Pranav B Prem

The National Company Law Tribunal (NCLT), New Delhi Bench comprising Ashok Kumar Bhardwaj (Judicial Member) and Reena Sinha Puri (Technical Member) has held that non-redemption of redeemable preference shares (RPS) in the absence of distributable profits or fresh share capital does not constitute a financial debt within the meaning of Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

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Background

The application was filed by REC Limited, a financial institution and member of a consortium of lenders, against Rattan India Power Limited (Corporate Debtor), alleging default in redeeming 2,87,20,978 redeemable preference shares (RPS) amounting to ₹28.72 crore. As per the Conversion-cum-Subscription Agreement dated 23 December 2019 and the Master Implementation Agreement, the corporate debtor had issued RPS of face value ₹10 each to the consortium lenders, including REC Limited. The redemption of these shares was due after two years from the date of allotment — i.e., 27 December 2021.

However, prior to the due date, the corporate debtor informed the lenders that it was unable to redeem the RPS due to negative reserves and accumulated losses and sought a two-year extension for redemption under Section 48 of the Companies Act, 2013. The request was reiterated multiple times but was rejected by the consortium lenders, including REC Limited. Alleging default in redemption, REC Limited filed the present petition under Section 7 of the IBC, seeking to initiate the corporate insolvency resolution process (CIRP) against the corporate debtor.

Corporate Debtor’s Response

The corporate debtor opposed the maintainability of the petition, contending that the amount invested by REC Limited represented capital investment, not a loan or financial assistance. It was submitted that the RPS holders were shareholders, not creditors, and that the preference shares did not carry the character of a financial debt under Section 5(8) of the IBC. It further argued that Section 55 of the Companies Act, 2013 explicitly prohibits redemption of preference shares except out of (a) profits available for dividend, or (b) proceeds of a fresh issue of shares. Since the company neither made a profit nor issued new shares, no legal redemption was possible, and thus, no “debt” existed that could trigger insolvency proceedings.

The corporate debtor relied on judicial precedents, including Radha Exports v. K.P. Jayaram [(2020) 10 SCC 538], Aditya Prakash Entertainment Pvt. Ltd. v. Magikwand Media Pvt. Ltd. [2018 SCC OnLine Bom 551], and Hindustan Gas & Industries Ltd. v. CIT [(1979) 117 ITR 549 (Cal)] to emphasize that shareholders cannot be treated as creditors merely because the shares become redeemable. It also relied on the NCLAT decision in EPC Constructions India Ltd. (Through its Liquidator) v. Matix Fertilisers and Chemicals Ltd., Company Petition (J.B.) No. 156/KB/2022, to argue that non-redemption of RPS due to non-fulfilment of conditions under Section 55 of the Companies Act cannot amount to default under the IBC.

Tribunal’s Observations

After examining the agreements and correspondence between the parties, the Bench observed that the amount received through issuance of RPS was a capital contribution, not a borrowing, and that the rights attached to such shares were purely contractual and governed by company law, not the IBC. The Tribunal held that a preference shareholder cannot automatically assume the character of a creditor merely because the shares have reached their redemption date. It reiterated that RPS can only be redeemed when:

• The company has sufficient distributable profits, or

• It has raised new share capital specifically for redemption.

In the absence of these preconditions, no redemption can lawfully occur, and therefore, no default can be said to exist. Quoting the NCLAT’s ruling in EPC Constructions India Ltd. v. Matix Fertilisers, the Bench noted: “Non-redemption of preference shares does not result in preference shareholders becoming creditors or the carrying value of preference shares and dividends becoming a debt. Therefore, a preference shareholder cannot step into the shoes of a creditor unless their preference shares become redeemable in accordance with law.” The Tribunal further pointed out that although the applicant claimed that the corporate debtor earned a profit of ₹348 crores during FY 2021–2022, it did not establish that such profits were available for dividend in compliance with Sections 123 and 127 of the Companies Act, 2013. Thus, even the alleged profitability could not automatically trigger redemption obligations.

Holding that the conditions under Section 55 of the Companies Act were not satisfied, the NCLT concluded that non-redemption of RPS due to absence of distributable profits or fresh capital issue cannot be treated as default in payment of debt. The Bench dismissed the Section 7 application filed by REC Limited but clarified that the petitioner was at liberty to pursue appropriate remedies under company law for enforcing any rights available to it as a preference shareholder. 

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“Non-redemption of RPS on account of non-availability of sufficient profit or capital raised through fresh shares would not be a ground to invoke Section 7 of the IBC. However, if the statutory conditions for redemption under Section 55 are fulfilled, the entitlement of the RPS holder to receive the redemption amount would be different.” Accordingly, the petition was dismissed, with liberty to seek alternate remedies under the Companies Act.

Appearance

For the Applicant: Sr. Adv. Sunil Fernandes, Adv. Gaurav Arora, Adv. Mritunjoy Ray, Adv. Aditya Marwah, Adv. Anushri Joshi

For the Respondent: Sr. Adv. Krishnendu Datta, Adv. Karan B. Adv. Alina Merin Methew, Adv. Tanvi Sapr

Cause Title: REC Limited v. Rattan India Power Limited

Case No: C.P. (IB)-265/PB/2024

Coram: Ashok Kumar Bhardwaj (Judicial Member), Reena Sinha Puri (Technical Member)