Shareholders Under the IBC: Why Equity and Preference Holders Rarely Qualify as “Persons Aggrieved”
This article examines statutory provisions, judicial precedents from the Supreme Court, High Courts, and NCLAT, and clarifies why shareholders rarely succeed in asserting creditor‑like rights in insolvency appeals.
The Insolvency and Bankruptcy Code, 2016 (IBC) marked a paradigm shift in India’s insolvency framework by introducing a creditor-centric, time-bound resolution regime. By design, the Code prioritises debt resolution and creditor control over corporate rescue, consciously subordinating equity interests.
Despite this clarity, a recurring question continues to surface in insolvency litigation: can shareholders, whether equity or preference, be treated as “persons aggrieved” under Section 61 of the IBC, and can preference shares qualify as “financial debt” under Section 5(8)?
Recent jurisprudence from the Supreme Court, High Courts, and the National Company Law Appellate Tribunal (NCLAT) has decisively answered these questions in the negative, subject only to narrow and exceptional circumstances. The emerging judicial consensus underscores a firm demarcation between capital and debt, and between economic loss and legal injury.
Statutory Framework
- Section 5(8), IBC defines “financial debt” as a debt disbursed against consideration for the time value of money, including loans, debentures, bonds, and other instruments with a commercial effect of borrowing.
- Section 61, IBC provides that “any person aggrieved” by an order of the Adjudicating Authority (NCLT) may prefer an appeal to NCLAT.
- Companies Act, 2013 (Sections 43–55) classifies preference shares as part of share capital, with rights limited to priority in dividends and repayment on winding up, but not voting rights in ordinary matters.
Thus, the statutory scheme distinguishes between share capital and debt and restricts appeal rights to those who suffer direct legal injury.
Supreme Court Jurisprudence: Creditor Primacy and Shareholder Limits
Swiss Ribbons Pvt. Ltd. v. Union of India (2019)
- The IBC is creditor-driven.
- Committee of Creditors’ (CoC) commercial decisions are binding and largely non-justiciable.
- Shareholders cannot assert rights equivalent to creditors or challenge resolution plans solely based on economic loss.
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2020)
- Confirms CoC decisions are paramount once approved.
- Shareholder objections cannot override statutory priority or resolution outcomes.
- Shareholders do not hold proprietary or decision-making rights over corporate assets.
- Residual rights alone are insufficient to maintain appeals under Section 61.
Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd. (2022)
EPC Constructions India Ltd. v. Matix Fertilizers and Chemicals Ltd. (2025)
- Reinforced that redeemable preference shares are not financial debt.
- Non-redemption does not create enforceable debt under the IBC.
- CIRP initiation by preference shareholders under Section 7 is impermissible.
High Court Perspectives
Commissioner of Gift Tax v. Raghu Hari Dalmia (Delhi HC, 2021)
The court held that preference shareholders have limited rights, primarily priority in dividends, but no managerial control.
Shyamlal Purohit And Another v. Jagannath Ray And Another(Calcutta HC, 2023)
The Court extensively analysed precedents, statutes, and legal principles to conclude that shareholders, distinct from the corporate entity, do not hold proprietary interests in the company's assets during the liquidation process.
National Company Law Appellate Tribunal (NCLAT) Rulings, Narrow Exceptions and Firm Rules
Sanjay D. Kakade v. HDFC Ventures Trustee Co. Ltd. (2023)
In Sanjay D. Kakade v. HDFC Ventures Trustee Co. Ltd., NCLAT recognised that certain preference shares may qualify as financial debt if structured with contractual obligations ensuring a fixed Internal Rate ofReturn (IRR) or buy‑back at an assured value. The tribunal held that such instruments have the commercial effect of borrowing, since the company is obliged to repay with interest‑like returns.
However, this was a narrow exception, applicable only where the company itself undertakes repayment obligations, not merely promoters.
This case illustrates that form alone is insufficient; the substance of contractual terms determines whether preference shares cross into debt territory.
