EPC Constructions India Limited Through Its Liquidator – Abhijit Guhathakurtha vs M/s Matix Fertiliser And Chemicals Limited

Per: Bidisha Banerjee. Member (Judicial)

This Court is congregated in a hybrid mode.

Ld. Senior Counsel/Ld. Counsels for the Financial Creditor and Ld. Senior Counsels/Ld. Counsels for the Corporate Debtor were heard in full.

This instant Petition is filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity “I&B Code”) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudication Authority) Rules, 2016 by “EPC Constructions India Limited Through Its Liquidator, Mr. Abhijit Guhathakurtha” hereinafter referred as Financial Creditor (Petitioner) against “M/S Matix Fertiliser and Chemicals Limited” [CIN: U24120WB2009PLC153272] having its registered office at Panagarh Industrial Park, P.O. Panagarh Bazar, District – Purba Bardhaman Panagarh Bardhaman, West Bengal 713148, hereinafter referred as Corporate Debtor (Respondent), whereby, the Financial Creditor seeks to initiate an insolvency resolution process (for brevity “CIRP”) against the Corporate Debtor.

EPC Constructions India Limited, (in short “EPC”), Financial Creditor herein, bearing its CIN: U99999MH1989PLC053280, has its registered address at Office No 102, First Floor, Kaatyani Business Centre, OFF Mahakali Caves Road, Andheri East, Mumbai 400093 and Mr. Abhijit Guhathakurta (Liquidator of EPC) has its registered office at Deloitte India Insolvency Professionals LLP, 32^nd Floor, Tower 3, One International Centre, Senapati Bapat Marg, Elphinstone Road (West), Mumbai.

It is claimed that the Corporate Debtor was incorporated on 07/07/2009, having Nominal Share Capital of Rs. 9900,00,00,000/- (Rupees Ninety-Nine Hundred Crore Only) and having Paid-up Share Capital of Rs. 22,15,46,03,370/- (Rupees Twenty-Two Hundred Fifteen Crore Forty-Six Lakh Three Thousand Three Hundred Seventy Only).

Particulars of Alleged Financial Debt:

The Ld. Sr. Counsel/ Ld. Counsel for the Financial Creditor relies upon the following documents in supporting its claim:

The Submissions made by the Ld. Sr. Counsel/ Ld. Counsel for Petitioners would be thus:

The Financial Creditor is seeking CIRP under Section 7 of I&B Code against Corporate Debtor on account of default in redemption and pay-out of Rs. 310 Crore (Indian National Rupees Three Hundred and Ten Crore Only) having become due and payable on account of maturity of 25 Crore Cumulatively Redeemable Preference Shares (in short “CRPS”) having a face value of Rs. 250 crores, since August 26, 2018 plus dividend on Rs 250 Crore @ 8% p.a. till the realization of entire amount.

That, NCLT, Mumbai, had vide its Order dated March 03, 2022, allowed I.A. 375 of 2022, filed by the Liquidator, inter alia, under Section 33(5) of the I&B Code seeking permission to file the application under Section 7 of the I&B Code against Matix Fertiliser and Chemicals Limited (in short “Matix”).

The Ld. Counsel for the Financial Creditor submits that the liability of Rs. 310 Crore arises in terms of and pursuant to an EPC Contract dated 29/07/2010 (as amended from time to time), the On-shore Contract dated 29/07/2010 and Off-shore Contract dated 20/08/2010 respectively executed between EPC and Matix, referred to as “Subject Contracts”. In terms of the Subject contracts, pursuant to the works performed, an amount of Rs. 199.85 Crore had become due and payable. In addition, there to of Rs. 120.22 Crore against certain approved or notified extra work done, an amount of Rs. 2.65 Crore towards certain equipment rental as well as a further amount of Rs. 250 Crore for the works performed under the aforesaid Subject Contracts was admittedly due and payable commutatively totalling to Rs. 572.72 Crores and such amount arose out of mutually accepted contractual terms.

The Ld. Counsel for the Financial Creditor further submits that in the foregoing circumstances, thereafter the Corporate Debtor proposed to issue 25 crores CRPS with face value of Rs. 10/- each, redeemable at par at the end of three (03) years with 8% dividend cumulatively in respect of receivables to the tune of Rs. 250 crores out of the amount of Rs. 572.72 crores (approx.) as on March/April 2015. The aforesaid request made by the Matix was (in principle) agreed to and accepted by EPC on 08/05/2015 vide a letter of even date. Subsequent thereto, the Board of Directors of EPC resolved to make the investment up to Rs. 400 crores into 8% Cumulative Redeemable Preference Shares of Rs. 10/- each of Matix. Pursuant thereto, on 31.07.2015, EPC communicated the aforesaid decision and approval of the Board to Matix vide an email dated 31.07.2015.

Further, it is submitted that thereafter, post receipt of email dated 31.07.2015 from EPC, the Board of Directors of Matix (Corporate Debtor), in its meeting dated 14.08.2015 approved the allotment of Rs. 25 Crore CRPS of Rs. 10/- each aggregating to Rs. 250 Crores to EPC. Subsequent thereto, the same was also approved by the shareholders of Matix in its Extraordinary General Meeting held on 26.08.2015. In terms of the said approvals, Matix issued a letter dated 26.08.2015 to EPC listing the terms and conditions of the issuance of CRPS. The aforesaid CRPS attained maturity on 26.08.2018. It is contended that after the date of maturity, as per the terms of issue, the unpaid dividends at rate of 8% would add to the principal amount. Thus, for each year where the CRPS remains unpaid, an interest of Rs. 20 Crore gets added. Thus, this claim of Rs. 310 Crore is as of add up of 3 year’s unpaid dividends along with Principal of Rs. 250 Crore. This, as per the terms, shall continue to accrue until redemption of the CRPS.

