Facts
Previously, Essar Projects India was the name of the appellant, EPC Constructions India Limited, or simply “EPCC.”LTD. On December 11, 2009, it signed an engineering and construction agreement with the respondent, M/s Matix Fertilizers and Chemicals Limited, also known as “Matix.” The construction of a fertilizer complex for the manufacturing of ammonia and urea at Panagarh Industrial Park, District Burdwan, West Bengal, was the subject of the contract. Design, engineering, procurement, construction, erection, and installation were all part of the project. In order to supply plants and equipment of Indian origin, an onshore supply contract was signed on July 29, 2010, and in order to supply plants and equipment of non-Indian origin, an offshore supply contract was signed on August 20, 2010.The appellant claims that INR 572.72 crores (five hundred seventy two crores and seventy two lakhs only) become due under the aforementioned contracts and payable to the appellant by Matix. The appellant claims that in order to convert a portion of the receivables into a subordinate debt, the contracting parties corresponded and discussed the parameters of the conversion.As a consequence, on July 27, 2015, respondent Matix wrote a letter requesting that EPCC convert the outstanding sums up to Rs. 400 crores into Non-Cumulative Redeemable Preference Shares (NCRPS). The respondent was informed of the board resolution adopted by the EPCC on July 30, 2015, via a letter dated that date.EPCC committed to converting a portion of the receivables into CRPS in accordance with the board resolution.
Issues
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?
Legal Provisions
Section 7: Initiation of corporate insolvency resolution process by financial creditor: This is the main section under which the appellant filed the petition to initiate the Corporate Insolvency Resolution Process (CIRP).
Section 5(7): Definition of “financial creditor”: A financial creditor is defined as any person to whom a financial debt is owed.
Section 5(8): Definition of “financial debt”: Financial debt means a debt, along with interest, that is disbursed against the consideration for the time value of money.
Section 5(8)(f): Includes “any amount raised under any other transaction… having the commercial effect of borrowing”. The appellant argued that the CRPS conversion fell under this sub-clause.
Section 3(11): Definition of “debt”: 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.
Section 3(12): Definition of “default”: Default means non-payment of debt when the whole or any part of the debt has become due and payable and is not paid.
Section 3(33): Definition of “transaction”: It includes an agreement or arrangement in writing for the transfer of assets, funds, goods, etc., from or to the corporate debtor.
Section 3(37): Application of definitions from Companies Act: Words and expressions used but not defined in the IBC but defined in the Companies Act, 2013, shall have the meanings respectively assigned to them in that Act
Arguments
Appellants
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, 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”. The learned Senior Counsel claims that the transaction in question, which was carried out through a letter exchange between the parties, is a transaction in accordance with IBC Section 3(33), which satisfies the requirement of IBC Section 5(8)(f). In order to maintain a debt-to-equity ratio for future borrowings and the commissioning of the fertilizer plant, the learned senior counsel argued that Matix understood the “conversion of receivables” as a “subordinate debt.” Matix also acknowledged that it committed to repaying the aforementioned “Subordinate Debt” upon raising equity at par within three years, thus satisfying the requirement of the “commercial effect of borrowing” with repayment obligations. Learned Senior Counsel relied on the judgment of the NCLAT in Sanjay D Kakade vs. HDFC Ventures Trustee Company Ltd. and Ors, Company Appeal (AT) (Insol.) No.481/2023 . They also relied on the judgments of this Court in Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt Ltd and Anr. 2024 SCC OnLine SC 649 , and Pioneer Urban Land and Infrastructure Ltd. and Another v. Union of India and Others (2019) 8 SCC 416 to contend that an expansive interpretation of the phrase “commercial effect of borrowing” ought to have been placed by the NCLAT.
Respondent
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. Preference shares do not constitute equity, they said, citing Section 3(37) of the IBC read with Sections 2(64), 2(55), 2(84), 43, 47, and 55 of the Companies Act, 2013. According to their submission, preference shareholders do not have the authority to file for insolvency against the company under Section 7 IBC, which is a privilege reserved for the company’s financial creditors, because preference shares are a part of the share capital (and not debt capital).
Analysis
In this ruling, the Supreme Court upheld the dismissal of the application submitted under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), concluding that the holder of Cumulative Redeemable Preference Shares (CRPS) is an investor and not a creditor. The Court reasoned that preference shares do not amount to debt because they are a component of a company’s share capital. Importantly, redemption is conditioned on the firm having profits available for dividends or issuing new shares for that purpose, as stated in Section 55 of the Companies Act, 2013.
Judgement
The Court ruled that the CRPS holders, even after the redemption period expired, remain shareholders, not creditors, and therefore do not fulfil the definition of a financial creditor under Section 5(7) for the purpose of initiating CIRP under Section 7 of the IBC.
Conclusion
Hence the conclusion that a holder of Cumulative Redeemable Preference shares is held to be an investor and not a creditor. This meant that the Appellant cannot be classified as a creditor but as an investor under Section 7 of the IBC. This ruling is based on the principle that preference shares are part of a company’s share capital, not a debt , and thus the money paid for them does not constitute a loan.
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