IBC – Vinod Kothari Consultants

Treatment of employee dues under IBC has always been a matter of debate. While various judicial precedents have interpreted the provisions of the Code (see discussion later), however, the dilemma may revive with the notification of Code on Social Security, 2020 (“Social Security Code”). The Social Security Code now speaks of retirement benefits being paid in accordance with the priority under IBC; while Courts in the past have ruled that retirement dues will have to be paid beyond the priorities under IBC. Obviously, there was no reference to IBC in the labour laws before. Now that there is an explicit submission to IBC, does it result in a different interpretation as to the payment of dues such as provident fund, gratuity, pension, etc?

In our view, it will be quite a long and costly way to try and get the reconciliation between the labour codes and IBC through jurisprudence; instead, whatever be the policy and intent of the lawmaker should be spelt clearly in the law itself, more so because a comprehensive amendment to the Code is imminent.

[A comparison of the provisions of Code on Social Security Code, 2020 with the erstwhile provisions of relevant Labour Laws is provided in the Annexure to this article]

A voice without a vote: IBBI proposes OCs as observers amongst unrelated FCs in CoC

November 26, 2025/0 Comments/in Insolvency and Bankruptcy, Resolution /by Staff

Team Resolution | resolution@vinodkothari.com

Where the CoC has no regulated financial entity and a single unregulated financial creditor holds over 66% of the voting share, effectively dominating all decisions, IBBI in its Discussion Paper dated 17th November, 2025 proposed that the five largest operational creditors will also be brought into the CoC meeting, giving them a seat and a voice in the discussions, even though they will not have voting rights.

Such operational creditors will be entitled to receive the notice, agenda and minutes of the meeting and may participate in deliberations. Notably, they cannot cast their vote in any of the agenda and merely attend the meeting as observers. However, the proposal suggests that the RP shall record their observations, if any, in the minutes.

The rationale behind such inclusion is that, in cases where the CoC does not have any regulated lender and an unregulated creditor effectively controls decisions with more than 66%, it raises a genuine concern about the quality and objectivity of CoC decision-making. Such a creditor may not have the financial or institutional expertise that banks and regulated entities typically bring to the process, and in some cases may even be a friendly or aligned party. This creates a risk that decisions may not withstand scrutiny and may dilute the credibility of what is otherwise treated as the CoC’s commercial wisdom.

However, the proposal does not fully take into account the following:

Whether possible under subordinate law: The Code already provides for exclusion of related party financial creditors from CoC. The Code does not permit further exclusions or inclusions to be specified by IBBI. The only scenario where IBBI regulations can step in is where there are NO financial creditors. Therefore, whether this proposed inclusion of operational creditors is possible by way of amendments in regulations, can be a point of discussion. Notably, the constitutionality and the “intelligibility” of the distinction between financial and operational creditors was discussed and settled in very early rulings of the SC on the Code – viz., Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors., Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors. In those rulings as also in the frame of the Code, the image of a CD under insolvency has been one who has multiple financial creditors, primarily banks. The structure of the Code does not realize that in practice, there are several outliers. There are situations where insolvency may be a design rather than a fait accompli. In such cases, there may be a so-called financial creditor who has been introduced to avoid the formation of a CoC with operational creditors. Hence, the concern that IBBI is trying to address is quite well appreciated, but the issue is – are these remedies possible without the main law being amended?
Regulated vs. unregulated financial creditors: The proposal seeks to distinguish between “regulated” vs. “unregulated” financial entities. The concerns as to quality, objectivity may still be there, as being a regulated entity does not guarantee these features. There are some 8000-odd NBFCs which are regulated. Technically, even the non-corporate moneylenders may also have registration under State money-lending laws and may claim to be regulated. The mere fact that a financial creditor is regulated does not ensure objectivity and transparency.

In fact, assume there is a single regulated entity holding the financial debt. The very fact that one entity has 66% share (that is, the voting share required to have decisions passed) in the admitted financial claims gives the creditor the right of complete control on the proceedings.

