preference shares formed part of share capital, not debt, and that redemption could occur only from profits or fresh share issues as per Section 55 of the Companies Act, 2013.

The National Company Law Tribunal (NCLT) dismissed the application, holding that CRPS were investments, not debt instruments. The National Company Law Appellate Tribunal (NCLAT) affirmed the finding, observing that no debt could arise without profits or proceeds from new shares to redeem the preference shares. The appellant then challenged the NCLAT’s order before the Supreme Court. The key statutory provisions discussed included Sections 3(11), 3(12), 5(7), and 5(8) of the IBC, and Sections 43 and 55 of the Companies Act, 2013, concerning the nature of share capital and redemption of preference shares.

The Court observed that “preference shares are part of the company’s share capital and the amounts paid up on them are not loans. Dividends are paid on the preference shares when the company earns a profit.” It recorded that “if dividends were paid without profits or in excess of profits made, it would amount to an illegal return of capital. Amount paid up on preference shares not being loans, they do not qualify as a debt.”

The Bench stated that under Section 3(37) of the IBC, terms undefined in the Code but defined in the Companies Act must carry the meanings assigned there. It cited Section 2(84) of the Companies Act defining a share as “a share in the share capital of a company.” The Court referred to Section 43, which recognizes preference share capital as part of the company’s share capital with preferential rights to dividends and repayment on winding up.

Discussing Section 55, the Court stated that “preference shares shall be redeemed only out of the profits of the company which would otherwise be available for dividends or out of the proceeds of a fresh issue of shares made for the purpose of such redemption.” It relied on precedents including Lalchand Surana v. Hyderabad Vanaspathy Ltd., holding that “holders of redeemable preference shares do not and cannot become creditors of the company in case their shares are not redeemed.”

The Bench further observed, “for a default to exist under Section 3(12) of the IBC, there should be non-payment of debt when it becomes due and payable. The CRPS had not become due and payable since the respondent had not made profits or possessed proceeds from a fresh issue of shares.” It recorded that “the appellant, by accepting CRPS, consciously converted its receivables into share capital. The earlier outstanding amount stood extinguished, and the appellant became a preference shareholder.”

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The Bench also recorded: “The appellant as preference shareholder could not have maintained an application under Section 7, IBC.” It added: “Applying the real nature of the transaction, the sole irresistible conclusion that is possible is that the appellant being a preference shareholder, is not a creditor and an application by it under Section 7 was not maintainable, as has been rightly held by the authorities below.”

The Court rejected the appellant’s argument that the transaction masked a borrowing arrangement, stating that “there is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding. The egg having been scrambled, the attempt to unscramble it must necessarily fail.” It concluded that “entries in account books are not determinative of the true nature of the transaction,” and that accounting treatment cannot override statutory characterizations of equity and debt.

The Court stated: “For all these reasons stated above, we find no merit in this appeal. The appeal stands dismissed. No order as to costs.”

Advocates Representing the Parties:
For the Petitioners: Mr. Niranjan Reddy, Sr. Adv. Mr. Abhishek Swaroop, Adv. Mr. Aditya Vikram Singh, Adv. Ms. Sanya Sud, AOR Ms. Akhila Reddy, Adv. Ms. Palak Arora, Adv. Ms. Shreya Chandhok, Adv.

For the Respondents: Mr. Mukul Rohatgi, Sr. Adv. Mr. Nitin Rai, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Ms. Geetika Sharma, Adv. Ms. Madhavi Agarwal, Adv. Mr. E. C. Agrawala, AOR

Case Title: EPC Constructions India Limited v. Matix Fertilizers and Chemicals Limited
Neutral Citation: 2025 INSC 1259
Case Number: Civil Appeal No. 11077 of 2025
Bench: Justice J.B. Pardiwala and Justice K.V. Viswanathan