Epc Constructions India Limited vs. M/S Matix Fertilizers And Chemicals Limited

REPORTABLE

IN THE SUPREME COURT OF INDIA
2025 INSC 1259
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)


J U D G M E N T


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-
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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
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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:-

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"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
th
Meeting held on 14 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
th
meeting held on 26 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.

Page 6 of 42

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
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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
th
losses incurred and the 4 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.
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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,
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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.
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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
1
Ltd and Anr. , and Pioneer Urban Land and Infrastructure
2
Ltd. and Another v. Union of India and Others 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
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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
th
Companies Act” (18 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
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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
3
Lalchand Surana vs. M/s Hyderabad Vanaspathy Ltd. 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
4
vs. ICICI Bank and Another , 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
5
and Another :-
”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
6
Technologies Limited , 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.
7
Commissioner of Income Tax , Ernakulam 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
8
Telecom Service Providers of India and Others , 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
9
Limited and Others , 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;
th
28 October, 2025
Page 42 of 42