CRPS Holders Are Not Financial Creditors: Redemption Preconditions under Section 55 of the Companies Act Govern IBC ‘Default’

Case: EPC Constructions India Limited (through Liquidator) v. M/s Matix Fertilizers and Chemicals Limited

Citation: 2025 INSC 1259 (Supreme Court of India, Civil Appeal No. 11077 of 2025)

Bench: K.V. Viswanathan, J.; J.B. Pardiwala, J.

Date: 28 October 2025

Introduction

This decision settles a recurring and commercially significant question at the interface of corporate finance and insolvency law: can a holder of cumulative redeemable preference shares (CRPS) seek initiation of corporate insolvency resolution under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) on the premise that redemption has fallen due? The Supreme Court answers emphatically in the negative, holding that CRPS are a component of share capital (equity), not debt; and that redemption obligations are qualified by Section 55 of the Companies Act, 2013. Absent profits or proceeds of a fresh issue earmarked for redemption, the liability to redeem does not become “due and payable” in law; consequently, no “default” under the IBC can arise.

The case arises from an EPC contractor–project owner relationship: EPC Constructions India Limited (EPCC)—formerly Essar Projects India Ltd—converted a portion of its receivables into 8% CRPS in Matix Fertilizers and Chemicals Ltd (Matix) during project completion finance stress. After EPCC itself entered CIRP, its liquidator sought to trigger Section 7 IBC against Matix claiming non-redemption of CRPS (Rs. 310 crore) and other receivables. The NCLT and the NCLAT rejected the Section 7 petition, holding CRPS are an investment, not debt; the Supreme Court affirms.

Summary of the Judgment

Nature of CRPS: CRPS are part of “preference share capital” and therefore equity (Companies Act, Section 43). Amounts paid-up on preference shares are not loans; dividends are payable only out of profits; and preference shareholders are not creditors by virtue of holding such shares.
Redemption governed by Section 55: Preference shares may be redeemed only out of (i) profits available for dividend; or (ii) proceeds of a fresh issue made for redemption. Where these preconditions are absent, redemption cannot occur, and the holder does not become a creditor.
No “default” under IBC: “Default” under Section 3(12) IBC presupposes a “debt” that has become “due and payable” in law. Because Section 55 preconditions for redemption were not met (Matix had no profits and had not raised fresh issue proceeds for redemption), no amount was “due and payable”; therefore no default existed to sustain a Section 7 application.
Conversion extinguished the prior receivable: EPCC consciously converted receivables into CRPS as an equity infusion to help Matix maintain debt-equity covenants and draw additional finance. The pre-existing receivable stood extinguished; the relationship thereafter was that of shareholder–company, not creditor–debtor.
Accounting treatment irrelevant: Even if financial statements classified CRPS as “unsecured loan” or “other financial liability” under Ind AS 32, accounting labels cannot override the legal character of the instrument and the statutory scheme.
Section 5(8) IBC not attracted: CRPS do not satisfy the essential elements of “financial debt”: there was no disbursal against consideration for time value of money, and the instrument is not within the genus of bonds/debentures/loan stock; nor can Section 5(8)(f) (“commercial effect of borrowing”) apply absent an underlying debt.
Appeal dismissed: The Court affirmed NCLT/NCLAT orders refusing admission under Section 7 IBC.

Detailed Analysis

1. Precedents and Authorities Cited

Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407: Establishes that Section 7 admission hinges on occurrence of “default” in respect of a “debt” which is “due and payable” in law. The Supreme Court relies on Innoventive to reaffirm that if an obligation is not payable in law, there can be no default. Here, Section 55 made redemption legally impermissible absent profits or fresh issue proceeds.
Anuj Jain v. Axis Bank, (2020) 8 SCC 401: Clarifies that the core of “financial debt” in Section 5(8) is “disbursal against the consideration for the time value of money.” Every sub-clause (a)–(i) is tethered to this core. Applied here, the CRPS structure lacked disbursal and time-value consideration; hence, no financial debt.
Global Credit Capital Ltd v. Sach Marketing Pvt Ltd, 2024 SCC OnLine SC 649: Reiterates that the “means and includes” structure in Section 5(8) requires all enumerated categories also to satisfy the principal clause’s time-value-of-money test. The Court uses Global Credit to hold that Section 5(8)(f) cannot be used to re-characterize equity as financial debt absent proof of disbursal/time value.
Radha Exports (India) Pvt Ltd v. K.P. Jayaram, (2020) 10 SCC 538: Payments for shares duly issued cannot constitute debt, let alone financial debt. The Supreme Court applies this principle to hold that CRPS are equity; dividends are contingent upon profits; they are not debt instruments.
Lalchand Surana v. Hyderabad Vanaspathy Ltd, 1988 SCC OnLine AP 290 (B.P. Jeevan Reddy, J.): A classic exposition under the old Section 80 of the 1956 Act (pari materia to Section 55 of the 2013 Act) that non-redemption of preference shares does not convert a preference shareholder into a creditor because redemption is statutorily limited to profits or proceeds of fresh issue. The Supreme Court expressly endorses this logic.
Commissioner of Income Tax v. Rathi Graphics Technologies Ltd, 2015 SCC OnLine Del 14470: Conversion of interest into equity extinguishes the underlying liability; this is different from conversion into a loan. The Court analogizes to hold that conversion of receivables into CRPS extinguished the earlier receivable—no surviving “debt” remained.
State Bank of India v. CIT, (1985) 4 SCC 585; UOI v. Association of Unified Telecom Service Providers of India, (2020) 3 SCC 525: Accounting entries/standards guide book-keeping but cannot override legal character or contractual/statutory definitions. The Court applies this to neutralize reliance on Ind AS 32 treatment of redeemable preference shares.
NCLAT in Sanjay D. Kakade v. HDFC Ventures Trustee Co. Ltd (24.11.2023): Distinguished on facts; that case dealt with a composite shareholder agreement/subscription structure not analogous to a straightforward allotment of shares by conversion. The Court rejects attempts to transplant Kakade’s ratio here.
Treatises: Ramaiya’s Guide to the Companies Act and Gower’s Principles of Modern Company Law are cited for the doctrinal distinction between debt and preference equity: dividends are payable only out of profits; debt holders rank ahead of preference shareholders and are not contingent on profits.

