When Debt Turns into Capital Investment: The EPC v. Matix Lesson on Preference Shares and Section 55

The Hon'ble Supreme Court’s ruling in EPC Constructions India Ltd. v. Matix Fertilizers and Chemicals Ltd. (2025) clarifies that preference shares—however structured—remains part of a company's share capital, and cannot be regarded as "debt". Even if classified as “financial liability” under Ind AS 32, legal character under the Companies Act still governs enforceability. A cautionary tale for investors and creditors relying on redeemable or “put option” structures to secure repayment. 

The Case in Brief

In EPC Constructions (supra), the appellant had over ₹400 crores in receivables for project work. The appellant/ former operational creditor agreed to convert its dues into 8% Cumulative Redeemable Preference Shares (CRPS)—redeemable in three years.

When the respondent/ debtor failed to redeem, the appellant (then in liquidation), through its liquidator, filed a Section 7 petition under the Insolvency and Bankruptcy Code (IBC), claiming default on redemption. Both the NCLT and NCLAT dismissed the case, holding that preference shares are capital instruments, not debt, and therefore no default could arise under IBC. When an appeal was made before the Apex Court, it agreed with the views of the tribunal.

The Key Legal Point — Section 55 Matters

Under Section 55 of the Companies Act, 2013, redemption of preference shares can occur only out of:

• Profits available for dividend, or

• Proceeds of a fresh issue of shares made for that purpose.

If neither exists, redemption cannot happen—and no “default” arises in law. The holder remains a shareholder, not a creditor.

By agreeing to the CRPS structure, the appellant in the instant case lost its ability to claim as a creditor. What began as an operational debt was legally converted into share capital/ investment.

Debt vs. Preference Shares — Legal Consequences

Aspect	Operational Debt/ Loan	Preference Shares
Nature	Liability on the balance sheet	Part of share capital
Repayment Source	Contractual obligation	Only from profits or fresh issue proceeds (Section 55)
Enforceability	Legally recoverable; default creates IBC trigger	No enforceable “default” unless company can lawfully redeem
Return	Interest (even without profit)	Dividend (only if profit available)
IBC Status	Financial or operational creditor	Shareholder – not a creditor

Structured Preference Shares – Still Investment/ Share Capital

Many modern investment deals use structured preference shares with put or exit options to simulate debt-like features.

However, EPC v. Matix reinforces the following:

• Even if the preference shares carry fixed return, redemption date, or a put option giving the investor the right to “sell back” shares—
  → They remain governed by Section 55, not by contract law.

• If redemption cannot be effected from profits or new issue, the obligation is not a “debt”, and failure to redeem cannot trigger IBC.

So, a put option clause may give a contractual exit right but not a statutory guarantee to repayment akin to a creditor.

EPC’s mistake wasn’t in restructuring—it was in documenting it wrong.
By accepting preference shares, the company gave up creditor status and all insolvency rights.

Bad drafting turned a recoverable debt into non-redeemable instrument.
“Redeemable” is not the same as “recoverable.”

Drafting Takeaways

• Do not rely solely on “redeemable” or “puttable” language. Ensure repayment feasibility under Section 55. Since redemption becomes contingent, depending on profits or new issue, “debt” may never be payable.

• Consider convertible debt instead of preference shares if the intent is repayment, not investment.

• Document purpose clearly. If the intent is to defer payment (not to invest), record it as a debt restructuring, not a capital infusion.

• Avoid automatic debt-to-capital conversions, use optionally convertible debt instead.
  Once converted, your claim is an capital risk—not a recoverable receivable.