Park Energy Pvt. Ltd. v. State Bank of India (2025)
In Park Energy Pvt. Ltd. v. SBI (2025), a three‑member bench of NCLAT ruled that shareholders cannot maintain appeals under Section 61. The tribunal reasoned that shareholders’ interests are derivative and reflective, tied to profits, not direct legal rights.
Allowing shareholders to appeal would cause multiplicity of proceedings and undermine creditor primacy under IBC. It was held that only those suffering direct legal injury qualify as “persons aggrieved.”
This ruling has become the authoritative precedent, consistently applied to bar shareholder appeals.
M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd. (2021)
In M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd. (2021), a three-member bench of NCLAT ruled that shareholders cannot file a petition under Section 7. The petition was filed without a Board Resolution because the other 50% shareholder (the Managing Director) refused to sign it, citing a deadlock in the company.
The counsel for the respondent had argued that the petitioner doesn't have locus standi to file a petition under Section 7, as shareholders do not fall under the definition of aggrieved person under Section 61 of IBC.
NCLAT affirmed the findings of the respondent counsel that there is no Board Resolution authorizing the petitioner to file the Petition and held there is a specific notification by the Central Government under sub-section (1) of Section 7 of the IBC that on behalf of the Financial Creditor a guardian, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the board of directors of a company may file Application for initiation of CIRP against the Corporate Debtor.
Peninsula Holdings & Investments Pvt. Ltd. v. JM Financial Credit Solutions Ltd (2025)
In Peninsula Holdings & Investments Pvt. Ltd. v. JM Financial Credit Solutions Ltd. (2025), NCLAT Principal Bench dismissed an appeal under Section 61 filed by a shareholder of Hem Infrastructure. The appellant argued that its Redeemable Optionally Convertible Preference Shares (ROCPS) with 20% IRR made it a financial creditor.
NCLAT rejected the claim, holding that the appeal was filed in capacity of a shareholder, not a creditor. Applying Park Energy, the tribunal ruled that mere shareholder status does not confer locus under Section 61.
Key Distinction: Equity vs. Preference Shareholders
- Equity shareholders: Always barred; their rights are residual and profit‑linked.
- Preference shareholders: Normally barred, but may qualify as financial creditors if contractual terms impose repayment obligations akin to borrowing.
- Judicial trend: Courts and tribunals have narrowed exceptions, highlighting that most preference shares remain capital instruments, not debt.
Policy Rationale
The IBC’s framework is deliberately creditor-centric, designed to expedite insolvency resolution while preserving maximum value for creditors. Allowing shareholders to assert creditor-like rights or appeal under Section 61 would undermine the speed, certainty, and predictability of the process, leading to multiplicity of proceedings and potential misuse of insolvency mechanisms for equity recovery.
By restricting appeals and enforcing the statutory waterfall under Section 53, the Code ensures that risk capital remains subordinated, CoC decisions are given primacy, and the resolution process focuses on genuine debt enforcement rather than derivative shareholder grievances.
This approach aligns with the legislative intent of balancing efficiency with fairness, preventing procedural delays while protecting the commercial integrity of insolvency proceedings.
The jurisprudence under the IBC leaves little room for ambiguity. Courts have consistently rejected attempts by shareholders,equity or preference to assume creditor-like rights through insolvency appeals. While NCLAT has, in limited circumstances, recognised preference shares structured with debt-like features as financial debt, the Supreme Court’s ruling in EPC Constructions decisively reaffirms that redeemable preference shares are investment instruments, not loans.
Consequently, shareholders rarely qualify as “persons aggrieved” under Section 61, and cannot challenge insolvency admissions or resolution outcomes merely on account of economic loss.
This doctrinal clarity strengthens creditor primacy, prevents misuse of insolvency processes, and ensures that the IBC remains focused on genuine debt resolution rather than shareholder disputes masquerading as insolvency claims.
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