The inclusion of OCs without voting rights raises concerns about utility: Their presence adds no real decision-making power, calling into question the practical value of their participation. The only silver lining may be that as the minutes of CoCs will capture the observations of the OCs, the NCLT while approving the plan may have regard to the fairness or otherwise of the decisions of the CoC. Going by the weight of SC views that AAs do not have the right to question the commercial wisdom of the CoC, whether a solo-powered CoC’s decisions will also carry the same aura of commercial wisdom remains to be seen.
The core issue remains unaddressed: An unregulated financial creditor with over 66% voting share continues to dominate outcomes, while the OCs’ views are merely recorded without any mandatory impact on final decisions.
The proposal diverges from the BLRC’s foundational reasoning: The BLRC Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. This proposal thereby contradicts the BLRC framework.

In this regard, the BLRC Committee noted as follows:

“Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.”

Our Views:

Even though the intent behind such a proposal is noble, it may fail its desired objective.. The intent of this provision can succeed only if the rights of OCs are clearly laid down. Securing a seat in CoC meetings and a right to put forward their views may be a welcome step for bringing OCs into the process. However, the actual influence that OCs can exert as mere observers remains uncertain. Only with time will it become clear whether their inclusion practically alters decision making in CoC meetings or merely remains a symbolic entry.

Also read our detailed article titled “Subordination of Operational Creditors Under IBC: Whether Equitable” [Published on 26th July, 2018]

Other Proposals in the DP:

1. Mandate that the IM shall include the details of all allottees, including their names, amounts due, and units allotted, as reflected in the CD’s records, regardless of whether they have filed formal claims and require that the resolution plan provides for the treatment of such allottees.

2. Disclosure of receivables, JDAs and information on assets which are under attachment, should be mandatorily included in the IM

3. When the CoC recommends liquidation even though a compliant resolution plan of value greater than the liquidation value was received, the reasons for recommendation for liquidation shall be recorded and submitted in the application for liquidation to the NCLT.

Going Concern Sales in Liquidation – Ghosted or Alive?

November 19, 2025/0 Comments/in Insolvency and Bankruptcy, Resolution /by Staff

– Sikha Bansal, Resolution Division, Vinod Kothari & Company | resolution@vinodkothari.com

About the Amendment

The edifice of IBC is premised on value-maximisation, and thus, resolution has always been preferred over liquidation^[1]. Even in liquidation, the regulations and Courts have stressed and preferred on selling the entity/business as going concern (referred to as GCS)^[2]. However, IBBI, vide Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2025 (“Amendment”)^[3], has amended Liquidation Regulations omitting the option of GCS altogether from the liquidation process. Notably both the GCS options – one, sale of CD as a going concern (reg. 32(e)), and second, sale of business of the CD as a going concern (reg. 32(f)) – have been omitted.

Redeemable preference shares not debt under IBC

November 3, 2025/0 Comments/in Case laws, Insolvency and Bankruptcy, Resolution /by Staff

– SC reinforces the distinction between ‘debt’ and ‘share capital’ for the purpose of IBC

– Sourish Kundu | resolution@vinodkothari.com

Introduction

The Supreme Court in a recent judgement in the matter of EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited, has categorically clarified that holders of Cumulative Redeemable Preference Shares (“CRPS”) are classified as investors rather than creditors (more specifically, financial creditors) and are therefore not entitled to file for insolvency under Section 7 of the IBC, since non-redemption of these shares do not qualify as a “default” under the Code.

In an article titled “Failed Redemption of Preference Shares: Whether a Contractual Debt?”, written way back in May, 2021, in the context of SC judgment in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Ventures Limited) & Ors, we concluded, on the basis of the provisions of section 55 of the Companies Act, 2013 (“Act”) and related judicial precedents around the meaning of “debt”, that there can be no debt associated with a preference share and, where there is no ‘debt’, there is no question of it being a ‘financial debt’.

The findings of the SC in EPC Constructions judgement resonate with our views as explained in the article. However, we delve deeper into the aspect with analysis of the ruling as below, as to on what basis it was concluded that preference shares cannot be considered as ‘debt.

Brief facts of the case

The appellant entered into a contract for construction of a fertilizer complex with the respondent, pursuant to which certain amounts became due and payable by the respondent to the appellant, The receivables under the contract was converted into NCRPS, and such conversion was duly approved by the respective boards. Eventually, in course of certain events, the appellant filed a Section 7 petition against the respondent, on account of failure to pay the redemption amount on account of maturity of CRPS. The application was dismissed by NCLT, and then NCLAT on grounds that the CRPS cannot be termed as debt. The application then came for appeal before SC.