Further, it is contended that after the CRPS become due and payable on 26/08/2018, EPC through the then RP issued a letter dated 20/08/2018 to Corporate Debtor, inter alia, calling upon Corporate Debtor to plan for redemption on the due date and arrange for remittance of redemption proceeds, including dividend, aggregating to Rs. 310 Crore. In response thereto on 24/08/2018, the Corporate Debtor, while admitting the liability of the CRPS redemption proceeds, requested for adjustment of the said liability against its purported claim submitted by it in the CRPS of the Financial Creditor, as after adjustment of the redemption proceeds of Rs. 310 Crore against the claim submitted, the dues towards CRPS would become NIL.

The Ld. Counsel for the Financial Creditor argues that at this juncture, it needs to be taken note of that Matix, Corporate Debtor herein, did not dispute, in any manner whatsoever, that the redemption proceeds were not due and payable – rather the liability was categorically admitted.

The Ld. Counsel for the Financial Creditor further argues that the Applicant herein, (then RP of EPC) on 27/10/2018, issued a demand notice to Matix claiming an amount of Rs. 632.71 Crore, which included the redemption amount of Rs. 310 Crore on account of maturity of the CRPS and Rs. 322.71 Crore on account of outstanding receivables for the services rendered by EPC under the Subject Contracts for the calendar year 2013, 2014 and 2015.

It is further contended that in response thereto, on 27/12/2018, Matix cited its vulnerable economic condition due to a purported accumulated loss of Rs. 5894 million. The balance amount of Rs. 322.71 Crore was sought to be disputed purportedly on the ground of on the non-completion of the assigned tasks under the Subject Contracts. The said notice was followed up by another demand notice dated 01/03/2021 wherein against in response the Corporate Debtor did not dispute the liability and only sought time to respond on account of the COVID restrictions. Thus, according to the Applicants herein, it is unambiguously clear that, the CRPS, which became due and payable on 26/08/2018, continues to remain due and payable due and payable as Matix has continued to default in its obligation of remitting the redemption proceeds aggregating to Rs. 310 Crore on one or the other frivolous grounds.

It is further claimed that the amount of Rs. 310 Crore is due and payable by Matix to EPC squarely falls within the definition of “debt” as defined under Section 3(11) of the I&B Code. Since the 25 Crore Preference Shares were issued by the Corporate Debtor against a part of the outstanding receivables i.e., Rs. 250 Crore, which were due to paid to EPC under the Subject Contracts, it amounts to infusion in the Matix by EPC and hence a “loan” – redeemable after 03 (three) years. Hence, the aforesaid “debt” is undisputedly a “financial debt” under Section 5(8)(f) of the I&B Code.

It is argued that the said “financial debt” is an admitted debt/ liability in the books of account of Matix as recent as that Financial Year 2020-21 – and admitted otherwise also as mentioned above. Therefore, non-payment of the aforesaid “Financial Debt”, which had become due and payable since 28/08/2018, amount to “default” as defined under Section 3(12) of the I&B Code.

Further, it is argued that while CRPS dues of Rs. 310 Crore were never disputed by Matix, the balance amount of Rs. 322.72 Crore, which continued to remain outstanding, were neither acknowledged nor paid by Matix and in most high handed and fraudulent manner Matix has refused to acknowledge the liability towards the balance amount and the said balance has been miraculously wiped off from the books of accounts to the much chagrin of not only the Applicant (but also all the stakeholders). That such conduct on part of Matix has caused a huge loss to the stakeholders of EPC which is under liquidation.

The Ld. Sr. Counsel for the Financial Creditor during his argument relied upon the various Statutory Provisions and cited decisions rendered by various Courts, which are as follows:

a. Preference shares are a ‘financial debt’ having ‘commercial effect of borrowing’ in terms of Sec. 5(8)(f) of the I&B Code:

HDFC Ventures Trustee Company Limited v. Kakade Estate Developers Private Limited, Company Petition (IB) No. 747 of 2022 wherein the Hon’ble NCLT, Mumbai Bench while considering the issue of an investment in the form of Compulsorily Convertible Preference Share (para 4.1 of the Judgment), held that the payment of money by the Applicant to the Corporate Debtor towards subscription of CCPS in terms of ‘Exit Route’ is a Financial Debt in terms of section 5(8)(f) of the Code, the liability in respect of such debt arising from the guarantee/ indemnity also squarely falls under ‘Financial Debt’(para 4.13.2 of the Judgment). Pertinently, in the instant case, the CD is directly liable to make repayment of dues under CRPS and therefore, the relation of financial creditor and debtor is a direct one.

b. Judgments passed in the context of Companies Act, 2013 or 1956 cannot be relied upon to infer the purport, meaning and ambit of provisions contained in the Code:

c. Balance sheets and financial statement are mandatory to be filed by a company, and therefore, the entries made therein qua admission and liability of debt ought to be considered:

Juxtaposed to the arguments that statutory provisions of Companies Act should not be looked into, the following decisions were referred to;

The Ld. Counsel for the Financial Creditor has proposed that of Mrs. MEGHA AGRAWAL, having Registration no.: IBBI/IPA-001/IP-P-01456/2018 -2019/12272, of 906, I-thum, Sector 62, Noida – 201301, Email ID: [email protected], as Interim Resolution Professional (IRP) to conduct the CIR process of the Corporate Debtor (Matix). The Written Consent from Mrs. MEGHA AGRAWAL is annexed as Annexure “C” at Pages 64-68 of the Company Petition.

Per contra, the Respondent would refute the claim in Reply Affidavit thus:

The Petitioner (EPC through its Liquidator) under Section 7 of the I&B Code filed the Company Petition is claiming a total amount of Rs. 310 Crore alleged to be in default. It is alleged by the Respondent that the claim of the Petitioner is on account of alleged non-redemption of Rs. 25 Crore Cumulative Redeemable Preference Share (“CRPS”) issued by the Respondent to the Petitioner by conversion of an Operational Debt into Preference Shares by mutual agreement between the Petitioner and Respondent.

