EPC Constructions India Limited Through Its Liquidator - Abhijit Guhathakurta vs M/s Matix Fertilizers And Chemicals Limited

2025 INSC 1259 REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 11077 OF 2025

EPC Constructions India Limited Through Its Liquidator - Abhijit Guhathakurta …Appellant(s)

VERSUS

M/s Matix Fertilizers And Chemicals Limited …Respondent(s)

JUDGMENT

K.V. Viswanathan, J.

1. The present appeal calls in question the correctness of

the judgment and order dated 09.04.2025 passed by the

National Company Law Appellate Tribunal (for short the

‘NCLAT’) in Company Appeal (AT) (Insolvency) No. 1424 of

2023. The NCLAT dismissed the appeal of the appellant and

confirmed the order dated 29.08.2023 passed by the Signature Not Verified Digitally signed by VARSHA MENDIRATTA Date: 2025.10.28 17:26:18 IST Reason:

Adjudicating Authority-National Company Law Tribunal (for

Page 1 of 42 short the ‘NCLT’), Division Bench, Court No.II, Kolkata. The

NCLAT had dismissed the application of the appellant filed

under Section 7 of the Insolvency and Bankruptcy Code, 2016

(for short the ‘IBC’).

2. Both the NCLT and the NCLAT held that the Cumulative

Redeemable Preference Shares (for short ‘CRPS’) held by the

appellant is in the nature of an investment and not a debt. It

further held that since payment against the CRPS is not due,

no liability can be said to arise.

3. To appreciate the controversy in question, a brief

reference to the facts of the case, needs to be made.

BRIEF FACTS :-

OFFER AND ACCEPTANCE OF CRPS:-

4. The appellant-EPC Constructions India Limited (for

short ‘EPCC’) was formerly known as Essar Projects India

Limited. It entered into an engineering and construction

contract with the respondent-M/s Matix Fertilizers and

Chemicals Limited (for short ‘Matix’) on 11.12.2009. The Page 2 of 42 contract was for the establishment of a fertilizer complex for

Ammonia and Urea production at Panagarh Industrial Park,

District Burdwan, West Bengal. The project involved

designing, engineering, procurement, construction, erection

and installation. An On-shore Supply Contract was executed

on 29.07.2010 (for supply of Indian origin plant and

equipment) and an Off-shore Supply Contract was entered

on 20.08.2010 for supply of non-Indian origin plant and

equipment.

5. According to the appellant, under the above mentioned

contracts, a sum of INR 572.72 crores (Five Hundred Seventy-

Two Crores and Seventy Two Lakhs only) became due and

payable by Matix to the appellant. According to the

appellant, correspondence was exchanged between the

contracting parties to convert a portion of the receivables to

a subordinate debt, the terms of which were to be discussed.

6. This resulted in a letter written by the respondent-Matix

on 27.07.2015 whereby Matix requested EPCC to convert the

outstanding amounts up to Rs. 400 crores into Non- Page 3 of 42 Cumulative Redeemable Preference Shares (NCRPS). By a

letter of 30.07.2015, the board resolution passed by EPCC

dated 30.07.2015 was communicated to the respondent.

Under the board resolution, EPCC agreed to convert a

portion of the receivables into CRPS. The relevant part of the

resolution is extracted hereinbelow:-

“6. INVESTMENT IN CUMULATIVE REDEEMABLE PREFERENCE SHARES OF MATIX FERTILIZER AND CHEMICALS LIMITED

………… Matix has informed the Company that due to shifting of SCOD, cost of completion for the Project has increased and it requires additional funding of Rs 1,210 Crores to complete the Project for which it has approached its lenders. However, due to this delay even further disbursement of existing credit facilities sanctioned has also been withheld by its lenders.

She further added that vide this letter, Matix had given the Company a proposal for conversion of its dues of Rs. 400 Crores payable to the Company on account of the project work into Redeemable Preference Shares (RPS).

It was informed by Matix that its lenders have extended additional credit facilities provided Matix bring additional equity to such extent to achieve the Debt Equity Ratio (DER) of 2:1 and therefore by conversion of dues of the Company into RPS will facilitate Matix to show equity infusion and it can draw additional credit facilities which will enable it to complete the Project.

