SC: IBC: Whether holders of Cumulative Redeemable Preference Shares (CRPS) can initiate insolvency proceedings under Section 7 of the IBC, 2016

 

EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited (Supreme Court, 28 October 2025)

I. Brief Background: 

In a recent significant judgment of the Hon'ble Supreme Court related to the Insolvency and Bankruptcy Code of EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited (judgment delivered 28 October 2025), the Court categorically held that holders of Cumulative Redeemable Preference Shares (CRPS) cannot initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") as preference shareholders are investors, and not financial creditors. 

In this case the Appellant (EPCC) had entered into an engineering and construction contract with the Respondent. The contract was for establishment of a fertiliser complex of ammonia and urea production. Two different off-shore supply contracts were also executed between the parties. In view thereof, a sum of 572 crore became due and payable by the Respondent to the Appellant. Whereafter, it was agreed that a portion of receivables was to be converted into non-cumulative redeemable preference shares. CIRP process was initiated against Appellant. Matix thereafter informed that it had unilaterally adjusted liability of CRPS against claim against EPCC. Matix also filed a revised claim before the Resolution Professional, which was rejected. Appellant had thereafter issued a demand notice to the Respondent calling upon payment of INR 632.71 Crores (INR 310 Crores on account of maturity of the CRPS and INR 322.71 crores on account of outstanding receivables). However, Respondent disputed the demand. Appellant obtained NCLT's permission to initiate legal proceedings for recovery of against the Respondent. The Appellant later filed a Petition under Section 7 of the IBC 2016 on account of failure to pay the redemption amount of 310 crores on account of maturity of CRPS. 

II. The NCLT dismissed the Section 7 application, holding that:  

1. Non-redemption does not create debt: Under Section 55 of the Companies Act, 2013, preference shares can be redeemed only out of profits available for dividends or from proceeds of a new share issue. If these conditions are unmet, no enforceable debt arises. 
2. No default under the IBC: Since Matix had not earned profits or raised fresh capital, redemption was legally impossible. Therefore, no default had occurred. 
3. Nature of CRPS: The preference shares represented capital investment, not a loan or borrowing. Once EPC accepted shares in place of receivables, the earlier debt stood extinguished. 

Issue: The core issue that arose before the Hon'ble Supreme Court was whether the NCLT and NCLAT were justified in dismissing the application of the appellant under Section 7 of the IBC, after holding that the appellant was not a financial creditor?

III. Key Legal Principles Established

(a) Distinction Between Debt and Share Capital: The Supreme Court categorically reinforced the distinction between 'debt' and 'share capital' for purposes of the IBC.  The Court held that preference shares form part of a company's share capital and not its debt capital. Consequently, preference shareholders cannot be treated as creditors, nor can they initiate insolvency proceedings under Section 7 of the IBC, which is reserved for financial creditors. Dividend is payable on Preference Shares when the company earns profit. 

(b) Conversion of Receivables into CRPS: The Court noted that the preference shares were issued upon conversion of outstanding receivables. The board of the preference shareholder exercised its commercial wisdom in accepting the shares, given the low recovery prospects. The Court remarked: "The egg having been scrambled, attempt to unscramble it, must necessarily fail.". Once debt is converted into preferential shareholding, the debt extinguishes and the preference shareholder cannot pose as a financial creditor. 

(c) No Financial Debt Under Section 5(8): The Court held that "It is well settled in Company Law that preference shares are part of the company's share capital and the amounts paid up on them are not loans. Dividends are paid on the preference shares when company earns a profit... Amount paid up on preference shares not being loans, they do not qualify as a debt." 

(d) No Default Under Section 7: Since preference shares are redeemable only out of profits or fresh issue proceeds, no "debt" arises unless such conditions exist; consequently, there can be no default under Section 7 of the IBC. CRPS were at the stage where redemption period has expired would not lend greater weight to the case, as they continue to be preference shares and preference shareholder do not enjoy the status of creditors of the Company. Hence, they do not fulfil the definition of financial creditor for the purposes of Section 7 of the IBC. 

(e) Accounting Treatment Not Determinative: The Supreme Court held that treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties. 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. 

Practical Implications of the Judgment: 

This judgment settles the long-standing controversy regarding whether holders of Cumulative Redeemable Preference Shares can invoke insolvency proceedings under Section 7 of the IBC.  The ruling affirms that preference shareholders remain shareholders and cannot claim creditor rights, regardless of non-redemption.