2. Legal Reasoning and the Court’s Approach

The Court’s reasoning proceeds through four interlocking steps.

Statutory cross-reference fixes legal character as equity: By virtue of Section 3(37) IBC, undefined terms adopt Companies Act meanings. Sections 2(84) and 43 classify preference shares as “share capital.” Section 55 prescribes stringent redemption mechanics—only out of profits available for dividend or a fresh issue’s proceeds. This statutory framework makes preference shareholders members, not creditors. Dividends are profit-contingent, not consideration for time value of money.
No “debt” and no “default”: Section 3(11) IBC defines “debt” as a liability “in respect of a claim which is due.” Section 3(12) defines “default” as non-payment when “due and payable.” Because Section 55 conditions for redemption were unmet (no distributable profits/fresh issue proceeds), no obligation to redeem became “due in law.” Without a “debt” due, there can be no “default” to trigger Section 7.
Section 5(8) IBC not satisfied:
- Principal clause essential elements: There was no “disbursal” by EPCC to Matix in the CRPS transaction; instead, there was a conversion of receivables into share capital. There was no “consideration for time value of money”; 8% is a dividend rate (profit-contingent), not contractual interest payable irrespective of profits.
- Enumerated categories: Sub-clause (c) lists bonds/notes/debentures/loan stock or “similar” instruments—critically omitting preference shares. The omission is telling. Sub-clause (f) (“commercial effect of borrowing”) cannot be used to re-characterize equity because it still demands the principal clause’s elements (disbursal/time value), per Anuj Jain and Global Credit.
Conversion extinguished the prior receivable: The Board resolution and allotment letter show a deliberate equity conversion to shore up Matix’s debt-equity ratio and unlock lender disbursements. Upon allotment, the pre-existing receivable was extinguished. The Court’s metaphor—“the egg having been scrambled”—captures the irreversible reconstitution of legal relations into shareholder–company.

3. Accounting Classification vs Legal Character

Matix’s financial statements, at points, treated CRPS as an “unsecured loan”/“other financial liability,” arguably consistent with Ind AS 32 rules that sometimes require classifying mandatorily redeemable preference shares as financial liabilities. The Court decisively holds that:

Accounting standards guide financial reporting; they do not redefine legal relationships or statutory consequences.
Where the instrument’s legal character is fixed by the Companies Act (as share capital) and its legal consequences (redemption only out of profits/fresh issue) are statutory, accounting cannot transmute equity into “financial debt” for IBC purposes.

4. Companies Act Section 55 Controls IBC ‘Default’ Analysis

The distinctive contribution of this judgment is its clear recognition that Section 55’s redemption preconditions are not mere corporate law niceties; they directly inform whether an obligation is “due in law.” If redemption cannot lawfully occur (no distributable profits; no fresh issue proceeds), the clock on “default” under Section 3(12) IBC does not start. In a word:

Mandatory redemption by contract does not override Section 55’s statutory conditions.
Even after the stated redemption period lapses, CRPS holders remain shareholders. They do not morph into creditors by efflux of time.

Impact and Implications

A. Insolvency practice and admission thresholds

Bright-line boundary between equity and debt preserved: The judgment deters attempts to weaponize IBC as a recovery forum for equity-like instruments labeled “quasi-debt.”
Section 7 petitions by preference shareholders are not maintainable: Unless the instrument is demonstrably a debt (meeting disbursal/time-value criteria) and is due in law, CRPS holders cannot invoke Section 7.
Default inquiry now expressly conditioned by corporate law: Adjudicating Authorities must examine the Companies Act’s redemption preconditions when faced with CRPS redemption-based defaults.