Below is a discussion highlighting the rationale for which dues pertaining to preference shares were not held to be financial debt.

Actions speak about “intent”: Conversion of receivables into CRPS conclusive of intent

It was contended by the Appellant that the true nature of the transaction should be unveiled in order to determine whether such preference shares should be treated as debt or not. The fact that there were outstanding receivables, which had become due and payable, the Appellant argued that conversion of the same into preference shares was in a way ‘subordination of debt’, i.e. debt which is having lower priority than other debt in terms of payment, and was with the objective of maintaining the debt-equity ratio. As clear from the communication between the parties, 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. Therefore, the substance of the transaction should be given weightage, and an expansive interpretation of the term “commercial effect of borrowing” should be applied, as was interpreted by the Apex Court while classifying home buyers as FCs.^[1] In fact, the SC, in another matter^[2] delved into the real nature of a transaction while determining whether a debt is a financial debt or an operation debt.

On this, the Court noted that the preference shares were issued upon conversion of outstanding receivables. The board of the preference shareholder exercised its commercial wisdom in accepting the shares, given the low recovery prospects. Therefore, what was actually a financial debt, extinguished owing to such conversion, and hence the appellant cannot pose as a financial creditor.There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding^[3]. The SC, therefore, remarked:

“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, . . . attempt to unscramble it, must necessarily fail.”

Debt vs. preference shares: Redeemable preference shareholder not a creditor

The SC placed reliance on the relevant provisions of the Companies Act, particularly Sections 43, 47, and 55, and held that preference shares form part of the company’s share capital and not its debt capital. Consequently, preference shareholders cannot be treated as creditors, nor can they initiate insolvency proceedings under Section 7 of the IBC, which is reserved for financial creditors.

The Court noted that –

“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.” (Emphasis added)

Dividends on preference shares are payable only out of profits or proceeds from a fresh issue of shares for redemption. Thus, only a profit-making company can redeem its preference shares, as profits accrue after all expenses, including interest on borrowings. To suggest that preference shareholders become creditors upon default, even when the company has no profits, would distort this basic principle. ^[4] As aptly stated in “Principles of Modern Company Law”^[5]:

“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 constraint; and that the debt holder will rank before the preference holder in a winding-up.”

In the context of a CIRP, initiation under Section 7 requires a “default”, a debt that has become due and payable. The Supreme Court observed that since preference shares are redeemable only out of profits or fresh issue proceeds, no “debt” arises unless such conditions exist; consequently, there can be no default under Section 7.

Difference between preference shareholder and a creditor was concisely captured in “A Ramaiya’s Guide to the Companies Act”^[6]:

“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 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.”

A financial debt necessarily involves disbursal against the consideration for time value of money, typically represented through interest.^[7] While interest may not be a sine qua non in every case^[8], there must at least be an element of consideration for the time value of money. In the present case, no such disbursal or consideration existed and hence, the claim failed to meet the threshold of a financial debt.

As such, preference shares do not fall within the ambit of “financial debt” under Section 5(8)(f) of the Code, and equating them with financial creditors would distort the fundamental distinction between shareholders and creditors^[9].

Whether accounting entries/recognition as “liability” would make a difference

It was contended that financial debt is an admitted liability in the books of accounts of Matix.

However, the SC^[10], held 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.

Our Analysis

While the judgment firmly settles that preference shareholders cannot be treated as creditors, since shares represent ownership and not loans, the question often arises why such instruments, though debt-like in spirit and accounting treatment, are not “debt” under law. The rationale goes beyond mere nomenclature.

Ind AS 32 [Para AG25 to AG28] clarifies that in determining whether a preference share is a financial liability, or in other words, a debt, or simply an equity instrument, the shares has to be assessed against the rights attached to it, and whether it signifies a character of financial liability. In other words, if a preference share is redeemable at a specific date in the future at the option of the shareholder, such instrument carries a financial liability and is treated as such. However, it should be noted that every law has to be read in a given context. Treatment under accounting standards is more from the perspective of the financial position of the issuer. However, in case of IBC, the question is of rights – as a creditor will have right to file an application under section 7, but a shareholder will not have such right; similarly, a creditor will have a higher priority under section 53, while a shareholder stands in the lowest step of the priority ladder.

