Summary: In EPC Constructions India Ltd. v. Matix Fertilizers & Chemicals Ltd., the Supreme Court addressed whether holders of non-cumulative redeemable preference shares can initiate insolvency proceedings under Section 7 of the IBC, as financial creditors. The Court held that preference shareholders are not creditors and cannot trigger insolvency proceedings, as preference shares remain part of the share capital even upon maturity, and conversion of debt into preference shares permanently extinguishes the original creditor relationship. This landmark judgement reinforces the fundamental distinction between debt and equity, clarifying that IBC remedies are available only to creditors and not shareholders.
Introduction
The Supreme Court in EPC Constructions India Ltd. (through its Liquidator, Abhijit Guhathakurta) v. Matix Fertilizers and Chemicals Ltd.,[1] has addressed a crucial question at the intersection of company law and insolvency law — can the holder of non-cumulative redeemable preference shares (“NCRPS”) initiate corporate insolvency resolution process (“CIRP”) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”)?
The matter reached the Supreme Court after the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) dismissed EPC Constructions India Limited’s (“EPCC”) Section 7 application. Both the NCLT and NCLAT held that NCRPS are investments, not debt; and hence, EPCC does not qualify as a financial creditor.
Facts in Brief
EPCC (formerly known as Essar Projects India Limited) entered into an engineering and construction contract with Matix Fertilizers and Chemicals Limited (“Matix”) on December 11, 2009, for the establishment of a fertilizer complex for ammonia and urea production at Panagarh Industrial Park, West Bengal. Under these contracts, INR 572.72 crore became due and payable by Matix to EPCC.
By a letter dated July 27, 2015, Matix requested EPCC to convert the outstanding amounts of up to Rs 400 crore into NCRPS, on the ground that the lenders of Matix had agreed to extend additional credit facilities if Matix infused further equity to achieve a debt-equity ratio of 2:1. Consequently, converting these dues into NCRPS would enable Matix to demonstrate equity infusion, allowing it to access the additional credit facilities required to complete the project.
The EPCC Board passed a resolution on July 30, 2015, approving up to Rs 400 crore investment into 8% cumulative redeemable preference shares of Rs 10/- each of Matix, in one or more tranches. Subsequently, on August 26, 2015, Matix allotted 25,00,00,000 cumulative redeemable preference shares of Rs 10/- each, at 8% dividend, aggregating to INR 250 crore to EPCC, with the shares being redeemable at par at the end of three years.
CIRP was initiated against EPCC on April 20, 2018. On October 27, 2018, EPCC, through its RP, issued a demand notice to Matix for payment of INR 632.71 crore (INR 310 crore on account of maturity of the NCRPS and INR 322.71 crore on account of outstanding receivables). EPCC filed a Section 7 application against Matix for not paying the INR 310 crore redemption amount due at NCRPS maturity.
Key Issue
The central issue in the case was whether NCRPS holders qualify as “financial creditors” under the IBC, and whether NCRPS can be considered as “financial debt” that would enable the initiation of insolvency proceedings under Section 7 of the IBC.
Court’s Reasoning
The apex court emphasised that it is well settled in Company Law that preference shares are a part of the company’s share capital and the amounts paid up on them are not loans. Dividend is paid on preference shares only when a company earns profit, because if it is paid without profit or in excess of profit made, it would amount to an illegal return of capital. Amount paid up on preference shares, thus, not being loans, do not qualify as debt.
The apex court reasoned that Section 3(37) of the IBC provides that words and expressions used but not defined in the Code, but defined in the Companies Act, 2013, (“Companies Act”), shall have meanings, respectively, assigned to them in the Companies Act. Hence, Section 2(84) of the Companies Act defines “share” as a share in the share capital of a company, including preference share capital. Further, Section 55 of the Companies Act stipulates that preference shares shall be redeemed only out of the profits of the company, which would be otherwise available for dividend or out of the proceeds of fresh issue of shares made for the purpose of such redemption.
The Court also relied on Lalchand Surana v. Hyderabad Vanaspathy Ltd.,[2] to emphasise that unlike debt, holders of redeemable preference shares do not and cannot become creditors of the company in case their shares are not redeemed by the company at the appropriate time, as shares can be redeemed only out of the profits of the company. Further, the Court relied on Innoventive Industries Limited v. ICICI Bank,[3] which held that for a default “to kick in” and to maintain proceedings under Section 7, there should be non-payment of debt, when whole or any part of the debt has become due and payable and is not paid.
In this case, the Court found that the NCRPS had not become due and payable since Matix had not made profits and did not have any reserve out of the profits made in the past, nor did it possess any proceeds from fresh issue of shares made for the purpose of redemption. Hence, the question of there being a debt or default thereof, did not arise.
Additionally, the Court underscored the strict interpretation of the term “financial debt”, stating that for a debt to qualify under Section 5(8) of the IBC, it must involve a disbursal against consideration for the time value of money, and while note purchase facility, bonds, notes, debentures, loan stock, or any other similar instruments are covered, the omission of preference shares is significant.
Further, the Court rejected the EPCC’s argument about unveiling underlying intent, holding that in view of the issuance of NCRPS, the earlier outstanding amount stood extinguished, and the nature of the relationship altered to that of a preference shareholder. The Court relied on Commissioner of Income Tax v. Rathi Graphics Technologies Limited,[4] to highlight the difference between conversion of interest into a loan/ borrowing (where the liability subsists) and conversion into equity (where the liability stands extinguished).
The Court also rejected EPCC’s argument that the financial debt was an admitted liability in the books of accounts of Matix. Relying on State Bank of India v. Commissioner of Income Tax, Ernakulam,[5] it was observed that entries in account books, due to the prescription of accounting standards, are not determinative of the true nature of the transaction, and that the treatment in accounts will not be determinative of the nature of relationship between the parties as reflected in the documents executed by them. The IBC has its own prerequisites that a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold.
Conclusion and Key Takeaways
The Supreme Court dismissed EPCC’s appeal, establishing several critical principles that clarify the boundaries between debt and equity in insolvency law. The Court held that preference shareholders are not creditors and cannot qualify as financial creditors under Section 7 of the IBC, maintaining a clear distinction between debt and equity. It emphasised that shares can only be redeemed from profits or amounts set aside for dividend, and that mere expiry of the redemption period does not transform preference shares into debt. The judgement further established that conversion of receivables into preference shares permanently extinguishes the original debt relationship and replaces it with a shareholder relationship that cannot be reversed. Additionally, the pre-requisites of financial debt, as defined under Section 5(8) of the IBC, must be fulfilled. Further, accounting treatment under accounting standards cannot override the legal nature of transactions as determined by contractual documents and applicable law.
The ruling underscores the importance of structuring debt-to-equity conversions with a clear understanding of their legal consequences, as such conversions permanently alter the nature of the relationship between parties.
For businesses and lenders alike, the judgement serves as a reminder that while innovative financing structures may support projects, they cannot be retrofitted into insolvency remedies when expectations fail to materialise.
For further information, please contact:
Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas
vikashkumar.jha@cyrilshroff.com
[1] 2025 SCC Online SC 2293
[2] 1988 SCC OnLine AP 290
[3] (2018) 1 SCC 407
[4] 2015 SCC OnLine Del 14470
[5] (1985) 4 SCC 585