That the CRPS issued and allotted by the Respondent to the Petitioner was pursuant to conversion of receivable of the Petitioner, i.e., Operational Debts payable by the Respondent to the Petitioner, into CRPS.

That there was never any financial debt advanced by the Petitioner to the respondent. The transaction between the parties was a contract under which the Petitioner was obligated to construct a green field fertiliser complex and handover the same to the respondent after completing installation, commissioning and issue final acceptance certificate. Therefore, the receivables of the Petitioner, if any, from the Respondent, at the highest, would be an Operational Debt under the I&B Code.

The Ld. Counsel for the Corporate Debtor further argues that the allegation made by the Petitioner regarding the failure of Respondent to redeem the CRPS on the date of maturity tantamount to a default in payment of financial debt, is patently erroneous. Section 55 of the Companies Act, 2013 stipulates that a Preference Share can be redeemed by a company only out of profits of the company available for distribution of dividend, or out of the proceeds of fresh equity raised by the company for redemption of the preference shares, whereas, the Respondent has not recorded profits or raised fresh equity at the relevant time for the purpose of redemption. Therefore, there was no obligation on the Respondent to redeem the CRPS issued to the Petitioner. In absence of any such obligation the Petitioners cannot claim that the Respondent is in default.

The Ld. Counsel for the Corporate Debtor further alleges that the instant Company Petition is nothing but a brazen chance litigation being attempted by the Liquidator of the Petitioner which is contrary to the very scheme, spirit and purpose of the I&B Code.

That pursuant to the Order dated March 03, 2022 passed the Ld. NCLT Mumbai Bench in I.A. No. 375/2022 in CP(IB) No. 1832/MB/2017 filed by the Liquidator of the Petitioner, the EPC through its Liquidator filed this present Company Petition under Section 7 of I&B Code, whereas the Observation made by the Ld. NCLT Mumbai in the Order dated March 03, 2022 is contrary to the truncation documents between the parties and also contrary to the settled position of law that a Preference Shareholder is not a Financial Creditor within the scope of Section 5(7) of the I&B Code and as such not binding on this Bench. The NCLT Mumbai Bench could not have pre-judged the dispute while granting permission to a liquidator to initiate proceedings under Section 33(5) and 35(1)(k) of the I&B Code.

At hearing, the Ld. Senior Counsel, Mr. Arun Kathpalia appearing for the Corporate Debtor would place the following facts germane to the issue raised in the Application:

EPC Contracts between the Parties and failure of the Petitioner to complete scope of works:

a. Onshore Supply Contract dated July 29, 2010;

b. Engineering & Construction Contract dated July 29, 2010; and

c. Offshore Supply Contract dated August 20, 2010. collectively referred to as the “EPC Contracts”.

Conversion of Receivables of Petitioner under the EPC Contracts into Cumulative Redeemable Preference Shares (CRPS)

The Ld. Sr. Counsel for the Corporate Debtor (Respondent) in the course of hearing relied upon the various Statutory Provisions and Judgment passed by various Courts, which are as follows:

The Ld. Senior Counsel for the Corporate Debtor contends that the Petitioner (EPC through its Liquidator) under Section 7 of the I&B Code filed the Company Petition is claiming a total amount of Rs. 310 Crore alleged to be in default. It is alleged by the Respondent that the claim of the Petitioner is on account of alleged non-redemption of Rs. 25 Crore Cumulative Redeemable Preference Share (“CRPS”) issued by the Respondent to the Petitioner by conversion of an Operation Debt into Preference Shares by mutual agreement between the Petitioner and Respondent and it is a settled position of law that preference Shareholder is not even a creditor of issuing company. The Petitioner is not a Financial Creditor qua the Respondent within the meaning of Section 5(7) of the I&B Code. The Ld. Counsel for the Respondent further alleges that the CRPS issued and allotted by the Respondent to the Petitioner was pursuant to conversion of receivable of the Petitioner, i.e., Operational Debts payable by the Respondent to the Petitioner, into CRPS. It is a settled position of law that once a debt has been converted into shares, it irrevocably loses all characters of debt.

Ld. Sr. Counsel relies upon the following judgments supporting his contention as:

c. There is no obligation to redeem preference shares when the company has not made any profit and dividend has not been declared

The instant Petition under Section 7 of Code is maintainable at the instance of a preference shareholder and the claim of Financial Creditors fall under ‘financial debt’:

a.) CRPS in the instant case is in the nature of an amount having commercial effect of borrowing, as provided under Sec. 5(8)(f) of the Code, and therefore, a “financial debt”. The agreed terms and conditions would be evident from the letter dated 28.04.2015 whereby CD approached FC with a request to consider converting the amounts outstanding from CD under EPC Contract as “Subordinated Debt” and mentioned that this would be a bridge arrangement. CD also committed that as and when [CD] raise equity, the same will be earmarked for paying of this subordinate debt of [FC]. The said terms and conditions were accepted by FC vide Letter dated 08.05.2015 issued by FC, forming a contract.

b.) Pursuant to the said contractual arrangement, CD allotted 25 Crore Cumulative Redeemable Preference Shares (“CRPS”) to FC aggregating to INR 250 Crores, with the following terms:

c.) Essence and / or substance of the contract / arrangement unequivocally agreed between the parties, was that, firstly the dues owed by CD to FC would be converted into a ‘subordinated debt’, and secondly, the debt would be repaid upon raising of equity by CD which would be earmarked for the said purpose. Issuance of CRPS was only the form through the arrangement was implemented.

