Supreme Court on Financial Creditor Eligibility under the IBC – Preference Shares vs. Debt.

The Supreme Court held that a holder of cumulative redeemable preference shares (CRPS) in a company cannot be treated as a “financial creditor” under the Insolvency and Bankruptcy Code, 2016 (IBC) merely because the redemption period has expired and they claim amounts due. The CRPS were held to be part of share capital (equity) and not a debt, and hence initiation of insolvency proceedings under Section 7 IBC was not maintainable by the appellant.

1. The appellant (EPCC) had executed large construction contracts with the respondent (Matix) and claimed dues of ₹ 572.72 crores.
2. Matix proposed converting a portion of its liability into CRPS (8% cumulative redeemable preference shares) and EPCC accepted the proposal, becoming a preference shareholder.
3. Subsequently EPCC (now liquidated) initiated an application under Section 7 IBC against Matix, claiming the CRPS redemption amount plus receivables, asserting that default had occurred.
4. The adjudicating authority (NCLT) dismissed the Section 7 application. NCLAT upheld the dismissal, and EPCC appealed to the Supreme Court.

1. Preference shares, even if redeemable, are by nature share capital and not debt, as per the Companies Act, 2013 and company law jurisprudence.
2. The IBC definition of “financial debt” (Section 5(8) IBC) requires a debt along with interest, disbursed against consideration for time value of money, or a transaction having the commercial effect of borrowing.
3. In this case, although EPCC claimed the transaction had the commercial effect of borrowing, the Court held that the documentation and board resolution clearly showed the conversion of receivables into share capital, extinguishing the former liability rather than creating a financial debt.
4. It was further observed that mere bookkeeping or account-entry treatment of a liability does not determine its legal nature; substance must prevail over form.
5. Given that no “default” under Section 3(12) IBC could be said to have occurred (since no debt obligation materialized), the Section 7 petition was unsustainable.

1. Section 7, Insolvency and Bankruptcy Code, 2016 (IBC) – Initiation of Corporate Insolvency Resolution Process by a financial creditor. SCI API
2. Section 5(7), 5(8), 3(11), 3(12) IBC – Definitions of financial creditor, financial debt, debt and default. SCI API
3. Section 43, 55, Companies Act, 2013 – Kinds of share capital and rules for redemption of preference shares.

Citation: 2025 INSC 1259

Case: EPC Constructions India Ltd. (Through Its Liquidator) v. Matix Fertilizers & Chemicals Ltd.

Court: Supreme Court of India

Coram: Justice K. V. Viswanathan

Civil Appeal No.: 11077 of 2025