Further Mr. Sawa clarified to the Board that at present, Matix does not have enough liquidity to repay the outstanding dues of the Company and even complete the balance part of the project. Realizing this, lenders have also sanctioned additional debt to Matix to complete the

Page 4 of 42 project. If Matix does not get additional funding from its lenders, the project will not be completed which will hamper the possibilities to recover Company's outstanding amount from Matix. Therefore it is in the best interest of the Company to extend support to Matix by making investment in the RPS that will help Matix drawdown additional debt for completion of the project and also commence its operations. This in turn will help Matix to raise fresh equity which will be used to redeem the RPS as assured by Matix vide their letter dated July 27, 2015.

The Directors then discussed about the terms and conditions of the proposal given by Matix. The Company Secretary explained in detail the terms and conditions of the RPS. She also informed the Board that if the proposal is accepted by the Board of Directors, there will be no outflow of funds from the Company and only the outstanding receivables will be converted into RPS.

The Directors after further deliberation desired that RPS should be cumulative and carry a dividend rate of 8%.

Taking into account the representation made by the Company Secretary and the clarification given by Mr. Sawa that infusion of funds (debt and equity as mentioned earlier) will not only help Matix to complete the project but also create value, without which the prospects of recovery of Company's dues looks dim, the Board approved the proposal of Investment into RPS of Matix in one or more tranches by conversion of existing dues of up to Rs. 400 Crores with the following modification in the terms and conditions of RPS:

1. RPS should be cumulative

2. RPS should carry 8% dividend.

Thereafter, the Board passed the following resolution unanimously:-

Page 5 of 42

"RESOLVED THAT subject to such statutory approvals as may be required, if any and pursuant to the provisions of Section 179, 186 and any other applicable provisions, if any, of the Companies Act, 2013 read with rules made thereunder and subject such consents and approvals, if any, as may be required, the consent of the Board of Directors of the Company be and is hereby accorded to make investment up to Rs. 400 Crores into 8% Cumulative Redeemable Preference Shares of Rs. 10/- each of Matix Fertilizer and Chemicals Limited (Matix) in one or more tranches.” (Emphasis supplied)

7. On 26.08.2015, by letter dated 26.08.2015, the

respondent-Matix communicated to the appellant as under: -

“We refer to your e-mail dated July 31, 2015 wherein Essar Projects India Limited Board has approved and accepted for conversion of outstanding receivables from Matix Fertilisers And Chemicals Limited (Matix ) to EPIL towards work done under EPC Contract into 8% Cumulative Redeemable preference Shares (CRPS) of Matix The same was also approved by the Board of Matix in Its Board Meeting held on 14th August, 2015 and thereafter, by the Shareholders of Matix in its Extra Ordinary General Meeting held on 26" August, 2015.

Pursuant to the approval of shareholders Matix Board in its meeting held on 26th August, 2015 Matix has allotted 25,00,00,000 8% Cumulative Redeemable Preference Shares of Rs 10/- each aggregating to Rs.250,00,00,000 to Essar Projects India Limited on the following terms and conditions.

Sr. Particulars Amount Rs. 1 Total Value Rs. 250 Crs (Rs. Two Hundred of CRPS Fifty Crores)

Page 6 of 42 2 Face Value Rs. 10 per Share 3 Issue Price At par (face value) 4 Tranches Can be issued in one or more tranches 5 Tenor and Redeemable at par at the end Redemption of 3 years. However, Company at its sole discretion, may redeem CRPS at any time within 3 years from the date of issue. 6 Annual 8% in first year Dividend rate 8% in second year (Cumulative) 8% in third year 7 Transferability Can be transferred subject to the approval of Board of the Company 8 Listing Not to be listed 9 Rights These CRPS carry a preferential rights with respect to- a) Payment of dividend, and b) Repayment in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up. 10 Modification Can be modified before of terms redemption with mutual discussions and written consent of both the parties.

We request your confirmation by signing as EPILs acceptance to proceed with documentation and other necessary compliances.”

There is no dispute that the appellant accepted this letter and

in fact the CRPS came to be issued as proposed hereinabove.

