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2025 Supreme(Online)(NCLAT) 315
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
Justice Ashok Bhushan (Chairperson) , Hon'ble Mr. Barun Mitra (Member (Technical)) ,
EPC CONSTRUCTIONS INDIA LIMITED through its Liquidator- Abhijit Guhathakurta – Appellant
Versus
MATIX FERTILISERS AND CHEMICALS LIMITED – Respondent
1424/ND/2023 COMPANY APPEAL(AT)(INS)
Preference shares do not constitute financial debt unless redeemable, and conversion of debt into shares extinguishes the original liability.
Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 7 - Preference Shares - The appeal challenges the rejection of a Section 7 application by the Adjudicating Authority, asserting that Cumulative Redeemable Preference Shares (CRPS) constitute financial debt. The Adjudicating Authority found that preference shares are not creditors unless redeemable, and no default was established. (Paras 14.4, 14.9, 15)
(B) Financial Debt - Definition - The court reiterated that preference shares do not equate to financial debt unless they are redeemable, emphasizing the need for profits or fresh issues for redemption. (Paras 14.4, 14.9)
(C) Nature of Debt - The court concluded that the conversion of debt into shares extinguishes the liability, thus the Appellant cannot claim as a financial creditor. (Paras 15, 29)
Facts of the case:
The Appellant executed an EPC contract for a fertilizer complex and later converted outstanding amounts into CRPS. The Respondent claimed the amounts were adjusted against its own debts. The Adjudicating Authority rejected the Section 7 application, stating no debt was due.
Findings of Court:
The court upheld the Adjudicating Authority's decision that no financial debt existed due to the nature of the CRPS and lack of profits for redemption.
Issues: The main issues were whether a preference shareholder is a creditor, the maintainability of a Section 7 application by a preference shareholder, and whether CRPS constitute financial debt.
Ratio Decidendi: The court ruled that preference shares do not confer creditor status unless redeemable, and the conversion of debt into shares extinguishes the original liability.
Result: Appeal dismissed.
JUDGMENT
ASHOK BHUSHAN, J.
This appeal has been filed challenging the order dated 29.08.2023 passed by the Adjudicating Authority (National Company Law Tribunal), Cont’d…/
Division Bench, Court No. II, Kolkata rejecting Section 7 application filed by the Appellant.
2. Brief facts of the case necessary to be noticed for deciding this appeal are:
(i) The Appellant executed an EPC contract with the Respondent for setting up a fertilizer complex for production of ammonia-urea complex at Panagarh Industrial Park, Distict Burdwan, West Bengal on 11.12.2009. Contracts for onshore supply, offshore supply as well as engineering and construction were entered between the parties in the year 2010.
(ii) Amounts became due and payable by the Respondent towards the Appellant in pursuance of the contract. The Respondent on 28.04.2015 wrote a letter to the Appellant requesting Essar Projects (India) Ltd. (earlier name of the Appellant) to consider converting the amounts outstanding as subordinated debt.
(iii) The Appellant sent its agreement vide letter dated 08.05.2015 to give an extended credit upto Rs.403 Crores against their receivables from Matix.
(iv) A resolution dated 30.07.2015 was passed by the Appellant giving consent to make investment upto Rs.400 Crores into 8% Cumulative Redeemable Preference Shares (hereinafter referred to as ‘CRPS’) of Rs.10/- each of Matix Fertilizer and Chemicals Limited (Matix) in one or more tranches.
(v) The Respondent responded to the e-mail of the Appellant dated 31.07.2015 on 26.08.2015 that the decision of Appellant in converting outstanding receivables from Matix to the Appellant towards work done under EPC contract into 8% Cumulative Redeemable Preference Shares of Matix has also been approved by the board in its meeting dated 14.08.2015 as well as in meeting of the shareholders. Matix in consequence allotted 25,00,00,000 8% Cumulative Redeemable Preference Shares of Rs.10/- each to Appellant and Essar Projects in terms and conditions mentioned therein. The Cumulative Redeemable Preference Shares were renewable within three years.
(vi) NCLT initiated CIRP against the Appellant by order dated 20.04.2018. The Appellant issued a letter on 28.08.2018 to the Matix asking the Matix for redemption of CRPS including dividend, aggregating to Rs.310 Crore.
(vii) Matix sent a reply dated 24.08.2018 informing that liability towards redemption of CRPS along with cumulative dividend, aggregating to Rs.310 Crores have been adjusted against the claim which Matix has against the Appellant. It was also informed that Matix has submitted a claim in the CIRP of Appellant of Rs.377.87 Crores, information of which was also sent on 05.06.2018 for adjustment of total liability of CRPS against the aforesaid claim.
(viii) The Resolution Professional of the Appellant also wrote a letter on 27.10.2018 to the Matix claiming total amount of debt of Rs.632.71 Crores which included amount of Rs.250 Crores towards investment in CRPS with dividend of Rs.60 Crores totaling to Rs.310 Crores.
(ix) The Liquidator of the Corporate Debtor moved an application before the Adjudicating Authority seeking leave under Section 33 of the I&B Code for taking proceeding for recovery of the debt of the Appellant. Consequently, an application under Section 7 was filed by the Liquidator of the Appellant on 25.04.2022 against the Matix claiming default amount of Rs.250 Crores + Rs.60 Crores totaling to Rs.310 Crores. Date of default was mentioned as August, 2018.
(x) Notice was issued under Section 7 to the which reply was filed by the Matix. Matix contested the claim of the Appellant. Rejoinder and Sur-rejoinder were also filed before the Adjudicating Authority. The Adjudicating Authority heard both the parties and by the impugned order dated 26.07.2023 has rejected Section 7 application.
(xi) The Adjudicating Authority framed three issues for consideration, as noted in Para 14.2 of the order, which are as follows:
“14.2. The issues that have cropped up for determinati
