The Supreme Court of India, in a judgment dated October 28, 2025, has ruled that a holder of Cumulative Redeemable Preference Shares (CRPS) cannot be classified as a “financial creditor” under the Insolvency and Bankruptcy Code, 2016 (IBC).
A bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan dismissed Civil Appeal No. 11077 of 2025, filed by the liquidator of EPC Constructions India Limited. The Court affirmed the orders of the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT), which had held that CRPS represents an “investment” in the company’s share capital, not a “debt,” and therefore, a petition for insolvency under Section 7 of the IBC is not maintainable.
The judgment, authored by Justice Viswanathan, clarified that the non-payment of the redemption amount for such shares does not constitute a “default” under the IBC, as the redemption itself is contingent upon the company’s profits as mandated by the Companies Act, 2013.
Background of the Case
The appellant, EPC Constructions India Limited (EPCC), formerly Essar Projects India Limited, had entered into engineering and construction contracts with the respondent, M/s Matix Fertilizers and Chemicals Limited (Matix), in 2009 and 2010 for a fertilizer complex in West Bengal.
According to the appellant, a sum of INR 572.72 crores became due and payable from Matix. Following correspondence, this led to an arrangement where EPCC agreed to convert a portion of these receivables.
On July 30, 2015, the EPCC board passed a resolution approving an “investment” of up to Rs. 400 Crores into 8% Cumulative Redeemable Preference Shares (CRPS) of Matix. The resolution noted this conversion would help Matix achieve the Debt-Equity Ratio (DER) of 2:1 required by its lenders, which would, in turn, enable Matix to draw additional credit, complete the project, and improve the prospects of EPCC’s recovery.
Subsequently, on August 26, 2015, Matix allotted 25,00,00,000 8% CRPS of Rs. 10/- each, aggregating to Rs. 250 Crores, to EPCC. The terms stipulated that the shares were “redeemable at par at the end of 3 years.”
On April 20, 2018, EPCC itself was brought under the Corporate Insolvency Resolution Process (CIRP). On October 27, 2018, after the three-year redemption period for the CRPS had passed, the Resolution Professional (RP) for EPCC issued a demand notice to Matix for INR 632.71 Crores, which included INR 310 Crores on account of the maturity of the CRPS. After Matix disputed the liability, the liquidator of EPCC filed a petition under Section 7 of the IBC against Matix, claiming a default on a financial debt.
The NCLT dismissed this petition, holding that the CRPS was an investment, not a debt, and that no liability had arisen as the payment was not due. The NCLAT upheld this order, leading to the present appeal before the Supreme Court.
Arguments of the Parties
Mr. Niranjan Reddy, learned Senior Advocate for the appellant (EPCC), contended that the true nature of the transaction had the “commercial effect of borrowing,” thus qualifying as a “financial debt” under Section 5(8)(f) of the IBC. He argued the CRPS merely acted as a “temporary tool for borrowing” to provide Matix “a pause point” and that the structure “masked the borrowing arrangement.”
Countering this, Mr. Mukul Rohtagi and Mr. Ritin Rai, learned Senior Advocates for the respondent (Matix), argued that preference shares are unequivocally part of the “share capital” of a company, as defined under the Companies Act, 2013 (which is imported into the IBC via Section 3(37)). They submitted that preference shareholders are not creditors and that treating them as such would “blur the line between shareholders and creditor.”
Supreme Court’s Analysis and Findings
The Supreme Court rejected the appellant’s contentions and provided a detailed analysis of company law and the IBC.
1. Preference Shareholder is Not a Creditor
The Court stated, “It is well settled in Company Law that preference shares are part of the company’s share capital and the amounts paid up on them are not loans.” It observed that dividends are paid from profits, and any payment without profits would amount to an “illegal return of the capital.”
The judgment affirmed that under Section 43 of the Companies Act, 2013, preference share capital is a “kind of share capital.” Citing ‘A Ramaiya’s Guide to the Companies Act’, the Court noted, “a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor… An unredeemed preference shareholder does not become a creditor.”
2. No ‘Default’ as Debt Was Not ‘Due and Payable’
The Court analyzed the prerequisites for a Section 7 application, which requires a “default” in payment of a “financial debt.” Under Section 3(12) of the IBC, a “default” is the non-payment of a debt that has become “due and payable.”
The judgment held that the CRPS had not become “due and payable” because Section 55 of the Companies Act, 2013, mandates that preference shares “shall be redeemed only out of the profits of the company” or “out of the proceeds of a fresh issue of shares.”
The Court found: “Admittedly, the CRPS had not become due and payable since the respondent had not made profits… In this admitted scenario, the question of there being any default under Section 3(12) of the IBC does not arise.”
3. ‘Underlying Intent’ Argument Rejected
The Court dismissed the appellant’s argument to “unveil the underlying intent” of the transaction as “absolutely without merit.” It pointed to EPCC’s own Board Resolution dated 30.07.2015, which showed a “conscious call to accept the CRPS” and used the specific term “investment.” The resolution acknowledged the purpose was to show “equity infusion” to lenders.
The Court held: “In view of the issuance of CRPS, the earlier outstanding amount stood extinguished and the nature of relationship of the appellant with the respondent became that of a preference shareholder.”
In a pointed remark, Justice Viswanathan wrote, “The egg having been scrambled, Mr. Reddy’s attempt to unscramble it, must necessarily fail.”
4. Accounting Entries Not Determinative
The appellant had argued that Matix’s own books of accounts recorded the CRPS as an “unsecured loan” and “other financial liability.” The Supreme Court held that such entries, prescribed by accounting standards, “will not be determinative of the nature of relationship between the parties.” Citing State Bank of India VS. Commissioner of Income Tax, Ernakulam, the Court held that entries in books of account are not conclusive.
5. CRPS Not a ‘Financial Debt’ under Section 5(8)
Finally, the Court found that CRPS does not meet the definition of “financial debt” in Section 5(8) of the IBC. It noted that the definition requires a “disbursal against consideration for the time value of money.”
The Court pointed out that while Section 5(8)(c) lists instruments like bonds, notes, and debentures, it “does not talk of preference shares. The omission is significant.” It held that paid-up money on shares is “share capital” and does not “constitute debt.” Therefore, the transaction did not satisfy the “root requirements” of a financial debt.
Decision
Concluding that the appellant, as a preference shareholder, could not maintain an application under Section 7, the Court found no merit in the appeal. “The appeal stands dismissed,” the judgment ordered.
