New Delhi, October 28, 2025: The Supreme Court has delivered a significant verdict clarifying that holders of redeemable preference shares cannot be considered financial creditors under the Insolvency and Bankruptcy Code (IBC), 2016, reinforcing the distinction between a company's shareholders and its creditors and shielding companies from being forced into insolvency by investors when redemption conditions are not met.
Key Findings. The Court held that a preference shareholder is a member of the company, not a loan creditor — money paid for shares is capital, not debt. Redemption of preference shares is legally permissible only from company profits or a fresh issue of shares; if a company has no profits, the shares cannot be redeemed and no “default” under the IBC occurs. The Court also held that how a company records a liability in its books — even labelling preference shares an “unsecured loan” — is not determinative of its legal character for IBC purposes.
Background. The dispute arose between EPC Constructions India Ltd. (EPCC), now in liquidation, and Matix Fertilizers and Chemicals Ltd. After EPCC executed a large engineering contract for Matix, over ₹572 crores became due. In 2015, to help Matix improve its debt-to-equity ratio, the parties agreed to convert ₹250 crores of the dues into 8% Cumulative Redeemable Preference Shares, redeemable after three years. When Matix did not redeem the shares, EPCC's liquidator filed an application under Section 7 of the IBC claiming a default of ₹310 crores. Both the NCLT and NCLAT dismissed EPCC's plea, holding the shares represented investment, not debt.
Supreme Court's Analysis. A bench of Justices K.V. Viswanathan and J.B. Pardiwala upheld the NCLT and NCLAT's decisions. The Court noted that the IBC's definition of “financial debt” specifically includes instruments like debentures and bonds but omits preference shares — a significant legislative omission. It also relied on Section 55 of the Companies Act, which mandates redemption only from profits or a fresh share issue; since Matix had incurred losses, no default could arise. The Court held that by accepting the CRPS, EPCC's old debt was extinguished and replaced by a shareholder relationship — a conscious commercial decision. “The egg having been scrambled,” attempts to “unscramble it” must fail, the Court observed, rejecting arguments to look behind the transaction's clear intent.
The ruling firmly establishes that the IBC is not a remedy for preference shareholders to recover their investment — their rights are governed by company law instead, preventing the blurring of lines between risk-bearing capital contributors and obligation-owed lenders.