d.) The allotment letter dated 26.08.2015 for issuance of CRPS read with the contract entered between CD and FC by virtue of terms proposed by CD vide letter dated 28.04.2015, agreed to by FC vide letter dated 08.05.2015, makes it apparent that firstly, the ‘subordinated debt’ was transacted through issuance of CRPS, and secondly, the amount under CRPS was repayable from the equity raised by CD within a period of three years at CD’s option or at the end of three years. Undisputedly, as per the financial statements of the CD, it did raise money from equity after allotment of CRPS in FY 2015-16. However, it never fulfilled its contractual obligation to repay the CRPS, either during the tenure of three years or even at the end of three years.

e.) Further, it is an admitted and undisputed fact that,

As such, it is evident that there is a financial debt and there is a default. In these circumstances, the Application filed by FC should be admitted

f.) Further, the question of whether preference shares are a ‘financial debt’ is not more res integra as the Hon’ble NCLT, Mumbai Bench in HDFC Ventures Trustee Company Limited (supra) (para 4.13.2) while considering the issue of an investment in the form of Preference Share, held that the CCPS transaction had the commercial effect of borrowing.

g.) The judgements relied upon by the CD to argue that preference shares are not a ‘financial debt’ are all judgments passed in winding up proceedings under 1956 Act, in writ petitions regarding tender matter and under tax statute and are, thus, completely inapplicable in the instant case in view of Gujarat Urja (supra) and Moser Baer (supra).

h.) The following judgments relied on by CD are not applicable in the instant case:

The argument of the Corporate Debtor that once debt is converted into shares, it leads to extinguishment of debt and loses the character of debt, is contrary to law and inapplicable in case of redeemable preference shares:

a.) The equity shares, unlike redeemable preference shares, are not liable to be redeemed or repaid. Therefore, the judgments relied upon by the CD to argue that the conversion of debt into shares extinguishes the debt, pertain to equity shares are inapplicable.

b.) Further, it is argued that the three judgments in Commissioner of Income Tax v. Rathi Graphics Technologies Limited reported in 2015 SCC Online Del 14470, para 15; Canara Bank v. IVRCL Limited reported in 2019 SCC Online NCLT 5327, para 32 and Karnataka State Financial Corporation v. Namasthe Exports Private Limited reported in 2020 SCC Online NCLT 3185, para 7 were all in respect of equity shares and not preference shares. Therefore, any reliance upon such judgments to decide the present case is irrelevant.

c.) The fourth judgment reported in Anup Jhunjhunwala v. Adea Powerquips Private Limited reported in 2023 SCC Online NCLT 7, para 23, 24, 27 is not applicable in the instant case as the said judgment was under Section 9 of the Code, and thus, had nothing to do with preference shares.

To counter the contention of the CD that it has no obligation to redeem preference shares as the CD has not made any profit or has not declared dividend, and as such redemption of CRPS is barred by Section 55 of Companies Act, 2013:

a.) Section 55 of the 2013 Act only provides as to the manner in which preference shares can be redeemed i.e., out of the profits of the company or out of the proceeds of a fresh issue of shares made for the purpose of such redemption.

b.) In the instant case, the preference shares were to be redeemed not out of the profits, but out of the proceeds of fresh issue of shares, which contractual arrangement is evident form the letter dated 28.04.2015 issued by the CD and acceptance letter dated 08.05.2015 issued by the FC. The CD had already committed for such equity to be earmarked for paying of this subordinate debt of FC.

c.) It is an admitted position that fresh issue of equity was made after the issuance of the CRPS and the same would be evident from the balance sheets of the CD. In spite, the CD defaulted in making redemption of CRPS. The argument of the CD that the equity was raised prior to maturity of the CRPS is also of no relevance as the terms and conditions on which CRPS was issued clearly mentions that the equity which would be raised will be earmarked for paying of the subordinate debt of [FC] and in any event, the terms clearly provided that the CD at its sole discretion may redeem CRPS at any time within 3 years from the date of issue.

d.) Further, the reliance placed by CD on MFR D’Crux v. K N Vishwanathan reported in (1941) 54 LW 745, AIR 1941 Mad 806, pg. 748] is as the said judgment merely deals with a situation wherein redemption was required out of profits, and not out of fresh issue.

The contention of CD that the entries in the balance sheets were reflected as the Accounting Standards required the CD to do so and the same cannot override statute:

a.) The contention of the CD that Accounting Standards cannot override the statute is untenable as the statute i.e., the 2013 Act itself provides that Accounting Standards should be followed. The judgments relied on by the CD in Union of India v. Assn. of Unified Service Providers of India reported in (2020) 3 SCC 525, para 65, 76, Cyrus Investment Pvt. Ltd. v. Tata Sons Ltd. and Ors. Reported in 2017 SCC Online NCLT 77, para 57-60 and Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax reported in (1972) 3 SCC 252, para 8 are not appliable. The statute provides that the financial statements of the company should provide true and fair picture of the affairs of the company. The statute also provides that if there is deviation from the Accounting Standards, reasons should be assigned for such deviation.

b.) The entries in the balance sheet in respect of CRPS in the instant case, being “unsecured loan” is correct, true and fair, and therefore no reason was called for any deviation from the Accounting Standards. In Bishal Jaiswal (supra) (para 22), the Hon’ble Supreme Court held that filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory and any transgression is punishable by law. Further, there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission. As such, the admission of the dues in relation to CRPS as being an “unsecured loan” is true and fair admission of the liability of CD. Therefore, for the CD to argue that such mandatory prescription under the Act recognized by judgments of the Hon’ble Supreme Court, has no bearing, would render the 2013 Act and the said judgments otiose.

c.) Further, since the equity was admittedly raised by CD, as also reflected in the balance sheet of the CD, the said amount had become due and payable in terms of Section 55(2) proviso of the 2013 Act.

