Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-011077-011077 – 2025 |
| Diary Number | 29684/2025 |
| Judge Name | HON’BLE MR. JUSTICE AHSANUDDIN AMANULLAH |
| Bench | HON’BLE MR. JUSTICE AHSANUDDIN AMANULLAH; HON’BLE MR. JUSTICE K.V. VISWANATHAN |
| Precedent Value | Binding |
| Overrules / Affirms | Affirms |
| Type of Law | Corporate insolvency and company law |
| Questions of Law | Whether holders of cumulative redeemable preference shares can be “financial creditors” under Section 7 of the Insolvency and Bankruptcy Code, 2016. |
| Ratio Decidendi | The Court held that preference shares form part of share capital under the Companies Act and are redeemable only out of profits or fresh equity. Amounts paid on CRPS do not constitute “debt” or “financial debt” under IBC. A financial creditor under Section 7 must hold a debt disbursed for the time value of money and default must be on a sum due and payable. Preference shareholders, lacking that status, cannot initiate Section 7 proceedings. |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities Relied Upon |
|
| Facts as Summarised by the Court | NCLT and NCLAT held that CRPS issuance extinguished the prior receivable, is part of share capital, not repayable except out of profits or fresh issue, and therefore no liability arose that could be treated as a financial debt. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All Adjudicating Authorities under the IBC (NCLT, NCLAT, Supreme Court) |
| Persuasive For | High Courts, tribunals and practitioners in corporate insolvency |
| Distinguishes | NCLAT in Sanjay D Kakade v. HDFC Ventures Trustee Co. Ltd. (2023) |
| Follows |
|
What’s New / What Lawyers Should Note
- Confirms that cumulative redeemable preference shares are equity, not financial debt under IBC.
- Reaffirms that redemption under s. 55 Companies Act is permissible only out of profits or fresh share issues.
- Clarifies that issuance of CRPS extinguishes prior receivables and creates shareholder status.
- Default under s. 3(12) IBC requires a debt due and payable; CRPS liabilities not automatically due without profits.
- Entries in company accounts or accounting standards cannot override statutory definitions in IBC.
- Emphasises that to maintain a Section 7 petition, one must be a “financial creditor” holding a financial debt as defined.
Summary of Legal Reasoning
-
Companies Act Analysis
- Preference shares are part of share capital (s. 43) and redeemable only out of profits or fresh equity (s. 55).
- Amounts paid on CRPS are not loans or debts.
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Debt vs. Share Capital
- Equity v. debt distinction—dividends contingent on profits, no fixed repayment obligation like a loan.
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IBC Definitions
- “Debt” (s. 3(11)) and “default” (s. 3(12)) require an obligation due and unpaid.
- “Financial debt” (s. 5(8)) demands disbursal against consideration for the time value of money.
- “Financial creditor” (s. 5(7)) is one owed financial debt.
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Maintainability of Section 7 Petition
- Only a financial creditor may file; preference shareholders are not such.
- No default arises where redemption is not statutorily due.
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Precedents
- Lalchand Surana: unredeemed preference shareholders do not become creditors.
- Radha Exports: share subscriptions are not debt.
- Innoventive, Anuj Jain, Global Credit Capital: construe “financial debt” narrowly.
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Accounting Entries Non-Determinative
- True legal form of transaction prevails over book treatment (State Bank v. CIT; Union of India v. AUSPI).
Arguments by the Parties
Petitioner (EPCC / Liquidator)
- Underlying transaction had commercial effect of borrowing; CRPS were a subordinate debt.
- Matix intended to maintain debt-equity ratio and committed to repay within three years.
- Reliance on Sanjay D Kakade (NCLAT) and broader interpretation of “financial debt” in Global Credit Capital and Pioneer Urban.
Respondent (Matix)
- Preference shares are equity under Companies Act (ss. 2(84), 43, 55) and cannot be classified as debt or financial debt.
- Section 3(37) IBC imports Companies Act definitions; preference shareholders are not creditors.
- Financial debt under s. 5(8) IBC does not include CRPS.
- Accounting entries and balance-sheet labels are non-determinative of legal character.
Factual Background
EPC Constructions India Ltd. (EPCC) had ₹572.72 Cr receivables from Matix under EPC contracts. In July–August 2015, parties converted ₹250 Cr of receivables into 8% cumulative redeemable preference shares (CRPS). EPCC’s CIRP began in April 2018; as liquidator, it issued a demand notice and filed a Section 7 petition against Matix for ₹310 Cr alleged redemption default. NCLT (Aug 2023) and NCLAT (Apr 2025) dismissed the petition, holding CRPS as equity, not debt.
Statutory Analysis
Companies Act, 2013
- s. 43: Preference share capital is a class of share capital with preferential dividend and repayment rights.
- s. 55: Redemption of preference shares only out of profits or fresh share proceeds; unpaid CRPS do not convert into debt.
Insolvency and Bankruptcy Code, 2016
- s. 3(11): “Debt” includes financial debt and operational debt.
- s. 3(12): “Default” means non-payment of debt when due.
- s. 5(7): “Financial creditor” is one owed financial debt.
- s. 5(8): “Financial debt” must be money disbursed for time value of money, including specified instruments; CRPS not covered.
- s. 7: Only a financial creditor can initiate CIRP upon default of a financial debt.
Alert Indicators
- ✔ Precedent Followed – Affirms long–standing law that preference shares are equity, not financial debt.