DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

SABBAVARAM, VISAKHAPATNAM, A.P., INDIA

RESEARCH PAPER TITLE

PREFERENCE SHARES & INFRASTUCTURE PROJECTS UNDER COMPANY LAW

SUBJECT- Corporate Law I

NAME OF THE FACULTY

Dr. Dayananda Murthy C.P.

Name of the Candidate-PRIYANKA SINGH

Roll No.-2017068

Semester-7th

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 ABSTRACT

This paper discusses, against the background of the nature and limitations of preference shares,
the reasons why the role of preference shares as a source of long-term capital has been relatively
in- significant in recent years, and tries to examine whether the same factors will limit their use
in future. The paper also discusses the preferential shares in context of infrastructure projects.
S.55 of the Companies act allows companies involved in infrastructure projects to issue
preferential shares for a longer time. Their hybrid nature seems to have brought more
weaknesses than strengths to preference shares. They carry the promise of a fixed income like
debentures but without the element of safety of the latter; they participate in the risks of ordinary
shares without sharing in rising income during prosperous years.

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 TABLE OF CONTENTS

1. Synopsis…………...………..……………………………………………………...........4
 Objectives of the Study…………………………………………………………4
 Significance of the Study…………………………………………………........4
 Scope of the Study………………………………………………………………4
 Research Methodology………………………………………………………….4
 Research Question……………………………………………………………….4
 Review of Literature…………………………………………………………….4
2. Introduction……………………………………………………………………………...6
3. Meaning of Preference Shares…………………………………………………………6
4. Nature of Preference Share…………………………………………………………….7
5. Issue and Redemption of Preference Shares………………………………………….10
6. Issue and redemption of preference shares by company in infrastructure
projects………………………………………………………………………………….10
7. Conditions for Redemption…………………………………………………………….13
8. Analysis of NCLAT on Redemption of Preference Shares…………………………..14
9. Schedule VI to the Act relates to 'Infrastructure Projects/Infrastructural
Facilities'………………………………………………………………………………..15
10. Ingredients of Preferential Transactions……………………………………………..20
11. Conclusion………………………………………………………………………………22
12. Bibliography…………………………………………………………………………….22

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 SYNOPSIS

OBJECTIVE OF THE STUDY:

To study about the Preference Shares & Infrastructure Project under Company Law. The
objective also is to be able to understand about working of preference shares in infrastructure
projects.

SIGNIFICANCE OF THE STUDY:

In this project, we will learn about the problems in Preference Shares & Infrastructure Project
under Company Law. There is a need to make proper structure with efficient implementation.

SCOPE OF THE STUDY:

The scope of the project is limited to the study of theories of Preference Shares & Infrastructure
Project under Company Law.

RESEARCH METHODOLOGY:

The researcher has adopted doctrinal method of research and the entire paper is in the form of
analysis of established procedures, following the analytical research style. The sources are
books, articles and web sources.

RESEARCH QUESTION:

1. Whether there are some special provisions for issue of preference shares in companies
involved in infrastructure projects?

2. Whether these are provisions are helping companies involved in infrastructure projects?

REVIEW OF LITERATURE:

This research paper is prepared by referring many books, articles from magazines, journals,
newspapers, internet sources etc. some of them are mentioned below:

1. Y. Subrahmanyam, Role of Preference Shares in the Indian Corporate Sector,

Economic and Political Weekly , Nov. 26, 1977, Vol. 12, No. 48 (Nov. 26, 2010).

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 The article talks about the nature of preferential shares & also discusses the role
preferential shares in Indian Corporate sector. The article also explains the concept of
issue & redemption of preferential shares.

2. Gaurav N. Pingle, Infrastructure Projects & Infrastructure Facilities U/Companies

Act, 2013, [2019] 104 taxmann.com 259 (Article).
This article explains the about Infrastructure Projects & Infrastructure Facilities
U/Companies Act, 2013 & discusses their relevance in context of S.55 of the act which
talks about issues & redemption of preferential shares.

3. Afra Afsharipour, Corporate Governance and The Indian Private Equity Model,
National Law School of India Review , 2015, Vol. 27, No. 1 (2015), pp. 17-48.
This article talks about preferential shares in Indian private equity model and the
importance & need to have this. The article also discusses the special case of
Infrastructure Projects under it.

