1. Conversion of outstanding receivables into cumulative redeemable preference shares — failure to redeem — initiation of corporate insolvency resolution process under Section 7, IBC. (Para 1 , 2 , 4 , 5 , 6 , 7 , 10 )
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2025 Supreme(SC) 1862
SUPREME COURT OF INDIA
J. B. Pardiwala, K. V. Viswanathan, JJ.
EPC Constructions India Limited Through Its Liquidator - Abhijit Guhathakurta – Appellant
Versus
M/s Matix Fertilizers And Chemicals Limited – Respondent
Civil Appeal No. 11077 of 2025
Decided On : 28-10-2025
Advocates appeared:
For the Appellant(s) Mr. Abhishek Swaroop, Adv. Mr. Aditya Vikaram Singh, Adv. Ms. Shreya Chandhok, Adv. Ms. Sanya Sud, AOR
For the Respondent(s): Mr. Mukul Rohatgi, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Ms. Geetika Sharma, Adv. Ms. Madhavi Agarwal, Adv. Mr. E. C. Agrawala, AOR
For the Appellant(s) Mr. Abhishek Swaroop, Adv. Mr. Aditya Vikaram Singh, Adv. Ms. Shreya Chandhok, Adv. Ms. Sanya Sud, AOR
For the Respondent(s): Mr. Mukul Rohatgi, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Ms. Geetika Sharma, Adv. Ms. Madhavi Agarwal, Adv. Mr. E. C. Agrawala, AOR
Preference shareholders do not have creditor status under the Insolvency and Bankruptcy Code; their shares are deemed equity, not debt, and cannot initiate insolvency proceedings for non-payment.
Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 7 - Companies Act, 2013 - Sections 3(11), 5(7), 5(8), and 55 - Dismissal of appeal regarding Cumulative Redeemable Preference Shares (CRPS) deemed as investment, not debt - Liabilities of preference shares cannot arise as no payment due - Preference shareholders do not possess creditor status to initiate insolvency proceedings. (Paras 1-50)
(B) Legal Status of Preference Shareholders - Preference shareholders cannot claim debt status - No ability to initiate insolvency proceedings; their rights are limited to profits and capital repayment in winding up - The nature of CRPS converts receivable due into equity, extinguishing earlier debts. (Paras 20-40)
Facts of the case:
The appellant entered an agreement for a fertilizer plant, converting receivables to CRPS at the request of the respondent. The issuance of shares followed a resolution by the appellant’s Board. The appellant initiated insolvency proceedings for the non-payment of CRPS, which was dismissed by NCLT and NCLAT.
Findings of Court:
The court ruled that preference shares are part of share capital and not debt, reaffirming that dividends are only payable from profits. The appellant did not hold creditor status to file under Section 7 of the IBC.
Issues: The main issue was whether the appellant, as a preference shareholder, can be classified as a financial creditor and initiate insolvency proceedings.
Ratio Decidendi: The court concluded that preference shares do not constitute debt; thus, the appellant had no standing as a financial creditor under the IBC.
Result: Appeal dismissed.
Legal Category Hierarchy
- insolvency and bankruptcy law
- company law
- practice and procedure
Table of Contents
2. Whether redeemable preference shares constitute financial debt having the commercial effect of borrowing versus whether they are share capital and their holders are not creditors. (Para 14 , 15 , 16 , 17 )
3. Preference shares are share capital redeemable only from profits; non-redemption does not convert shareholders into creditors; accounting entries do not determine the legal nature of the transaction. (Para 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 34 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 )
4. Redeemable preference shares are part of share capital and not debt; holders are shareholders, not financial creditors, and cannot trigger insolvency proceedings under Section 7, IBC. (Para 20 , 27 , 36 , 42 )
5. Appeal dismissed — confirmation of orders holding that the application under Section 7, IBC was not maintainable. (Para 50 )
6. Do redeemable preference shares constitute a financial debt under the IBC?
No. Preference shares are part of a company's share capital and not loans. They do not qualify as debt or financial debt under Section 5(8) of the IBC, as they are not disbursed against the consideration for the time value of money. (Para 20 , 21 , 46 , 47 )