Page 7 of 42 APPELLANT BROUGHT UNDER CIRP :-

8. When matters stood thus, Corporate Insolvency

Resolution Process (CIRP) under the IBC was initiated against

the appellant on 20.04.2018 and one Shri Abhijit

Guhathakurta was appointed as an Interim Resolution

Professional and later confirmed as a Resolution Professional

(for short “RP”). According to the appellant, a letter was

written on 24.08.2018 by respondent Matix to the appellant

stating that the respondent has unilaterally adjusted the total

liability of CRPS amounting to INR 310 Crores against its

purported claim against EPCC. It further appears that Matix

filed a revised claim of INR 537.87 Crores before the RP of

the appellant-EPCC and the same was rejected. It is stated

that rejection was accepted by the respondent and it attained

finality.

DEMAND NOTICE BY THE APPELLANT – THROUGH ‘RP’ – ON MATIX :-

9. At this stage, on 27.10.2018, the appellant through its RP

issued a demand notice to the respondent calling upon Page 8 of 42 payment of INR 632.71 Crores (INR 310 Crores on account of

maturity of the CRPS and INR 322.71 crores on account of

outstanding receivables). On 07.12.2018, the respondent-

Matix, by its letter of 07.12.2018, replied to the demand

notice and disputed the demand. It also denied its liability.

The appellant obtained permission under Section 33(5) of the

IBC from the NCLT, Mumbai for permitting the liquidator

(same individual who was earlier the RP) to initiate legal

action for recovery against the respondent.

SECTION 7, IBC PROCEEDINGS – AGAINST MATIX:-

10. The appellant filed a Section 7 petition against the

respondent in CP (IB) No. 536 of 2022 on account of failure to

pay the redemption amount of INR 310 Crores payable on

account of maturity of CRPS. The appellant further submits

that the financial statements of the respondent showed the

liability towards CRPS as “unsecured loan” and “other

financial liability”. The respondent opposed the petition

under Section 7, IBC.

Page 9 of 42 DISMISSAL BY NCLT:-

11. The NCLT, by its order of 29.08.2023, dismissed the

Section 7-application of the appellant. The NCLT recorded

the following findings:-

a) Section 55 of the Companies Act, 2013 is explicit that if the issuing company is not making profits which are available for dividend or has not raised any equity investments specifically for the purpose of redemption of preference shares, then the preference shares cannot be redeemed.

b) The non-redemption of preference shares does not result in preference shareholders becoming creditors or the carrying value of preference shares and dividends becoming a debt.

c) The Balance Sheet of 2018-19 to 2020-21 manifests losses incurred and the 4th proviso to Section 123 of the Companies Act 2013 manifestly indicates that no dividend is payable out of losses and unless the CRPS becomes redeemable it cannot be termed as a “debt", much less a financial debt.

PROCEEDINGS BEFORE NCLAT:-

12. The appellant filed an appeal before the NCLAT. The

NCLAT, by its judgment of 09.04.2025, dismissed the appeal

and held as under: -

a) 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 made for the purposes of such redemption.

Page 10 of 42 b) Matix never declared dividend or earned profit to redeem the preferential shares. If the preferential shares allotted to the Appellant could not have been redeemed, no debt became due.

c) The correspondence between the parties which ultimately resulted in approval of resolution by the Board of Directors of the Appellant on 30.07.2015 and allotment. of shares by letter dated 26.08.2015 are evidence of a contract between the parties for allotment of 25,00,00,000 8% Cumulative Redeemable Preference Shares of Rs.10/- each aggregating to Rs.250,00,00,000.

d) When preferential shares were allotted to the Appellant, the shares were towards the capital of the Company and the earlier outstanding amount, which according to the Appellant was foundation of issuance of preferential shares shall come to an end.

CONTENTIONS OF PARTIES:-

13. We have heard Mr. Niranjan Reddy, learned Senior

Advocate for the appellant and Mr. Mukul Rohtagi and Mr.

Ritin Rai, learned Senior Advocates for the respondent. We

have perused the records.

CONTENTIONS OF THE APPELLANT:-

14. Mr. Niranjan Reddy, learned Senior Counsel, primarily

contended that the true nature of the transaction in question

must be assessed by unveiling the underlying intent, Page 11 of 42 especially when the structure masked the borrowing

arrangement. According to the learned Senior Counsel, the

CRPS, in the present case, stricto sensu fulfilled all the

ingredients required to constitute a “financial debt”, having

the “commercial effect of borrowing”. According to the

learned Senior Counsel, the transaction in question entered

into by way of exchange of letters between the parties is a

transaction in terms of Section 3(33) of the IBC fulfilling the

ingredient of Section 5(8)(f) of the IBC. Learned Senior

Counsel submitted that Matix understood the “conversion of

receivables” as a “subordinate debt”; that the said proposal

was for commercial purpose, i.e., to maintain a Debt-to-

Equity ratio for further borrowings and commissioning the

fertilizer plant and Matix admittedly committed to repay the

aforesaid “Subordinate Debt” upon raising of equity at par

within three years, thereby fulfilling the ingredient of

“commercial effect of borrowing” with repayment

obligations.