The contentions of the Corporate Debtor that the letters dated 28.04.2015 and 08.05.2015 cannot be relied on in view of Section 91 and 92 of the Indian Evidence Act is contrary to the stand taken by the CD and factually incorrect:

a.) CD has, itself, relied upon letter dated 28.04.2015 and the said letter was filed by CD as ‘Annexure – L’ to its Affidavit-in-Reply. The terms and conditions on which FC agreed to convert a part of its outstanding dues into CRPS and CRPS were issued would be evident from the said letter dated 28.04.2015 and acceptance of the said terms by FC is evident from the letter dated 08.05.2015. Therefore, for the CD to argue that the very contract and its terms entered between the parties, being the said letters, should not be looked into, is completely malicious and incorrect. The argument of CD to look into the form in disregard of the substance of contract is unknown to law, and therefore, deserves to be rejected.

b.) Further, the purported bar under Section 91 and 92 of the Indian Evidence Act is inapplicable in the instant case as the said provision, in fact, requires the content of the contract entered through the said letters to be taken into account, which are in consonance and not at variance with the allotment of CRPS by CD to FC vide letter dated 26.08.2015.

The contention of the CD that CRPS was in the nature of investment, and hence, not a ‘financial debt’ is a position contrary to the Code

a.) It is submitted that the Hon’ble NCLAT in Nikhil Mehta and sons v. AMR Infrastructure, CA (AT) (Ins) No. 7 of 2017 (para 20 to 24) and Shailesh Sangani v. Joel Cardaso and Ors., CA (AT) (Ins) No. 616 of 2018 (para 6 & 9), has clearly held an investment to be a ‘financial debt’. Therefore, such an argument of CD in not well found in the legal position under the Code.

Submission made by Ld. Sr. Counsel for the Corporate Debtor in Sur-Rejoinder in replying the Rejoinder of the Financial Creditor:

The Ld. Sr. Counsel for the Corporate Debtor admits that the Respondent has issued to the Petitioner 25 crores CRPS of Rs. 10% having a coupon rate of 8% pursuant to conversion of an operational debt under a contract for services. The Petitioner has received and accepted such share certificates without any demur or objection. With such allotment of shares (CRPS) on 30.07.2015, the financial statements of the Respondent for FY 2015-16 duly reflect such allotment in the share capital in accordance with the applicable GAAP accounting standards. The Petitioner has never offered to return the said shares or applied for the cancellation thereof. The CRPS held by the Petitioner is, as per the Petitioner’s own records, including its audited financial statements, an “investment” in the Respondent. The Petitioner has exercised rights as a shareholder after claiming redemption of the CRPS by participating in shareholder meetings. In the circumstances, the Petitioner cannot claim to be both shareholder and creditor of the Respondent.

The Ld. Sr. Counsel for the Corporate Debtor argues that:

a. It is the case of the Petitioner that the CRPS is an instrument “having the commercial effect of borrowing in terms of section 5(8)(f) of the I&B Code”. This submission is erroneous, untenable and contrary to the very notion of a preference share which forms part of the share capital of the company and is in no manner a form of debt or financial debt.

b. It is an admitted fact that the Petitioner is a preference shareholder of the Respondent having 25 crores shares.

c. The preference shareholder has all the rights of an equity shareholder and in addition thereto has certain preferential rights to share in the profits available for dividend and for return of capital in priority to that of an equity shareholder.

d. ‘Preference Shares’ are not defined, or described or discussed in the I&B Code which itself will demonstrate that a claim based on non-redemption of ‘Preference Shares’ cannot form the basis of a claim under Section 7 of I&B Code.

e. While a preference share is not defined under the I&B Code, one must then look into its definition and meaning assigned to preference shares under the Companies Act. Companies Act is a complete code enacted to consolidate and amend the law relating to companies and the legislature was conscious of this fact in drafting the I&B Code. It is accordingly that Section 3(37) of the I&B Code states that “words and expressions used but not defined in this Code but defined in the …Companies Act, 2013(18 of 2013) shall have the meanings respectively assigned to those Acts.” Therefore, the definition and relevant provisions of the Companies Act must be looked into in order to determine whether a preference share is an instrument “having the commercial effect of borrowing” as contended by the Petitioner.

f. Thus, the only difference between an equity share and a preference share is essentially that a preference shareholder has a preferential right to – (a) a share in the profits of the company that are available for dividend; and (b) return of capital of the company in priority to equity shareholders in the event of the company’s liquidation.

g. As per Section 2(55) of the Companies Act, 2013, “every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository”, whether equity shares or preference shares is defined as a member of the company.

h. Therefore, it is an indisputable position that the Petitioner who was issued and allotted 25 crores CRPS having face value of INR 10/-each is a member/shareholder of the Respondent and that the CRPS are preference shares within the meaning of Section 43 of the Companies Act that form part of the share capital of the Respondent. The instrument/ share certificate in respect of the CRPS issued to the Petitioner is at Page 858 of the Company Petition at Vol-6.

a. CRPS can be redeemed only from specific sources of funds unlike a debt which is an unconditional obligation to repay.

b. In support of the proposition that the issuing company cannot resort to any other source of funds to redeem preference shares or pay the dividend attached thereto including for instance, borrowing funds for the purpose of redemption, reliance is placed on M.F.R. D’Cruz v/s K.N. Vishwanathan (1941) 54 LW 745, AIR 1941 Mad 806 (pg. 748).

c. This is for the simple reason that redemption of preference shares in any manner other than as specified under Section 55 of the Companies Act would tantamount to a preferential payment to shareholders in priority to creditors of the company, which would be in contravention of law, specifically even the waterfall under Section 53 of the I&B Code which prohibits such an act. When paid out of profits, the lenders/ financial creditors are not affected, which highlights that CRPS is not a debt.