Therefore, the context in which accounting standards operate cannot be superimposed while interpreting the rights and liabilities under laws like the Code. Therefore, preference shares, depending on their terms of issuance may be classified as a liability for the purpose of complying with accounting principles, however, that cannot be said to be confer such preference shareholders the status of a creditor, and consequently, entitling them to file CIRP application under the Code.

Hence, there is a fundamental difference between “debt” and “shares” – a “debt” once converted into “shares”, moves from one end of the spectrum to another, and cannot retain its original nature and rights under the Code.

^[1] Pioneer Urban Land and Infrastructure Ltd. and Another v. Union of India and Others ((2019) 8 SCC 416)

^[2] Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt Ltd and Anr. (2024 SCC OnLine SC 649)

^[3] Commissioner of Income Tax v. Rathi Graphics Technologies Limited (2015 SCC OnLine Del 14470), where it was held that, 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.

^[4] Lalchand Surana v. M/s Hyderabad Vanaspathy Ltd. (1988 SCC OnLine AP 290)

^[5] (Tenth Edition) at page 1071

^[6] (18th Edition, Volume 1 Page 879)

^[7] Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and Others ((2020) 8 SCC 401)

^[8] Orator Marketing v. Samtex Desinz (Civil Appeal No. 2231 of 2021)

^[9] Radha Exports (India) Private Limited v. K.P. Jayaram and Another ((2020) 10 SCC 538)

^[10] Relied on State Bank of India v. Commissioner of Income Tax, Ernakulam ((1985) 4 SCC 585)

Kabhi Naa, Kabhi Haan: Key Takeaways from the SC’s verdict in Bhushan Steel

September 26, 2025/0 Comments/in Case laws, Insolvency and Bankruptcy, Resolution /by Staff

– Sikha Bansal, Senior Partner | resolution@vinodkothari.com

The proceedings in Bhushan Steel now take a U-turn, as the SC ruling has upheld the resolution plan of SRA. Earlier, the SC had ordered liquidation of the CD.

Here is a quick round up of important takeaways from the verdict:

CoC has a vital interest in the resolution plan and that such an interest would continue till the Resolution Plan is actually implemented. If it is argued that the CoC cannot act in any manner after approval of resolution plan, then it can lead to a limbo or an anomalous situation where, say, the plan could not be implemented for any reason, leaving the creditors high and dry. Notably, the cloud of uncertainty exists until finality is given by the SC under section 62. Until then, CoC remains interested.
Appeal to SC can be made only if it was appealed against before the NCLAT. Also, appeal to SC is available only on questions of law pertaining to any of the five grounds specified in Section 61 of the IBC – and, for no other reason.
A clause in the resolution plan empowering the CoC to merely extend the implementation timeline by a specified majority and neither providing for withdrawal nor modification, cannot be stated to be an open ended or indeterminate plan solely at the discretion of the resolution applicant.
CCDs are equity. Courtesy: SC rulings in Narendra Kumar Maheshwari, IFCI Limited v. Sutanu Sinha and Others. Also, if CoC has exercised its commercial wisdom in the matter, judiciary has nothing to interfere with.
For issues like distribution of profits arising during CIRP, look at the RFRP and the resolution plan. Unless there is a specific provision with regard to such distribution to be made to creditors, the money shall remain with CD. Also, in this case, the resolution plan explicitly contemplated that SRA shall take over the assets and liabilities of the CD as a ‘going concern’, which would include the profits or losses that may be generated by the company during CIRP.
Where a creditor was classified as contingent creditor by SRA and the plan was approved by CoC; and ambivalent stance was taken by the concerned creditor, then the commercial wisdom of CoC cannot be challenged.
Payments to creditors against pre-CIRP dues must be done only in accordance with the resolution plan and with the express agreement of the CoC.
Decisions pertaining to the resolution plan and dues thereunder fall under the “commercial wisdom” of CoC. Where CoC exercises commercial wisdom, the decision is deemed to be non-justiciable by this Court in view of ruling in K. Sashidhar.
Once the resolution plan has been approved by the CoC and NCLT, permitting any claims to be reopened which were not a part of the RFRP/resolution plan will open Pandora’s box, and will do violence to the provisions of IBC. SRA cannot be forced to deal with claims that are not a part of the RfRP issued in terms of Section 25 of the IBC or a part of its Resolution Plan. Courtesy: SC ruling in Essar Steel and Ghanshyam Mishra.