Preference Shareholders Not Financial Creditors: Supreme Court on IBC Section 7

EPC Constructions Limited (“EPCC”) accepted an issuance of 8% Cumulative Redeemable Preference Shares (“CRPS”) from Matix Fertilizers and Chemicals Limited (“Matix”) in August 2015 in lieu of outstanding receivables, with an aggregate allotment of about INR 250 crores and a contractual redemption timeline, after which EPCC’s insolvency professional demanded redemption and filed a Section 7 IBC application when Matix disputed liability. The NCLT dismissed the application and the NCLAT affirmed, and on appeal the Supreme Court upheld those orders, holding that EPCC as a CRPS holder was not a financial creditor entitled to maintain an insolvency petition under Section 7 of the IBC.

Issue before the court

The question was whether a holder of CRPS can be treated as a financial creditor with a right to initiate a Section 7 IBC proceeding upon non-redemption of CRPS, and whether conversion of receivables into CRPS preserves a debt or transforms the claim into share capital outside the scope of financial debt under the IBC.

Findings of the court

The Court held that preference shares form part of share capital and amounts paid up on such shares are not loans, which means a preference shareholder is a member rather than a creditor and non-redemption does not by itself create a debt or default under Sections 3(11) and 3(12) of the IBC. The Court emphasized that Section 55 of the Companies Act permits redemption only out of profits available for dividend or out of proceeds of a fresh issue made for such redemption, and unless those statutory preconditions are met there is no enforceable liability that is due and payable in the sense required to constitute an IBC default even if the contractual redemption date has passed. Interpreting Section 5(8) of the IBC, the Court reiterated that financial debt requires disbursal against consideration for the time value of money or a transaction that has the commercial effect of a borrowing, and CRPS as equity capital do not satisfy this test nor fall within Section 5(8)(f) absent an underlying borrowing. The Court further found that the conscious conversion of receivables into CRPS extinguished the original debt claim and recharacterized the relationship as that of shareholder, and that accounting presentations suggesting financial liability cannot alter the legal character of preference share capital under company and insolvency law.

Principle laid down

Preference shareholders are investors and not financial creditors, and non-redemption of CRPS does not constitute an IBC default that can ground a Section 7 application because the instrument is equity capital rather than a disbursal against time value of money within Section 5(8) of the IBC. Conversion of receivables into CRPS extinguishes the underlying debt and confines the holder to shareholder rights under company law, including dividends out of profits, redemption subject to Section 55 of Companies Act, and priority in winding up, rather than creditor remedies under the IBC.

Conclusion

The appeal was dismissed, and the Court has made it clear CRPS are equity and not financial debt, so non-redemption cannot be used to file a Section 7 insolvency petition. Any receivable converted into CRPS is treated as extinguished, and the holder’s rights are limited to those available under the Companies Act. If insolvency remedies are intended to be preserved, parties should use instruments that qualify as financial debt under Section 5(8) of the IBC. Where redemption is delayed due to lack of profits or fresh issue proceeds, issuers must follow the process set out in Section 55 of the Companies Act.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or recommendation.

Case Citation: EPC Constructions India Ltd. v. Matix Fertilizers & Chemicals Ltd., 2025 2025 INSC 1259; SCC OnLine SC 2293