Page 12 of 42

15. According to the learned Senior Counsel, the CRPS

merely acted as a temporary tool for borrowing, providing

Matix “a pause point” under the arrangement entered by

way of exchange of emails. Learned Senior Counsel relied on

the judgment of the NCLAT in Sanjay D Kakade vs. HDFC

Ventures Trustee Company Ltd. and Ors. dated 24.11.2023

in Company Appeal (AT) (Insol.) No.481/2023, where

according to the counsel, the NCLAT delved deeper into the

intention of the parties and the underlying transaction to

decide the question of existence of financial debt. Learned

Senior Counsel also relied on the judgments of this Court in

Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt

Ltd and Anr.1, and Pioneer Urban Land and Infrastructure

Ltd. and Another v. Union of India and Others2 to contend

that an expansive interpretation of the phrase “commercial

effect of borrowing” ought to have been placed by the

NCLAT.

1 2024 SCC OnLine SC 649 2 (2019) 8 SCC 416

Page 13 of 42 CONTENTIONS OF THE RESPONDENT :-

16. Mr. Mukul Rohtagi and Mr. Ritin Rai, learned Senior

Advocates, vehemently countered the submissions of the

learned Senior Counsel for the appellant. They contended

that under Section 3(37) of the IBC words and expressions

used in the IBC but not defined in the Code but defined in the

Companies Act, 2013 shall have the meaning assigned to

them under the Companies Act.

17. They contended by referring to Section 3(37) of the IBC

read with Sections 2(64), 2(55), 2(84), 43, 47 and 55 of the

Companies Act, 2013 that preference shares do not constitute

debt and preference shareholders are not creditors of the

Company. In their submission, preference shares being part

of the share capital (and not debt capital), preference

shareholders do not have a right to initiate insolvency

proceedings against the company under Section 7 IBC which

is a right available only with the financial creditors of the

company. They further contend that under Section 5(8)(f) of

the IBC, preference shares do not constitute a financial debt Page 14 of 42 as defined. According to their submission, the contention of

the appellant that preference shareholders can become a

financial creditor runs contrary to the very fabric of the share

capital of the Company and would blur the line between

shareholders and creditor.

QUESTION FOR CONSIDERATION: -

18. In this factual background, the question that arises for

consideration is whether the NCLT and NCLAT were justified

in dismissing the application of the appellant under Section 7

of the IBC, after holding that the appellant was not a financial

creditor?

ANALYSIS AND FINDINGS: -

REDEEMABLE PREFERENCE SHAREHOLDER NOT A CREDITOR :-

19. The admitted facts are that pursuant to the offer made

by Matix to convert the outstanding amount to RPS and

pursuant to the acceptance of EPCC by its Board Resolution

dated 30.07.2015 approving the proposal of investment in

Page 15 of 42 8% Cumulative Redeemable Preference Shares of Rs.10/-

each of “Matix” and pursuant to the receipt of the CRPS, the

appellant became a preference shareholder.

20. It is well settled in Company Law that preference shares

are part of the company’s share capital and the amounts paid

up on them are not loans. Dividends are paid on the

preference shares when company earns a profit. This is for

the reason that if the dividends were paid without profits or

in excess of profits made, it would amount to an illegal return

of the capital. Amount paid up on preference shares not

being loans, they do not qualify as a debt.

21. Section 3(37) of the IBC provides that words and

expressions used but not defined in the Code but defined in

the Companies Act, 2013 (18 of 2013), shall have the

meanings respectively assigned to them in the said Act.

Section 2(84) of the Companies Act defines share as:- “Share”

means a share in the share capital of a company and includes

stock.

Page 16 of 42

22. Section 43 of the Companies Act defines the kinds of

share capital as under:

“43. Kinds of share capital.—The share capital of a company limited by shares shall be of two kinds, namely:—

(a) equity share capital—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital:

Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act.

Explanation.—For the purposes of this section,—

(i) “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital;

(ii) “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

Page 17 of 42 (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-

clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause

(ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.”

