Preference Shares, Even After Maturity, Do Not Become Debt: Supreme Court Declares CRPS Holders Have No Right to Initiate Insolvency Proceedings Under IBC

“The Egg Having Been Scrambled, Mr. Reddy’s Attempt to Unscramble It Must Fail” – In a significant ruling Supreme Court of India has held that holders of Cumulative Redeemable Preference Shares (CRPS) are not financial creditors and therefore cannot maintain an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. Affirming the findings of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), the Supreme Court ruled that even upon the lapse of the redemption period, preference shares continue to retain their character as share capital and do not transform into an enforceable financial debt.

The Court, speaking through Justice K.V. Viswanathan, categorically rejected the contention that the CRPS in this case were merely a “camouflaged borrowing device.” Refusing to look beyond the express terms of the transaction, the bench observed that “the egg having been scrambled, Mr. Reddy’s attempt to unscramble it must necessarily fail.”

The dispute arose out of an Engineering Procurement and Construction (EPC) contract dated 11.12.2009 between EPC Constructions India Ltd (formerly Essar Projects India Ltd) and M/s Matix Fertilizers for the establishment of a fertilizer plant. EPC claimed that over INR 572 crores were outstanding for completed work, out of which INR 250 crores were converted into CRPS through mutual correspondence and board approvals in July and August 2015. The terms specified that these CRPS would be redeemable at Matix’s discretion within three years, subject to the conditions laid down in Section 55 of the Companies Act, 2013.

According to EPC, since the redemption period had expired and Matix failed to redeem the CRPS, a financial debt had arisen. Based on this premise, EPC’s liquidator filed a petition under Section 7 of the IBC before the NCLT, alleging default to the tune of INR 310 crores. The application was dismissed on the ground that CRPS do not constitute debt. The NCLAT upheld this view, and the matter reached the Supreme Court.

Rejecting EPC’s arguments, the Court began by identifying the central legal issue: whether the appellant, by virtue of holding CRPS, could be considered a financial creditor under the IBC. The Court held firmly that preference shares form part of share capital and not debt capital. It observed, “Section 55 of the Companies Act stipulates that preference shares shall be redeemed only out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares.” This, the Court said, precluded any automatic right of redemption, and consequently, no “debt” arose upon mere maturity of the CRPS.

In a categorical observation, the bench stated, “Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed and cannot, as of right, claim a return of their share money except in a winding-up.” Relying on authoritative commentary from A Ramaiya’s Guide to the Companies Act and precedents such as Lalchand Surana v. Hyderabad Vanaspathy Ltd. and Radha Exports (India) Pvt. Ltd. v. K.P. Jayaram, the Court emphasized that “an unredeemed preference shareholder does not become a creditor.”

The Court dissected the definition of “financial debt” under Section 5(8) of the IBC, stressing that the essential elements are disbursal and consideration for time value of money. It held, “The paid-up amounts towards shares being ‘share capital’ do not have the character of debt. They do not qualify as a financial debt.” It further clarified that for a transaction to fall under clause (f) of Section 5(8), it must first satisfy the basic requirement of being a “debt.” Since CRPS do not meet this threshold, they cannot be construed as a financial debt even if they appear to have the commercial effect of borrowing.

The Court firmly rejected the appellant’s reliance on the accounting treatment of CRPS as “unsecured loans” in the financial statements of Matix. It ruled that “accounting treatment cannot override the legal nature of the transaction,” and cited State Bank of India v. CIT to assert that entries in books of account are not conclusive of the legal character of a transaction. “The IBC has its own prerequisites which a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold,” the Court added.

The argument that the three-year period had expired, triggering redemption, was also held to be misplaced. The Court pointed out that under Section 55 of the Companies Act, redemption can only be effected from profits or proceeds of a fresh issue, and Matix had neither. “In this admitted scenario, the question of there being any default under Section 3(12) of the IBC does not arise,” the Court declared.

The appellant had placed strong reliance on Sanjay D Kakade v. HDFC Ventures, Global Credit Capital v. Sach Marketing, and Pioneer Urban Land and Infrastructure Ltd., to support its interpretation of “financial debt.” However, the Court distinguished these cases, holding that they involved different types of financial instruments and unique contractual frameworks. “We are convinced… that the appellant as preference shareholder could not have maintained an application under Section 7,” the Court concluded.

Critically, the Court addressed the legal consequence of converting operational dues into preference share capital, noting, “By virtue of issuance of CRPS, the earlier outstanding amount stood extinguished and the nature of relationship of the appellant with the respondent became that of a preference shareholder.”

In perhaps the most striking line of the judgment, Justice Viswanathan delivered a final blow to the appellant’s theory of veiled borrowing: “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.”

The judgment serves as a clear reaffirmation of the fundamental divide between equity and debt and signals that strategic conversions of dues into preference shares cannot later be weaponized under the IBC to trigger insolvency proceedings. Preference shareholders, the Court has held, are entitled to preferential treatment in winding up—not a shortcut into the IBC.

Date of Decision: 28 October 2025