B. Corporate finance and structuring

Conversions extinguish receivables: Converting trade receivables into CRPS terminates debt-like remedies. Parties seeking debt remedies should avoid conversions into share capital if insolvency enforcement is contemplated.
Label vs substance: References to “subordinate debt” in correspondence or board materials cannot override the legal nature of the allotted instrument. If the outcome is share allotment, equity rules prevail.
Instrument choice matters: If parties intend a debt outcome, instruments such as non-convertible debentures (NCDs), subordinated debt agreements, or inter-corporate loans—with clear disbursal and time-value consideration—should be used rather than preference shares.

C. Accounting and disclosure

Ind AS classification is not dispositive: Even if Ind AS 32 requires liability classification for mandatorily redeemable preference shares, that does not equate to “financial debt” under IBC.
Consistency between legal documentation and financial reporting is prudent: Misalignment invites disputes but will not alter legal outcome.

D. Alternative remedies for CRPS holders

Companies Act Section 55(3): Where redemption is not possible, the company may—with 3/4th value preference shareholder consent and Tribunal approval—issue further redeemable preference shares equal to the amount due (including dividend), upon which the unredeemed shares are deemed redeemed. The Tribunal shall order immediate redemption for dissenters. This is a corporate-law route, not an IBC remedy.
Winding up or oppression/mismanagement: CRPS holders are members; remedies must align with shareholder status, subject to statutory thresholds and limitations.

Complex Concepts Simplified

Preference shares vs debt: Preference shares are equity with preferential rights (priority in dividends and on capital repayment in winding-up). Dividends are paid only out of profits. Debt requires repayment irrespective of profits and typically carries interest compensating for time value of money.
Cumulative preference shares: If dividends are not declared in a year, the entitlement accumulates to future years, but remains payable only when profits are available.
Redemption of preference shares (Section 55): Redemption is a return of capital and can be funded only from distributable profits (with transfer to Capital Redemption Reserve) or from proceeds of a fresh issue specifically for redemption. No profits/fresh issue = no lawful redemption.
“Disbursal against consideration for time value of money” (Section 5(8) IBC): There must be an outflow of funds to the corporate debtor (disbursal) and a contractual return (interest or equivalent) compensating for the period of use of money.
“Commercial effect of borrowing” (Section 5(8)(f) IBC): A wide residual category capturing borrowings in substance. However, per Supreme Court, it does not dispense with the principal clause requirements: there must still be a debt disbursed for time value of money.
“Default” under IBC: Non-payment of a debt that has become “due and payable” in law. If an obligation is contingent or legally incapable of payment (e.g., redemption preconditions unmet), there is no default.

Key Passages and Doctrinal Highlights

Equity, not debt: “Preference shareholders are only shareholders and not in the position of creditors… An unredeemed preference shareholder does not become a creditor.”
Redemption preconditions control default: “Admittedly, the CRPS had not become due and payable since the respondent had not made profits… nor did it possess any proceeds from a fresh issue… In this admitted scenario, the question of there being any default… does not arise.”
Conversion extinguishes receivables: “In view of the issuance of CRPS, the earlier outstanding amount stood extinguished… The egg having been scrambled… cannot be unscrambled.”
Accounting labels not determinative: “The treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties.”
Section 5(8) structure: The omission of preference shares in Section 5(8)(c) and the requirement of “disbursal for time value of money” across all sub-clauses confirm CRPS do not fit the definition of financial debt.

Practice Notes and Drafting Guidance

Instrument selection is outcome-determinative: If IBC remedies are desired, avoid converting receivables into preference shares. Use debt instruments with clear disbursal and interest obligations.
Beware of “mandatory redemption” clauses: Contractual redemption dates cannot override Section 55. If profits/fresh issue proceeds are absent, redemption is not “due,” and no IBC default arises.
Align documentation with intent: Board resolutions and allotment terms should reflect the true nature of the instrument. Calling something “subordinate debt” cannot save an equity conversion if shares are allotted.
Consider corporate law remedies: Where redemption is delayed, assess feasibility of Section 55(3) solutions with shareholder consent and NCLT approval.

Conclusion

The Supreme Court’s decision in EPC Constructions v. Matix provides a lucid and authoritative reset on the boundaries between equity and debt in insolvency law. It holds that:

CRPS are equity, not “financial debt,” and preference shareholders are not “financial creditors.”
Redemption obligations are conditioned by Section 55 of the Companies Act; absent profits or fresh issue proceeds, no redemption is “due,” hence no IBC “default.”
Conversion of receivables into CRPS extinguishes the underlying debt; shareholders cannot later invoke Section 7 IBC to recharacterize their position.
Accounting classifications cannot override statutory definitions and legal character.

By preserving the equity–debt divide, the ruling curbs the misuse of IBC for effectuating exits from equity-like exposures and reinforces that insolvency is not a substitute for corporate law remedies. For financiers and corporates alike, the message is clear: choose instruments consistent with the intended legal and remedial consequences; the IBC will honor substance over labels, but not at the cost of statutory architecture.