d. Admittedly, the circumstances requiring redemption of the CRPS in terms of Section 55 of the Companies Act has not occurred namely: (A) The Respondent has not earned profits and therefore has not declared any dividend since August 2018 when the CRPS matured. (B) The Respondent has not raised any equity for the purpose of redemption of any preference shares since August 2015 when the CRPS was issued and allotted to the Petitioner. In fact, the Respondent has not raised any equity after August 2018, when the CRPS matured.

a. It is the Petitioner’s case that the arrangement between the parties was allegedly to convert the receivables under the EPC Contract into a form of subordinated debt/ extended credit/ bridge arrangement. The Petitioner contends that the letters dated 28.04.2015 (Letters exchanged between the Respondent and the Petitioner) and the letter dated 08.05.2015 (contending that the receivables under the EPC contract were to be converted into subordinate debt or extended credit/bridge arrangement) constitute the complete agreement between the parties and the “substance” of the transaction.

b. In the Financial Year 2015-16, CRPS reflects as an “investment” made by the Petitioner in the Respondent under the category of ‘non-current investment’ in the audited financial statement of the Petitioner [Annex A @ Page 7/29/64 of Additional Affidavit]

c. The second proviso to Section 47(2) of the Companies Act, suggest that upon the happening of certain events, preference shareholders will have a right to vote on all the resolutions placed before the company. Therefore, preference shareholders also being entitled to voting rights on par with equity shareholders cannot be deemed to be creditors of the Company.

d. In fact, the Petitioner has on multiple occasions exercised its right as a shareholder of the Respondent.

e. It is a settled position of law, as also enshrined in Section 91 of the Indian Evidence Act, 1872, that a written contract must be interpreted on its terms alone and any other evidence to interpret the same, must be excluded. In this regard, the Respondent seeks to rely on the following judgments:

a. At Page 14 of the Company Petition, the Petitioner describes itself to be an ‘Associate Company’ of the respondent No.1.

b. The relationship between the parties was contractual, the Petitioner would not have described itself to be an Associate Company of the Respondent.

c. The Petitioner describes itself as an Associate Company by reason of being a shareholder of the Respondent thereby clearly disowning any debtor-creditor relationship between the parties.

a. The claim of the Petitioner arises on the basis of the Cumulative Redeemable Preference Shares (CRPS). It is a settled position of law that, the said CRPS are part of the share capital of the issuing company and not a form of financial debt.

b. Section 5 (8) of the I&B Code defines and lists out the forms and categories of ‘Financial Debt’. The definition of Financial Debt being a “means and includes” definition is inclusive and therefore there can be no form or species of Financial Debt outside of Section 5(8) of the I&B Code. ‘Preference shares’ are not a form of financial debt listed in sub-clauses (a) to (f) of Section 5(8) of the I&B Code.

c. The case of the Petitioner that the CRPS is an instrument “having the commercial effect of borrowing in terms of section 5(8)(f) of the I&B Code” is baseless and not supported by any law or precedent in support of the proposition that ‘Preference Shares’ are financial debt ‘having the commercial effect of borrowing’.

d. It is the Petitioner’s case that vide letter dated 24.08.2018 issued by the Respondent to the Petitioner offering a set-off of the CRPS redemption against the balance amounts payable by the Petitioner to the Respondent is an admission and acknowledgment of liability by the Respondent. [Annex. K @pg. 840 of CP-Vol-6]

a. Under Section 53 of the I&B Code, repayment of “debt” to various stakeholders in sub-clauses (b) to (e) is followed by sub-clause (f) providing for payment of “any remaining debts and dues.”

b. It is only thereafter that sub-clauses (g) and (h) provide for distribution to preference shareholders followed by equity shareholders. In other words, preference shareholders and equity shareholders would be entitled to payment only after all remaining debts and dues of the company are discharged.

a. In the present case, no incidence has occurred for redeeming the CRPS. The Respondent has neither had profits available for dividend nor proceeds from fresh issuance of shares which was made for the purpose of redemption at the time of maturity of the CRPS. The Respondent was incurring losses at the time of maturity of the CRPS and has been incurring losses as can be seen from the balance sheets of the Respondent: -

b. The Petitioner’s contention is that the Respondent has earned profit before tax of INR 562.83 crores in FY 2021-22 and is therefore liable to pay dividend in respect of the CRPS. This submission of the Petitioner is incorrect and contrary to the fourth proviso of Section 123(1) of the Companies Act which states that “no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.” As per the audited balance sheet for FY 2021-22, that the Respondent has an accumulated loss of INR 867.71 crores and therefore the Respondent is not permitted to declare any dividend. [Annex. C @ pg. 74/88 “other equity” @ pg. 91 of Sur Rejoinder-Vol.1].

c. The Petitioner has sought to rely on the judgment of Moser Baer Karamchari Union v/s Union of India 2023 SCC Online SC 547 (para 56) which is a judgment on whether the amount to be paid to the workmen should be as per the waterfall mechanism under the I&B Code or the Companies Act, to state that the I&B Code is a complete code and cannot be compared to the earlier regime. The Petitioner has also sought to rely on the Hon’ble Supreme Court judgment of Gujarat Urja Vikas Nigam Limited v/s Amit Gupta & Ors. (Civil Appeal No. 9241 of 2019) in respect of the interpretation of Section 60(5) of the I&B Code to say that when a new legislation is enacted then an old legislation which was sought to be replaced, cannot be given a back door entry.

d. The reliance of the Petitioner on the above-mentioned judgments is ex-facie misplaced. The Respondent is relying on the Companies Act in respect of provisions relating to the CRPS which is only governed under the Companies Act and not under the I&B Code. Further, the I&B Code under Section 3(37) specifically stipulates reliance on the Companies Act in respect of such words and expressions which are not defined in the I&B Code.

