Supreme Court Rules Preference Shareholders Are Not Creditors, Bars Insolvency Petitions

In a landmark judgment, the apex court draws a clear line between investment and debt, protecting companies from insolvency proceedings by preference shareholders.

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. The ruling reinforces the fundamental distinction between a company’s shareholders and its creditors, thereby shielding companies from being forced into insolvency by investors when redemption conditions are not met.

Headlines: The Core of the Judgment

• Shareholder vs. Creditor: The Court unequivocally stated that a preference shareholder is a member of the company, not a loan creditor. The money paid for shares is part of the company’s capital, not a debt.
• No Default Without Profits: Redemption of preference shares is legally permissible only out of company profits or from a fresh issue of shares. If a company has no profits, the shares cannot be redeemed, and consequently, no “default” under the IBC occurs.
• Intent of Transaction Upheld: The Court rejected arguments to “unveil the underlying intent,” stating that the conscious decision to convert debt into equity was clear and final. “The egg having been scrambled,” the attempt to “unscramble it” must fail.
• Accounting Entries Not Decisive: How a company records a liability in its books of accounts, even if it labels preference shares as an “unsecured loan,” is not determinative of its legal character for IBC proceedings.

Background: The EPC-Matix Dispute

The case originated from a dispute between EPC Constructions India Ltd. (EPCC), now in liquidation, and Matix Fertilizers and Chemicals Ltd.

• The Original Debt: EPCC had executed a large engineering contract for Matix, after which a sum of over ₹572 crores became due to EPCC.
• Conversion to Shares: In 2015, to help Matix improve its debt-to-equity ratio and secure further funding, the parties agreed to convert ₹250 crores of the outstanding dues into 8% Cumulative Redeemable Preference Shares (CRPS). These shares were to be redeemed after three years.
• Insolvency Trigger: When Matix did not redeem the shares after three years, EPCC, through its liquidator, filed an application under Section 7 of the IBC, claiming a default of ₹310 crores (including dividend) and seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against Matix.
• Lower Courts’ View: Both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) dismissed EPCC’s plea. They held that CRPS represented an investment, not a debt, and since Matix had no profits to redeem them, no default had occurred.

Supreme Court’s Analysis and Conclusion

A Supreme Court bench comprising Justices K.V. Viswanathan and J.B. Pardiwala upheld the decisions of the NCLT and NCLAT, dismissing EPCC’s appeal. The Court’s reasoning was rooted in company law principles:

1. Legal Nature of Shares: Relying on the Companies Act, 2013, the Court emphasized that shares constitute capital, not a loan. A preference shareholder has preferential rights to dividend and repayment in a winding-up, but this does not make them a creditor during the company’s solvency.
2. IBC Definitions Scrutinized: The Court dissected the definition of “financial debt” under Section 5(8) of the IBC. It noted that the provision specifically includes instruments like debentures and bonds but omits preference shares, a significant legislative omission. For any transaction to qualify, it must first be a “debt,” which share capital is not.
3. The Redemption Rule: The judgment heavily relied on Section 55 of the Companies Act, which mandates that redemption can only be made from profits or a fresh share issue. As Matix had incurred losses and had no such profits, the redemption was not legally due, and thus, there could be no “default” under the IBC.
4. Finality of Conversion: The Court stated that by accepting the CRPS, EPCC’s old outstanding debt was extinguished and replaced with a new relationship—that of a shareholder. This was a conscious commercial decision taken with full knowledge of the terms.

Conclusion: A Precedent for Corporate Insolvency

This judgment provides crucial clarity for corporate India and the insolvency ecosystem. It firmly establishes that the IBC is not a remedy available to preference shareholders to recover their investment. Their rights are governed by company law, which provides a different set of protections and remedies. The ruling prevents the blurring of lines between risk-bearing contributors of capital (shareholders) and obligation-owed lenders (creditors), thereby upholding the structural integrity of corporate finance and insolvency proceedings.

Case Title:
EPC Constructions India Limited Through Its Liquidator – Abhijit Guhathakurta vs. M/s Matix Fertilizers And Chemicals Limited

Case Number:
Civil Appeal No. 11077 of 2025

• For Appellant– Mr. Niranjan Reddy, learned Senior Advocate
• For Respondent– Mr. Mukul Rohtagi and Mr. Ritin Rai, learned Senior Advocates