23. It will be noticed that preference share capital is a kind

of share capital. Further, for the purpose of Section 43,

preference share capital (and consequently preference

shareholder) carry a preferential right with respect to the

payment of dividend and in the case of winding up or

repayment of capital, a preferential right on the repayment of

the amount of the share capital.

24. Section 55 of the Companies Act, 2013 deals with issue

and redemption of preference shares and reads as under:-

55. Issue and redemption of preference shares.—(1) No company limited by shares shall, after the

Page 18 of 42 commencement of this Act, issue any preference shares which are irredeemable.

(2) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:

Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders:

Provided further that—

(a) no such shares shall be redeemed except 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 made for the purposes of such redemption;

(b) no such shares shall be redeemed unless they are fully paid;

(c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid- up share capital of the company; and

(d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed:

Page 19 of 42 Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

(ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

(3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-

fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed:

Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the

Page 20 of 42 case may be, a reduction, in the share capital of the company.

(4) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

Explanation.—For the purposes of sub-section (2), the term “infrastructure projects” means the infrastructure projects specified in Schedule VI”

Section 55 except sub-section (3) enforced w.e.f. 1-4-2014

25. Section 55 of the Companies Act stipulates that

preference shares shall be redeemed only out of the profits

of the company which would be otherwise available for

dividends or out the proceeds of the fresh issue of shares

made for the purpose of such redemption.

26. The following passage from “A Ramaiya’s Guide to the

Companies Act” (18th Edition, Volume 1 Page 879), pithily

explains the distinguishing features between a preference

shareholder and a creditor in the following words:-

“It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due Page 21 of 42 on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding-up. In Lalchand Surana v. Hyderabad Vanaspathy Ltd., (1990) 68 Com Cases 415 at 419 (AP), where a preference shareholder was denied redemption in spite of maturity, he was not allowed to file a creditor's petition for a winding-up order under s. 433(e) of the 1956 Act. An unredeemed preference shareholder does not become a creditor.” (Emphasis supplied)

27. B.P. Jeevan Reddy, J. (as His Lordship then was) in

Lalchand Surana vs. M/s Hyderabad Vanaspathy Ltd.3 held

as under:-

“… …. … The only question is whether, in case of failure of the company to repay the amount due thereunder, such shareholders become “creditors”. It is in this context that proviso (a) to sub-section (1) of section 80 becomes relevant. Sub-section (1) of section 80 says that subject to the provisions of the said section, a company limited by shares may, if so, authorised by its articles, issue (i) preference shares which are to be redeemed, or

(ii) preference shares which are liable to be redeemed at the option of the company. Proviso (a), however, says that no such shares shall be redeemed except 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 made for the purposes of the redemption.

This aspect, in my opinion, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a “creditor”. The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for

3 [1988 SCC OnLine AP 290]

Page 22 of 42 dividend, or by a fresh issue of shares. This is a limitation which is not applicable to the case of an ordinary creditor. In the face of this position in law, and in the absence of any authority on the subject, I hold that the holders of redeemable preference shares do not and cannot become creditors of the company in case their shares are not redeemed by the company at the appropriate time. They continue to be shareholders, no doubt subject to certain preferential rights mentioned in section 85. If they do not become the creditors of the company, they cannot apply for winding up of the company under section 433(e).” (Emphasis supplied)

CONCEPTUAL DIFFERENCE BETWEEN ‘DEBT’ AND ‘PREFERENCE SHARES’: -

28. Explaining the nuanced distinction between “debt” and

“share” particularly in the context of a “preference

shareholder”, Gower in his “Principles of Modern Company

Law” (Tenth Edition) at page 1071 has the following to say: -

“The line between the holder of a debt instrument and a share is particularly narrow if the contrast is made with a preference shareholder, who is a member of the company, but a member whose share rights may limit the shareholder’s dividend to a fixed percentage of the nominal value of the share and give that shareholder no right to participate in surplus assets in a winding-up, and perhaps only limited voting rights. The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this

Page 23 of 42 constraint; and that the debt holder will rank before the preference holder in a winding-up. Thus, the legal rules operate with a binary divide between debt and equity, but the accounting rules and general practice leads to the creation of securities whose classification in accordance with this divide is problematic.” (Emphasis supplied)

