In a landmark ruling, the Supreme Court of India has clarified that holders of Cumulative Redeemable Preference Shares (CRPS) cannot be classified as financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC).
The judgment draws a clear distinction between equity investment and debt financing, preventing investors from using insolvency proceedings to recover equity-based investments — a key precedent for future insolvency and restructuring cases.
Case Background
EPC Constructions India Ltd. (EPCC) — formerly Essar Projects India Ltd. — had provided engineering and construction services to Matix Fertilizers and Chemicals Ltd. When Matix failed to pay outstanding dues, both parties agreed to convert a portion of the debt into Cumulative Redeemable Preference Shares (CRPS) instead of direct repayment.
After the CRPS matured without redemption, EPCC (through its liquidator) filed a Section 7 IBC petition against Matix, claiming non-payment of redemption amounts as default.
Both the NCLT and NCLAT dismissed the petition, ruling that preference shareholders are investors, not creditors. EPCC appealed to the Supreme Court, arguing that the CRPS carried the commercial effect of a borrowing and thus should qualify as a financial debt.
Supreme Court’s Findings
A Bench of Justices J.B. Pardiwala and K.V. Viswanathan upheld the NCLT and NCLAT decisions, delivering key clarifications on the legal treatment of preference shares:
- Preference Shares Are Equity, Not Debt:
As per Sections 43(b) and 55 of the Companies Act, 2013, preference shares form part of share capital, not debt or loans. They differ fundamentally from instruments like bonds or debentures. - Conditional Right of Redemption:
Preference shares can only be redeemed out of profits available for dividends or proceeds from a fresh equity issue. The redemption right is not absolute and does not make the holder a creditor. - IBC Definition Excludes Preference Shares:
Section 5(8) of the IBC defines financial debt, listing bonds and notes but not preference shares. This omission, the Court said, was intentional and significant. - No Default Without Enforceable Debt:
Since Matix had no profits or new equity to fund redemption, there was no enforceable payment obligation — hence, no “default” under Section 3(12) of the IBC. - Substance Over Form:
The transaction was clearly an investment, not a loan. The Court rejected EPCC’s attempt to recast it as debt, noting that “once the egg is scrambled, it cannot be unscrambled.”
Key Takeaways
- 🔹 Redeemable Preference Shareholders Are Investors, Not Creditors:
CRPS holders cannot file insolvency petitions under Section 7 of the IBC. - 🔹 IBC Meant for Debt Recovery Only:
Insolvency remedies cannot be misused for equity investment recovery. - 🔹 Consistency with Companies Act:
The ruling harmonizes IBC with company law provisions on share capital. - 🔹 Accounting Classification Irrelevant:
Balance sheet treatment cannot change the legal nature of preference shares. - 🔹 Redemption Conditional on Profits:
Without profits or new equity, no redemption obligation arises.
Conclusion
The Supreme Court’s ruling in EPC Constructions India Ltd. vs Matix Fertilizers and Chemicals Ltd. decisively settles that cumulative redeemable preference shares do not qualify as financial debt under the IBC.
This judgment reinforces the boundary between capital and credit, prevents misuse of insolvency mechanisms by investors, and provides much-needed clarity for corporate finance, restructuring, and insolvency practice in India.
