Preference Shareholder Is Not A Creditor; His Application U/S 7 IBC Is Not Maintainable: Supreme Court

The Supreme Court held that a preference shareholder is not a creditor and his application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) is not maintainable.

The Court held thus in a Civil Appeal filed against the Judgment and Order of the National Company Law Appellate Tribunal (NCLAT), which confirmed the Order of the Adjudicating Authority-National Company Law Tribunal (NCLT).

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “Applying the real nature of the transaction, the sole irresistible conclusion that is possible is that the appellant being a preference shareholder, is not a creditor and an application by it under Section 7 was not maintainable, as has been rightly held by the authorities below.”

The Bench said that the preference shareholders do not enjoy the status of the creditors of the company and hence, do not fulfil the definition of a financial creditor for the purpose of Section 7 of IBC.

Senior Advocate Niranjan Reddy appeared on behalf of the Appellant, while Senior Advocates Mukul Rohtagi and Ritin Rai appeared on behalf of the Respondent.

Brief Facts

The Appellant company entered into an engineering and construction contract with the Respondent company in the year 2009. Thereafter, an on-shore supply contract was executed in 2010 and an off-shore supply contract was entered in the same year. Under the said contracts, a sum of Rs. 572.72 crores became due and payable by Respondent to the Appellant. Subsequently, a portion of the receivables were converted into Cumulative Redeemable Preference Shares (CRPS). The Appellant underwent insolvency in 2018 and the Corporate Insolvency Resolution Process (CIRP) under the IBC was initiated against it.

The Appellant obtained permission under Section 33(5) of the IBC from the NCLT, Mumbai for permitting the liquidator to initiate legal action for recovery against the Respondent. The Appellant filed a Section 7 Petition against the Respondent. Both the NCLT and the NCLAT held that the CRPS held by the Appellant is in the nature of an investment and not a debt. It was further held that since payment against the CRPS is not due, no liability can be said to arise. Being aggrieved, the Appellant was before the Apex Court.

Reasoning

The Supreme Court in view of the above facts, noted, “It will be clear from a plain reading that to maintain a proceeding under Section 7, an application has to be filed by a financial creditor and the application has to be filed when a default has occurred. It will be noticed from the above that for a default “to kick in” there should be non-payment of debt, when whole or any part of the debt has become due and payable and is not paid.”

The Court added that the CRPS had not become due and payable since the Respondent had not made profits and did not have any reserve out of the profits made in the past nor did it possess any proceeds from a fresh issue of shares made for the purpose of redemption.

“In this admitted scenario, the question of there being any default under Section 3(12) of the IBC does not arise. Hence, the argument that the three years period mentioned in the CRPS for redemption having expired, the shares were due for redemption, does not carry the case of the appellant any further”, it observed.

The Court said that the earlier outstanding amount stood extinguished and the nature of relationship of the Appellant with the Respondent became that of a preference shareholder.

“There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding. The egg having been scrambled, Mr. Reddy’s attempt to unscramble it, must necessarily fail”, it remarked.

The Court enunciated that Section 5(8)(c) of IBC 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.

“The omission is significant. As demonstrated above, the paid up money on shares being “share capital” they do not constitute debt”, it further noted.

Conclusion

The Court also clarified that 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.

“For all these reasons stated above, we find no merit in this appeal”, it concluded.

Accordingly, the Apex Court dismissed the Appeal.

Cause Title- EPC Constructions India v. M/s Matix Fertilizers and Chemicals Limited (Neutral Citation: 2025 INSC 1259)

Appearance:

Appellant: Senior Advocate Niranjan Reddy, AOR Sanya Sud, Advocates Abhishek Swaroop, Aditya Vikaram Singh, and Shreya Chandhok.

Respondent: Senior Advocates Mukul Rohtagi, Ritin Rai, AOR E. C. Agrawala, Advocates Mahesh Agarwal, Rishi Agrawala, Geetika Sharma, and Madhavi Agarwal.

Click here to read/download the Judgment