e. For the proposition that 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, reliance is placed on: -

a. Radha Exports v/s KP Jayaram (2020) 10 SCC 538 (paras 42); and

b. Aditya Prakash Entertainment Pvt. Ltd. v/s Magikwand Media Pvt. Ltd. 2018 SCC Online Bom 551 (para 9)

c. State Bank of India v/s Alstom Power Boilers Ltd. & Ors. 2003 SCC OnLine Bom 321 (para 25)

d. Hindustan Gas & Industries Ltd. v/s Commissioner of Income Tax [1978 SCC OnLine Cal 410 (paras 4, 10, 11, 12, 13)]

f. In fact, in the case of Tata Capital Financial Services Limited vs. Mcnally Bharat Engg. Company Limited [Order dated 10.02.2020 in C.P. (I.B.) No. 843/KB/2019] (“Mcnally Bharat”) a petition under Section 7 of the I&B Code filed by a holder of CRPS seeking to initiate CRPS on the basis that failure to redeem the CRPS constitutes default in payment of a financial debt was rejected by a coordinate bench of the Hon’ble National Company Law Tribunal Kolkata.

g. It is therefore an incontrovertible and settled position of law both under the winding up regime of the Companies Act, 1956 and under the I&B Code that a holder of CRPS can under no circumstance seek to initiate insolvency proceedings against the issuing company. The decision of a coordinate bench of this Hon’ble Tribunal in Mcnally Bharat, as stated above, in categorically holding that a CRPS is not a financial debt under Section 5(8) of the I&B Code is binding on this Bench. By the principle of stare decisis, even in the event this Hon’ble Bench is in disagreement with the ratio with McNally Bharat, it cannot allow the present Company Petition and the only option available to this Bench would be to refer the issue to a larger bench, as held by the Hon’ble National Company Law Appellate Tribunal in the case of DLF Phase-IV Commercial Developers Limited and Ors. [CA(AT)(Ins)No. 180 of 2019 dated 19.08.2019 (para 4)].

h. For the proposition that a debt upon conversion into shares is extinguished, reliance is placed on: -

a. The Petitioner has sought to rely on the financial statements of the Respondent, which have been prepared as per Ind AS 32, to contend that a financial instrument or financial liability as per Ind AS amounts to a financial debt under the I&B Code, notwithstanding the applicable provisions of law. It is also the case of the Petitioner that the balance sheet of the Respondent for FY 2018-19 refers to the fact that the Respondent has not redeemed the CRPS and does not state that the Respondent does not state that it has not earned profit. [Annex. D @ pg. 162 of the Additional Affidavit of the Respondent] Reliance has been placed on para 22 and 48 of the judgment of the Hon’ble Supreme Court in ARCIL v/s Tulip Star Hotels Limited & Ors. (Civil Appeal No. 84-85 of 2020) in this regard. This contention is untenable.

b. An instrument/ agreement has to be seen for itself to determine whether it constitutes a Financial Debt or not. Accounting Standards cannot determine this for many reasons. Consider the present case, admittedly till FY 2016-17, this very Preference Shares were reflected under the head of share capital [Annex P pg. 72 at pg. 88 of Affidavit in Reply]. Thereon, from 2017 onwards, without there being any change in the terms or nature of the CRPS, only because of the change in the accounting standards in the financial statements, the CRPS are classified under a different heading.

c. It is also the Petitioner’s case that the balance sheet of the Respondent, having been prepared in accordance with the relevant provisions of the Companies Act, present a true and fair picture of the state of affairs of the Respondent and that the same shows that the Respondent is allegedly indebted to the Petitioner. It is also the case of the Petitioner that the auditors have applied themselves while preparing the balance sheets for the Respondent and have rightly determined the CRPS as a liability.

d. In the Balance Sheet of the Respondent for FY 2015-16 [Annex P pg. 72 at pg. 88 of Affidavit in Reply], the CRPS are shown as part of share capital in the audited financial statement of the Respondent.

e. The CRPS are also shown as investment in Financial Statement for FY 2015-16 of the Petitioner. [Annex D @ Pg. 7/29/64 of Additional Affidavit of the Respondent].

f. In the Balance Sheet of the Respondent for FY 2016-17 – [Annex B @ 92/121/127/129/ of Additional Affidavit] as a result of change in accounting standards in the Financial Year 2016-17 from GAAP to Ind AS, the CRPS were transferred from share capital to financial liability.

g. Treatment of an instrument in the financials as per applicable accounting standards do not determine the legal liability/ obligation of the issuing company.

h. The Petitioner has sought to rely on the financial statements of the Respondent, which have been prepared as per Ind AS 32, to contend that a financial instrument as per Ind AS amounts to a financial debt under the I&B Code.

j. Further, in 2016, the Ministry of Corporate Affairs issued the Companies (Auditor’s Report) Order, 2016 (“CARO”) which deals with matters to be included in the statutory auditor’s report. Clause 3(ix)(a) of CARO requires the statutory auditor to mandatorily include a statement as to “whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender”. Accordingly, the statutory auditors of the Respondent have in their statutory audit report for FY 2018-19 onwards provided the lender wise details in respect of loans or borrowings on which the Company has defaulted during the relevant year and most pertinently does not include the name of the Petitioner or any reference to the CRPS. Had the liability under the CRPS been on the same footing as a liability under a ‘financial debt’ owed to a bank/ financial institution, an amount of INR 310 crores would have been reported to be in default under the CRPS in the statutory auditor’s report.

k. For the proposition that treatment under prescribed accounting standards do not determine the nature of an instrument or the liability arising thereunder reliance is placed on:

l. In view of the above, the mere classification of the CRPS under Financial Liability in the Balance Sheet of the Respondent for the purposes of compliance with the classification norms of Ind AS does not render the liability under the CRPS as a financial debt for the purposes of I&B Code and reliance of the Petitioner. Therefore, the reliance by the Petitioner on the balance sheets of the Respondent to contend that there is a financial debt is misplaced and contrary to law.