RELEVANT PROVISIONS OF THE IBC :-

29. This being the legal position, it is also time now to

examine the statutory provisions of the IBC to understand the

pre-requisites to maintain a petition under Section 7 of the

IBC. Section 7 speaks of initiation of Corporate Insolvency

Resolution Process by the financial creditor. Section 5(7) of

the IBC defines a financial creditor. It reads as under:-

“5(7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;”

30. Section 5(8) defines financial debt and it is extracted

hereunder: -

“5(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b)any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

Page 24 of 42 (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;”

Page 25 of 42

31. Section 3 (11) defines debt as under: -

“3(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;”

32. Section 3(12) defines default, which is a crucial

ingredient of Section 7 of the IBC, as under: -

“3(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;”

33. Section 7(1) and 7(5) of the IBC read thus:-

“7. Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred:

xxx xxx

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-

section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

Page 26 of 42

(b) default has not occurred or the application under sub-

section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.”

34. 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. Admittedly, 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

Page 27 of 42 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.

35. Dealing with the importance of the occurrence of default

for the purpose of maintainability of a Section 7-application

under the IBC, this Court in Innoventive Industries Limited

vs. ICICI Bank and Another4, held as under:-

“28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the

4 (2018) 1 SCC 407

Page 28 of 42 existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact.

The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.” (Emphasis supplied)

36. That the CRPS were at a stage when the redemption

period had expired would not lend greater weight to the

case of the appellant. They continue to be preference

shareholders and by being preference shareholders they do

not enjoy the status of the creditors of the company. Hence,

they do not fulfil the definition of a financial creditor for the

purpose of Section 7 of the IBC.

Page 29 of 42

37. We are supported by the following holding of this Court

in Radha Exports (India) Private Limited vs. K.P. Jayaram

and Another5:-

”42. The definition of "financial debt" in Section 5(8) makes it clear that "financial debt" means a debt along with interest, if any, disbursed against the consideration for time value of money and would include money raised or borrowed against the payment of interest; amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent, amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian accounting standards or such other accounting standards as may be prescribed; receivables sold or discounted other than any receivables sold on non-recourse basis or any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. Explanation to Section 5(8) which relates to real estate projects is of no relevance in the facts and circumstances of this case. The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits.” (Emphasis supplied)

38. The contention of Mr. Niranjan Reddy that the Court has

to unveil the underlying intent especially when the outward

structure masked the borrowing arrangements is absolutely 5 (2020) 10 SCC 538

Page 30 of 42 without merit. As the board resolution dated 30.07.2015

clearly indicates, the appellant who before the issuance of

CRPS had some receivables due on account of the

construction contracts took a conscious call to accept the

CRPS. The Board resolution further indicates the following:-

“The company secretary explained in detail the terms and

conditions of the RPS”. She also informed the board that if the

proposal is accepted by the board of directors, there will be

no outflow of funds from the company and only the

outstanding receivables will be converted into RPS. The

Board resolution also noticed that the lenders of Matix, the

respondent, have agreed to extend additional credit facilities

to Matix provided Matix brings in additional equity to such

extent as to achieve the debt equity ratio of 2:1 and

therefore, by conversion of dues of the company into RPS,

Matix will be able to show equity infusion and draw

additional credit facilities from the lenders. It is further

mentioned in the board resolution that if CRPS is not

accepted the prospects of recovery of the dues looked dim.

Page 31 of 42 On this basis CRPS came to be issued for a total value of INR

250 Crores.

39. In view of the 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. 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.

40. A Division Bench of the Delhi High Court in

Commissioner of Income Tax vs. Rathi Graphics

Technologies Limited,6 dealing with the extinguishment of

the liability of interest in view of the conversion of the same

into equity held as under:-

“16. When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is

6 2015 SCC OnLine Del 14470

Page 32 of 42 converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to section 43B of the Act, viz., conversion of interest into "a loan or borrowing". In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said Interest amount for which the conversion is taking place is no longer a liability.”

41. There is no merit in the reliance placed on the judgment

of the NCLAT in Sanjay D Kakade (supra). As has been held

in the impugned order, the said case turned on the

interpretation of the share subscription and the shareholders

agreement and documentation available thereon. It was

held by the NCLAT that the said case was not a case

regarding allocation of shares by payment of money on the

basis of which a Section 7-application came to be filed. It

was further held that the said case was not a case of simple

allotment of shares. NCLAT therein distinguished Radha

Exports (supra) with the above observations. We are

convinced on the perusal of the transaction between the

parties in the present case that the appellant as preference

shareholder could not have maintained an application under

Section 7, IBC.