4. Anjali Pandey, All About Issue of Preference Share on Preferential basis, 2019,
https://taxguru.in/company-law/redeemable-preference-shares.html.
This article explains the meaning of preferential shares, also discusses the point of their
issue & redemption and all other aspects related to it.

5. Mayank Garg, Issue & Redemption of Preference Shares, 2020,

https://taxguru.in/chartered-accountant/issue-redemption-preference-shares.html.
The article explains everything regarding issue & redemption of preferential shares &
discusses all the aspects related to it.

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 Introduction

The Redeemable Preference Shares are those, the amount of which can be paid back to the
holders of such shares. That is, the capital raised through the issue of Redeemable Preference
Shares can be paid back by the Company to such shares. The paying back of capital is called the
Redemption. The redemption of redeemable preference shares does not reduce the Company’s
authorized capital. From the Creditors’ point of view the capital remains intact because the share
capital redeemed is simply replaced by the nominal value of the new shares issued for the
purpose of redemption or by a Capital Redemption Reserve Account, for practical purposes, is
equal to the paid up capital of the company. 'Infrastructure Projects' & 'Infrastructure Facilities'
under Companies Act, 2013.

In Companies Act, 2013 ('the Act') there is no specific reference to the term 'real estate'.
However, there are a few provisions where there is a reference to the term 'infrastructure
projects' or 'infrastructure facilities'. The two relevant provisions are:

(i)   Section 55 of the Act relating to 'Issue and redemption of preference shares'
(ii)   Section 186 of the Act relating to 'Loan and investment by company'.
This article is an analysis of the above mentioned provisions of the Act, read with Schedule VI to
the Act (that defines 'infrastructure projects' or 'infrastructure facilities').

Meaning of Preference Shares:

 As per Explanation (ii) to section 42 of the Companies Act, 2013 (‘the Act’), the term
preference shares mean and includes that part of the share capital the holders of which have a
preferential right over payment of dividend (fixed amount or rate) and repayment of share capital
in the event of winding up of the company.1
 Further, as per Explanation (iii) to section 42, when a certain class of shares has either of
the following features, the same shall be deemed to be preference shares.
1. In addition to the preferential right to receive dividend, the shareholders have a right to
participate either fully or to a limited extent in the capital not having preferential treatment

1
Y. Subrahmanyam, Role of Preference Shares in the Indian Corporate Sector, Economic and Political Weekly ,
Nov. 26, 1977, Vol. 12, No. 48 (Nov. 26, 2010).

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2. In addition to the preferential repayment of share capital in the event of winding up, the
shareholders are entitled to participate either fully or to a limited extent in the surplus capital of
the company available

3. Rights Issue of Equity Shares no approval of Members required.

4. In view of Section 55 of the Companies Act, 2013 read with the Rule 9 of the Companies
(Share Capital and Debenture) Rules, 2014 Members approval by way of Special Resolution
required. We need to give effect of both the Sections.

5. Preference shares allow an investor to own a stake in the issuing company with a condition
that whenever the company decides to pay dividends, the holders of the preference shares will be
the first to be paid.

6. In addition to their preferential rights, the following rights are also attached to the preference
share capital.

7. In respect of dividend –  It has a right to participate, whether fully or to a limited extent, with
capital not entitled to the preferential right.

8. In respect of capital – It has a right to participate, whether fully or to a limited extent, with
capital not entitled to that preferential right in any surplus which may remain after the entire
capital has been repaid.2

NATURE OF PREFERENCE SHARE

Preference share has claims or rights ahead of equity share, but behind all debentures with regard
to both earnings and assets. The hybrid nature of preference share becomes apparent when one
tries to classify it in relation to debentures and equity shares. The priority feature and the fixed
dividend indicate that preference share is similar to debentures.3 On the other hand, if the
preference dividends are not earned, the company can forgo paying them without damage of
bankruptcy. Failure to pay the stipulated dividends does not cause default of the obligations, as

2
Afra Afsharipour, Corporate Governance and The Indian Private Equity Model, National Law School of India
Review , 2015, Vol. 27, No. 1 (2015), pp. 17-48.
3
Mayank Garg, Issue & Redemption of Preference Shares, 2020, https://taxguru.in/chartered-accountant/issue-
redemption-preference-shares.html.

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does failure to pay debenture interest. In this characteristic, prefernce share is similar to equity
share.4

 Kinds of Preference shares:

There are eight types of preference shares. In case of dissolution of the company, any of the eight
types would be paid out before other types of equity. Let’s understand each of them:

Cumulative: As the word indicates, all dividends are carried forward until specified, and paid
out only at the end of the specified period.

