EPC CONSTRUCTIONS INDIA LTD VS MATIX FERTILIZERS & CHEMICAL LTD. : CASE SUMMARY

The Supreme Court held in EPC Constructions Ltd Vs. Matix Fertilisers & Chemical Ltd. (Civil Appeal 11077/2025) that Cumulative Redeemable Preference Shares (CRPS) are part of the share capital of a company and cannot be treated as “financial debt” under the Insolvency and Bankruptcy Code (IBC).

BRIEF FACTS

EPC Construction India Ltd. (EPCC) entered into an Engineering and Construction Contract with Matix Fertilizers & Chemicals Ltd. in 2009 for the establishment of a fertilizer complex for Ammonia and Urea production at Panagarh Industrial Park, District Burdwan, West Bengal. Separate on-shore and off-shore supply contracts were executed. Matix became liable to pay Rs. 572.72 crore to EPCC under the contract. Out of this amount, Rs. 400 crore was converted into Cumulative Redeemable Preference Shares (CRPS).

EPCC went into CIRP and, through its Resolution Professional, raised a demand of Rs. 632.71 crores (Rs. 310 crore on account of maturity of CRPS and Rs. 322.71 crore on account of outstanding receivables). EPCC subsequently went into liquidation. The Liquidator initiated CIRP proceedings against Matix under Section 7, which were dismissed by the NCLT. The NCLT rejected the petition on the ground that the balance sheets for 2018-19 to 2020-21 showed continuous losses, and the fourth proviso to Section 123 of the Companies Act, 2013 clearly provides that no dividend is payable out of losses. Unless the CRPS become redeemable, they cannot be termed a “debt,” much less a financial debt. An appeal before the Hon’ble NCLAT was also dismissed.

FINDINGS OF THE SUPREME COURT

The Supreme Court noted that it is well settled under Company Law that preference shares are part of a company’s share capital and the amounts paid up on them are not loans. Dividends are payable only when the company earns profits. If dividends were paid without profits or in excess of the profits earned, it would amount to an illegal return of capital. Since the amount paid up on preference shares is not a loan, it does not qualify as a debt.

The Court observed that for maintaining proceedings under Section 7, the application must be filed by a financial creditor and only when a default has occurred. For a default “to kick in,” there must be non-payment of debt when the 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 Matix had not made profits, did not have any reserves from past profits, and did not possess proceeds from a fresh issue of shares for the purpose of redemption. In these admitted circumstances, the question of any default under Section 3(12) IBC does not arise.

The Court further held that the fact that the redemption period of the CRPS had expired does not strengthen the appellant’s case. The holders of CRPS continue to remain preference shareholders, and as preference shareholders they do not enjoy the status of creditors. Hence, they do not fall within the definition of a financial creditor for the purposes of Section 7 IBC.

The Supreme Court also observed that the earlier outstanding amount had stood extinguished upon conversion, and the nature of the relationship between the parties became that of a preference shareholder and company. There was no question of any underlying contrary intent, as the sole intention was conversion of the debt into preference shareholding. “The egg having been scrambled, Mr. Reddy’s attempt to unscramble it must necessarily fail.”

The Court rejected the argument that the financial debt was an admitted liability in the accounts of the respondent. It held that accounting treatment in accordance with accounting rules cannot determine the legal relationship between the parties as reflected in the documents executed by them. The Court concluded that cumulative redeemable preference shares do not satisfy the definition of “debt” under Section 5(8) IBC.

The Supreme Court found no merit in the appeal and dismissed it.

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