Ld. Senior Counsels/ Ld. Counsel for the parties were heard, records and written arguments perused, implications of the statutory provisions and judicial pronouncements considered.

The issues that have cropped up for determination are as follows:

We have noted that it is the case of the Financial Creditor that CRPS is an instrument having the commercial effect of borrowing in terms of Section 5(8)(f) of the I&B Code. The Section 5(8)(f) of the I&B Code provides that “Financial Debt” refers to a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. The Financial Creditor claimed that the default amount of Rs. 310 Crore is due and payable by the Corporate Debtor (Matix) to the Financial Creditor (EPC) falls within the definition of “Debt” as defined under Section 3(11) of the I&B Code. It is an admitted fact that the petitioner is a preference shareholder of the Respondent having 25 Crores shares and the preference shareholder has all the rights of an equity shareholder and in addition thereto has certain preference rights to share in profits available for dividend and for return of capital in priority to that of an equity shareholder.

It is evident that ‘Preference Shares’ are not defined in the I&B Code. Therefore, one must then look into its definition and meaning assigned to preference shares under the Companies Act. Companies Act is a complete code enacted to consolidate and amend the law relating to companies and the legislature was conscious of this fact in drafting the I&B Code. It is accordingly that Section 3(37) of the I&B Code states that “words and expressions used but not defined in this Code but defined in the …Companies Act, 2013(18 of 2013) shall have the meanings respectively assigned to those Acts.” Therefore, the definition and relevant provisions of the Companies Act must be looked into in order to determine whether a preference share is an instrument “having the commercial effect of borrowing” as contended by the Petitioner.

Further, Section 43 of the Companies Act, 2013 defines the two types of shares that constitute share capital namely equity share capital and preference share capital as follows:

It is explicit that in comparison with an equity shareholder, a preference shareholder has a preferential right to – (a) a share in the profits of the company that are available for dividend; and (b) return of capital of the company in priority to equity shareholders in the event of the company’s liquidation. As per Section 2(55) of the Companies Act, 2013, “every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository”, whether equity shares or preference shares is defined as a member of the company. The Petitioner who was issued and allotted 25 crores CRPS having face value of INR 10/-each is thus a member/shareholder of the Respondent and the CRPS or the preference shares within the meaning of Section 43 of the Companies Act, 2013 form part of the share capital of the Respondent.

Further, Section 47 of the Companies Act 2013 reads which is reproduced verbatim as:

Thus, a Preference Shareholder is a Member and Shareholder of a company who is also entitled to enjoy voting rights in every resolution placed before the company.

Further, the Section 55 of the Companies Act envisages that Preference Shares can only be redeemed out of – (a) the profits of the company which would otherwise be available for dividend; or (b) the proceeds of a fresh issue of shares made for the purpose of such redemption. Section 55 of the Companies Act, 2013 defines the “Issue and redemption of preference shares”, which are reproduced verbatim as below:

Thus, Section 55 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. Thus, shareholders cannot receive any payment before the debt of the company is fully discharged, unless preference shareholders are paid out of dividend/ profits of the company and thus, 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. Therefore, a Preference Shareholder cannot step into the shoes of a creditor of the Company unless their Preference Shares become redeemable in above terms.

We have also noted the following Statutory Provisions: Section 2(55) of the Companies Act, 2013 defines “Member” as under:

Further, Section 3(11) of the I&B Code defines “debt” as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” Thus, if payment against CRPS is not due, no liability can be said to arise. Further, Section 3(12) of the I&B Code defines “default” as “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be”. The necessary corollary would be that unless CRPS is payable, non-payment against CRPS cannot be termed as a default.

Further, Section 7 (1) of the I&B Code envisages that “a financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred” and it is a settled law that existence of a debt and default is sine qua non to maintain an application under Section 7 of I&B Code, 2016. In the event, no payment (debt) is due, no default is established.

The petitioner has referred to us the Balance Sheet and Financial Statement to contend that Respondent has earned profit and therefore it was obliged to issue dividend whereas their right to seek such issuance arose in 2018. The Balance Sheet of 2018-19 to 2020-21 manifests losses incurred and the 4^th 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”.

Whether an Application under Section 7 of I&B Code filed by a Preference Shareholder is maintainable: We have already discerned that 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, for the purpose reliance is placed on: -

a. Radha Exports v/s KP Jayaram (2020) 10 SCC 538 (paras 42); and

b. Aditya Prakash Entertainment Pvt. Ltd. v/s Magikwand Media Pvt. Ltd. 2018 SCC Online Bom 551 (para 9)

c. State Bank of India v/s Alstom Power Boilers Ltd. & Ors. 2003 SCC OnLine Bom 321 (para 25)

d. Hindustan Gas & Industries Ltd. v/s Commissioner of Income Tax [1978 SCC OnLine Cal 410 (paras 4, 10, 11, 12, 13)]

Further we rely upon the decision in Tata Capital Financial Services Limited vs. Mcnally Bharat Engineering Company Limited reported in MANU/NC/2656/2020 that:

Therefore, a Preference Shareholder is not a Financial Creditor unless the Preference Shares (here the “CRPS”) become due for redemption.

Such being the factual and legal position, we are constrained to hold that no case of any “debt” due to the Applicant and no existence of “default” on the part of Respondent within the meaning ascribed to the terms “debt” and “default” in the Code, is made out. In the aforesaid backdrop, we hold that this Petition, filed under Section 7 of IBC, 2016, is not maintainable.

Hence, we reject the prayer and accordingly dismiss this Company petition filed by EPC (Financial Creditor, herein). Liberty is however granted to the Petitioner to seek other remedies as may be available to it under any other law.

Urgent Certified copy of the Order, if applied for, be supplied to the parties, subject to compliance with all requisite formalities.