The Supreme Court recently held that holders of cumulative redeemable preference shares (CRPS) are not financial creditors under the Insolvency and Bankruptcy Code (IBC) and cannot therefore, initiate corporate insolvency proceedings under Section 7 of IBC [EPC Constructions Vs Matix Fertilizers].
A Bench of Justices JB Pardiwala and KV Viswanathan dismissed an appeal filed by EPC Constructions India Ltd (in liquidation) against Matix Fertilizers and Chemicals Ltd, affirming the findings of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) that the preference shares held by EPC represented an investment and not a financial debt.
The Court reiterated that preference shareholders remain members of a company and cannot claim the rights of creditors, even if the redemption period of the shares has expired.
"Section 5(8)(c) of IBC does not talk of preference shares while it talks of note purchase facility, bonds, notes, debentures, loan stock, or any other similar instrument to the categories mentioned thereunder. The omission is significant," the Court observed.
EPC Constructions (formerly Essar Projects India Ltd) had entered into a contract with Matix Fertilizers for setting up a fertilizer complex at Panagarh in West Bengal. Disputes later arose over payments under the contract.
In July 2015, Matix proposed to convert part of its dues — up to ₹400 crore — into redeemable preference shares to strengthen its debt-equity ratio for further borrowings. EPC’s board approved the proposal and in August 2015, Matix allotted 8 percent cumulative redeemable preference shares of ₹10 each aggregating ₹250 crore. These shares were redeemable at par after three years but only out of profits or proceeds of a fresh issue of shares.
When EPC later went into insolvency, its liquidator sought to recover ₹632.71 crore from Matix, including ₹310 crore claimed towards redemption of the CRPS.
Matix denied the liability and the liquidator moved the NCLT under Section 7 of the IBC alleging default.
The NCLT at Kolkata dismissed the application in August 2023 and held that non-redemption of preference shares could not be treated as default since Section 55 of the Companies Act of 2013 permits redemption only out of profits or proceeds of a new issue of shares.
In April 2025, the NCLAT affirmed the order, holding that preference share capital is part of a company’s share capital and not its debt. Since Matix had not earned profits or raised fresh funds, no liability had arisen and no financial debt existed, the NCLAT said.
The Supreme Court agreed with both tribunals and held that redeemable preference shareholders remain part of the company’s capital structure and cannot be equated with creditors.
The Bench cited A Ramaiya’s Guide to the Companies Act and the Andhra Pradesh High Court ruling in Lalchand Surana v. Hyderabad Vanaspathy Ltd to underline that preference shareholders cannot claim repayment as of right.
"It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding-up," the Court noted.
The Court emphasised that the payment on preference shares does not represent a loan or borrowing but forms part of the company’s share capital. If dividends were paid without profits or in excess of profits, it would amount to an illegal return of capital, the Bench observed.
It further held that the accounting treatment of such instruments as “financial liabilities” could not alter their true legal nature.
"However, the treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties as reflected in the documents executed by them. Further the IBC has its own prerequisites which a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resort to the treatment in the accounts this case cannot be decided," the Court ruled.
The Court concluded that EPC, as a holder of redeemable preference shares, was not a financial creditor and could not maintain an application under Section 7 of the IBC.
“Applying the real nature of the transaction, the sole irresistible conclusion is that the appellant being a preference shareholder is not a creditor, and an application by it under Section 7 was not maintainable,” the Bench said.
The appeal was dismissed without costs.
EPC Constructions India Ltd was represented by Senior Advocate Niranjan Reddy with advocates Abhishek Swaroop, Aditya Vikram Singh, Akhila Reddy, Palak Arora, Sanya Sud and Shreya Chandhok.
Matix Fertilizers and Chemicals Ltd was represented by Senior Advocates Mukul Rohatgi and Ritin Rai and advocates Mahesh Agarwal, Rishi Agrawala, Geetika Sharma, Madhavi Agarwal and EC Agrawala.
[Read Judgment]