7. Does the failure to redeem preference shares upon maturity convert a shareholder into a creditor?
No. Under Section 55 of the Companies Act, 2013, preference shares are redeemable only out of profits or fresh share issues. If not redeemed, the holder remains a shareholder and does not automatically assume the character of a creditor. (Para 24 , 25 , 26 , 27 , 34 )
8. Does the commercial effect of borrowing under Section 5(8)(f) of the IBC apply to preference shares?
No. For a transaction to have the commercial effect of borrowing, it must first be a debt. Since paid-up amounts towards shares are share capital and not debt, they cannot fall under the ambit of Section 5(8)(f). (Para 47 , 48 , 49 )
9. Are accounting entries in the books of accounts determinative of the legal nature of a financial instrument?
No. The true nature of a transaction is determined by the documents executed between parties. Accounting standards are guidelines for maintaining books and do not override the legal relationship or statutory definitions. (Para 43 , 44 , 45 )
JUDGMENT :
K.V. Viswanathan, J.
1. The present appeal calls in question the correctness of the judgment and order dated 09.04.2025 passed by the National Company Law Appellate Tribunal (for short the ‘NCLAT’) in Company Appeal (AT) (Insolvency) No. 1424 of 2023. The NCLAT dismissed the appeal of the appellant and confirmed the order dated 29.08.2023 passed by the Adjudicating Authority-National Company Law Tribunal (for short the ‘NCLT’), Division Bench, Court No.II, Kolkata. The NCLAT had dismissed the application of the appellant filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short the ‘IBC’).
2. Both the NCLT and the NCLAT held that the Cumulative Redeemable Preference Shares (for short ‘CRPS’) held by the appellant is in the nature of an investment and not a debt. It further held that since payment against the CRPS is not due, no liability can be said to arise.
3. To appreciate the controversy in question, a brief reference to the facts of the case, needs to be made.
BRIEF FACTS :-
OFFER AND ACCEPTANCE OF CRPS:-
4. The appellant-EPC Constructions India Limited (for short ‘EPCC’) was formerly known as Essar Projects India Limited. It entered into an engineering and construction contract with the respondent-M/s Matix Fertilizers and Chemicals Limited (for short ‘Matix’) on 11.12.2009. The contract was for the establishment of a fertilizer complex for Ammonia and Urea production at Panagarh Industrial Park, District Burdwan, West Bengal. The project involved designing, engineering, procurement, construction, erection and installation. An On-shore Supply Contract was executed on 29.07.2010 (for supply of Indian origin plant and equipment) and an Off-shore Supply Contract was entered on 20.08.2010 for supply of non-Indian origin plant and equipment.
5. According to the appellant, under the above mentioned contracts, a sum of INR 572.72 crores (Five Hundred Seventy- Two Crores and Seventy Two Lakhs only) became due and payable by Matix to the appellant. According to the appellant, correspondence was exchanged between the contracting parties to convert a portion of the receivables to a subordinate debt, the terms of which were to be discussed.
6. This resulted in a letter written by the respondent-Matix on 27.07.2015 whereby Matix requested EPCC to convert the outstanding amounts up to Rs. 400 crores into Non-Cumulative Redeemable Preference Shares (NCRPS). By a letter of 30.07.2015, the board resolution passed by EPCC dated 30.07.2015 was communicated to the respondent. Under the board resolution, EPCC agreed to convert a portion of the receivables into CRPS. The relevant part of the resolution is extracted hereinbelow:-
“6. INVESTMENT IN CUMULATIVE REDEEMABLE PREFERENCE SHARES OF MATIX FERTILIZER AND CHEMICALS LIMITED
………… Matix has informed the Company that due to shifting of SCOD, cost of completion for the Project has increased and it requires additional funding of Rs 1,210 Crores to complete the Project for which it has approached its lenders. However, due to this delay even further disbursement of existing credit facilities sanctioned has also been withheld by its lenders.
She further added that vide this letter, Matix had given the Company a proposal for conversion of its dues of Rs. 400 Crores payable to the Company on account of the project work into Redeemable Preference Shares (RPS). It was informed by Matix that its lenders have extended additional credit facilities provided Matix bring additional equity to such extent to achieve the Debt Equity Ratio (DER) of 2:1 and therefore by conversion of dues of the Company into RPS will facilitate Matix to show equity infusion and it can draw additional credit facilities which will enable it to complete the Project.
Further Mr. Sawa clarified to the Board that at present, Matix does not have enough liquidity to repay the outstanding dues of the Company and even complete the balance part of the project. Realizing this, lenders have also sanctioned additional debt