Page 33 of 42

42. Equally, the reliance placed on Global Credit Capital

Ltd. (supra) and Pioneer Urban Land and Infrastructure Ltd.

(supra) by Mr. Niranjan Reddy, learned Senior Advocate, is

not apposite. 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.

ENTRIES IN BOOKS OF ACCOUNTS – NOT DETERMINATIVE:

43. Mr. Niranjan Reddy, learned Senior Counsel, contended

that financial debt is an admitted liability in the books of

accounts of Matix. This was countered by the learned Senior

Counsels for Matix by contending that entries in account

books are not determinative of the true nature of the

transaction. Accounting Standards (AS 32) prescribe that a

preference share that provides for mandatory redemption by

the issuer for a fixed or determinable amount at a fixed or Page 34 of 42 determinable future date, or gives the holder the right to

require the issuer to redeem the instrument at or after a

particular date for a fixed or determinable amount, is a

financial liability. However, the treatment in the accounts

due to the prescription of accounting standards will not be

determinative of the nature of relationship between the

parties as reflected in the documents executed by them.

Further 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. Hence, by

resort to the treatment in the accounts this case cannot be

decided.

44. Emphasizing the significance of the true nature of the

transaction, this Court in State Bank of India vs.

Commissioner of Income Tax, Ernakulam7 held as under:-

“11. It was held by this Court in Sutlej Cotton Mills Ltd. v. CIT [(1978) 4 SCC 358 : 1979 SCC (Tax) 22 : (1979) 116 ITR 1] that where profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily

7 (1985) 4 SCC 585

Page 35 of 42 be a trading profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of a capital nature.

12. The important question to be considered is the true nature of the transaction and whether in fact it had resulted in profit or loss to the assessee. In that context it is well settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee might, by making entries which were not in conformity with the proper principles of accountancy, have concealed profit or showed loss and the entries made by him could not, therefore, be regarded as conclusive one way or the other.” (Emphasis supplied)

45. Further, in Union of India vs. Association of Unified

Telecom Service Providers of India and Others,8 the Court

held as under:-

“65. As per Clause 20.4, a licensee must make quarterly payment in the prescribed format as Annexure II showing the computation of revenue and licence fee payable. The format is part of the licence and is independent of accounting standards and is in tune with the definition of gross revenue, and is the basis for the calculation of licence fee. It is only for uniformity that the account has to be maintained as per accounting standards AS-9 which are prescribed from time to time. Once the licensee provides the details to the Government in format Annexure II along with accounts

8 (2020) 3 SCC 525

Page 36 of 42 certified by the auditor, the reconciliation has to take place. The accounting standard AS-9 is relevant only for whether the figure given by the licensee as to gross revenue is maintained in proper manner once gross revenue is ascertained, then after certain deductions, adjusted gross revenue has to be worked out. The accounting standard provided in AS-9 cannot override the definition of gross revenue, which is the total revenue for licence and the finding in Union of India v. Assn. of Unified Telecom Service Providers of India, (2011) 10 SCC 543 in this regard is final, binding and operative. The accounting standard AS-9 makes it clear that same is in the form of guidelines, it is not comprehensive and does not supersede the practice of accounting. It only lays down a system in which accounts have to be maintained. Accounting standards make it clear that it does not provide for a straitjacket formula for accounting but merely provides for guidelines to maintain the account books in systematic manner.

76. The definition of gross revenue is crystal clear in the agreement. How the adjusted gross revenue to be arrived at is also evident. It cannot be submitted that the revenue has not been defined in the contract. Once the gross revenue is defined, one cannot depart from it and the very meaning is to be given to the revenue for the agreement. Overall revenue, has to be taken into account for determination of licence fees without set off, as provided in the agreement. The same was defined to simplify it to rule out the litigation, disputes and accounting myriads. The submission raised that the term revenue has to be interpreted as the consideration payable in keeping with commercial and financial parlance is what is intended to be avoided. Raising of such submission is a futile attempt that has been made to wriggle out of the definition of gross revenue, which has been held to be binding in the previous judgment in Union of India v. Assn. of Unified Telecom Service Providers of India, (2011) 10 SCC 543 . The submission that the contract recognises the applicability of accounting standards, in our opinion, it is only to maintain books of accounts. To a certain extent, it

