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Informist, Tuesday, Oct. 28, 2025

 

NEW DELHI – The Supreme Court Tuesday ruled that an amount paid on preference shares being "share capital" do not constitute "debt" to start a corporate insolvency resolution process against entities under the Insolvency and Bankruptcy Code, 2016. The apex court rejected EPC Constructions India Ltd.'s plea to start insolvency proceedings against Matix Fertilizers and Chemicals Ltd. EPC Constructions had alleged that Matix Fertilizers failed to pay the redemption amount of INR 3.1 billion payable on account of maturity of cumulative redeemable preference shares.

 

Section 5(8) of the 2016 Code prescribes that to qualify as a financial debt, there needs to be disbursal against consideration for the time value of money, said the top court. Section 5(8)(c) 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, said the apex court, adding that the omission was significant. 

 

In view of the issuance of cumulative redeemable preference shares by Matix Fertilizers, the earlier outstanding amount by the company to EPC Constructions stood extinguished and the nature of relationship of the appellant with the respondent became that of a preference shareholder, said the court. There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding, the court said. "The egg having been scrambled, Mr.(Niranjan) Reddy's (advocate for EPC Constructions) attempt to unscramble it, must necessarily fail," said the top court.

 

The court also rejected EPC Constructions' argument that redemption was due of preference shares as "not meritorious". As required under Section 55 of the Companies Act, 2013, the shares could be redeemed only out of the profits or with any amount kept apart for dividends which is not the situation in the present case, said the top court.

 

The case has its genesis from EPC Constructions entering into an engineering and construction contract with Matix Fertilizers and Chemicals in 2009. The contract was for the establishment of a fertilizer complex for ammonia and urea production at Panagarh Industrial Park, district Burdwan in West Bengal. 

 

EPC Constructions said that under the contract, a sum of INR 5.73 billion became due and payable by Matix Fertilizers to it. In 2015, EPC Constructions agreed to convert a portion of the money due by Matrix Fertilizers into cumulative redeemable preference shares. 

 

Thereafter, an insolvency process was initiated against EPC Constructions in 2018. EPC Constructions, through its liquidator, filed an insolvency petition against Matix Fertilizers to pay the redemption amount payable on account of maturity of cumulative redeemable preference shares. Both the National Company Law Appellate Tribunal and the National Company Law Tribunal, Kolkata bench, held that the cumulative redeemable preference shares held by the appellant was in the nature of an investment and not a debt. They further held that since payment against the cumulative redeemable preference shares was not due, no liability can be said to arise.  End

 

Reported by Surya Tripathi

Edited by Akul Nishant Akhoury

 

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