Page 37 of 42 cannot be disputed that to have clarity, uniformity and definitiveness; the accounting standards lay down guidelines with respect to financial terms. However, when the financial terms in the agreement are clear in the form of definition of gross revenue governed by Clause 19.1 of the agreement, the definition of Accounting Standard 9 cannot supersede it which is a general one.” (Emphasis supplied)

46. Another important Section in the IBC to be noticed is

Section 5(8) which prescribes that to be a financial debt

there needs to be disbursal against consideration for the

time value of money. 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. The

omission is significant. As demonstrated above, the paid up

money on shares being “share capital” they do not constitute

debt.

47. As far as 5(8)(f) is concerned before we deal with the

term commercial effect of borrowing the opening clause of

5(8) cannot be lost sight of. It has to be first a debt and such

debt would be a financial debt if it is raised under any other

Page 38 of 42 transaction including any forward sale or purchase

agreement having the commercial effect of borrowing. As

already explained the paid up amounts towards shares do

not have the character of debt. The further argument that

redemption was due, is also 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.

48. This Court in Anuj Jain, Interim Resolution

Professional for Jaypee Infratech Limited vs. Axis Bank

Limited and Others9, held as under:-

“46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become ‘financial debt’ for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items

9 (2020) 8 SCC 401

Page 39 of 42 referred to in sub-clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in sub-

clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of ‘disbursement’ against ‘the consideration for the time value of money’ could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as ‘financial debt’ within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money.

49. Expounding yet further, in our view, the peculiar elements of these expressions “financial creditor” and “financial debt”, as occurring in Sections 5(7) and 5(8), when visualised and compared with the generic expressions “creditor” and “debt” respectively, as occurring in Sections 3(10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term “creditor” is defined to mean any person to whom the debt is owed and then, it has also been made clear that it includes a ‘financial creditor’, a ‘secured creditor’, an ‘unsecured creditor’, an ‘operational creditor’, and a ‘decree-holder’. Similarly, a “debt” means a liability or obligation in respect of a claim which is due from any person and this

Page 40 of 42 expression has also been given an extended meaning to include a ‘financial debt’ and an ‘operational debt’.”

(Emphasis supplied)

49. Further, in Global Credit Capital Limited (supra),

elucidating on the meaning of “financial debt” as defined in

Section 5(8), this Court held as under:-

“14. … … The definition incorporates the expression “means and includes”. The first part of the definition, which starts with the word “means”, provides that there has to be a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The word “and” appears after the word “money”. Before the words “and includes”, the legislature has not incorporated a comma. After the word “includes”, the legislature has incorporated Categories (a) to (i) of financial debts. Hence, the cases covered by Categories (a) to (i) must satisfy the test laid down by the earlier part of clause (8). The test laid down therein is that there has to be a debt along with interest, if any, and it must be disbursed against the consideration for the time value of money.

23. Now, coming back to the definition of a financial debt under clause (8) of Section 5 IBC, in the facts of the case, there is no doubt that there is a debt with interest @ 21% p.a. The provision made for interest payment shows that it represents consideration for the time value of money.

Now, we come to sub-clause (f) of clause (8) of Section 5 IBC. The first condition of applicability of sub clause (f) is that the amount must be raised under any other transaction. Any other transaction means a transaction which is not covered by sub-clauses (a) to (e). Sub- clause (f) covers all those transactions not covered by any of these sub-clauses of clause (8) that satisfy the test in the first part of Section 8. The condition for the Page 41 of 42 applicability of sub-clause (f) is that the transaction must have the commercial effect of borrowing. “Transaction” has been defined in clause (33) of Section 3 IBC, which includes an agreement or arrangement in writing for the transfer of assets, funds, goods, etc. from or to the corporate debtor. In this case, there is an arrangement in writing for the transfer of funds to the corporate debtor. Therefore, the first condition incorporated in sub-clause

(f) is fulfilled.

(Emphasis supplied)

50. For all these reasons stated above, we find no merit in

this appeal. The appeal stands dismissed. No order as to

costs.

……….........................J. [J. B. PARDIWALA]

……….........................J. [K. V. VISWANATHAN] New Delhi;

28th October, 2025

Page 42 of 42