Preference dividend is payable if the company earns adequate profit. However, cumulative
preference shares carry additional features which allow the preference shareholders to claim
unpaid dividends of the years in which dividend could not be paid due to insufficient profit.

iii. Non-cumulative Preference Shares

The holders of non-cumulative preference shares will get preference dividend if the company
earns sufficient profit but they do not have the right to claim unpaid dividend which could not be
paid due to insufficient profit.

iv. Participating Preference Shares

 Participating preference shareholders are entitled to share the surplus profit of the company in
addition to preference dividend.

v. Non-participating Preference Shares

Non-participating preference shareholders are not entitled to share surplus profit and surplus
assets like participating preference shareholders.5

vi. Convertible Preference Shares

The holders of convertible preference shares are given an option to convert whole or part of their
holding into equity shares after a specific period of time.

vii. Non-convertible Preference Shares

4
https://taxguru.in/company-law/redeemable-preference-shares.html.
5
Id.

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 The holders of non-convertible preference shares do not have the option to convert their holding
into equity shares i.e. they remain as preference share till their redemption.

Tenure of Preference shares:

i) A Company Limited by Shares may, if so authorised by its articles, issue preference shares
which are liable to be redeemed within a period not exceeding twenty years from the date of their
issue.

ii) A company may issue preference shares for a period exceeding twenty yearsbut up to thirty
years for infrastructure projects, subject to the redemption of 10% of shares on an annual basis at
the option of such preferential shareholders from 21st year onwards or earlier.

Methods of Issue of Preference Shares:

 Rights Issue under Section 62(1)(a)only to the existing Equity Shareholders; or

 ESOP Under Section 62(1)(b)specifically to the employees under a Scheme or
 Preferential Allotment under Section 62(1)(c)of the Companies Act, 2013 to any person
subject to the adherence to Rule  13 of Companies (Share Capital and Debenture) Rule, 2014;
 Private Placement of Shares under section Section-42 read with the Rules made there
under;
Conditions for issue of preference shares

Section 55 of the Act read with Rule 9 of the Companies (Share Capital and Debentures) Rules,
2014 made there under, requires a Company to meet with following conditions:

 Company’s Articles should contain such clause allowing issue of Preference Shares
 Company’s Memorandum Should have the Preference Shares as a part of Authorised
Capital
 The Company, at the time of such issue of Preference Shares, has no subsisting default in
the redemption of Preference Shares issued either before or after the commencement of this Act
or in payment of dividend due on any Preference Shares
 Obtain the prior approval of the Shareholders, by way of a Special Resolution
 Valuation Report to be taken to arrive at issue price.6
6
9 Securities and Exchange Board of India, The Securities and Exchange Board of India (Delisting of Equity
Shares) (Amendment) Regulations, 2015, (March 24, 2015), available at http://www. sebi.gov.in/cms/sebi

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 ISSUE AND REDEMPTION OF PREFERENCE SHARES

 Company cannot issue irredeemable preference shares or redeemable preference shares

with the redemption period beyond 20 years.
 Section 55 (1) states that no company limited by shares shall issue any preference shares
which are irredeemable.
 Section 55(2) further states that a company limited by shares may, if so authorised by
its articles, issue preference shares which are liable to be redeemed within a period not
exceeding 20 years from the date of their issue subject to such conditions as may be prescribed.7

Exceptions

Issue and redemption of preference shares by company in infrastructure projects

A company engaged in the setting up and dealing with of infrastructural projects may issue

preference shares for a period exceeding 20 years but not exceeding 30 years,

(However redemption subject to minimum 10% of such preference shares per year from
the twenty first year onward or earlier on proportionate basis, at the option of the preference
shareholders).8

The term “infrastructure projects” means the infrastructure projects specified in Schedule VI.

 Other conditions attached

Proviso to Section 55(2) states that

> Preference Shares shall be redeemed

a) Out of divisible profits (Profits available for dividend) or

b) Out of proceeds of fresh issue of shares

> Preference Shares shall be redeemed only if they are fully paid.

data/attachdocs/ 142726 1684807.

7
Supra Note 1.
8
Gaurav N. Pingle, Infrastructure Projects & Infrastructure Facilities U/Companies Act, 2013,
[2019] 104 taxmann.com 259 (Article).

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 > Premium payable on redemption of preference shares shall be provided for (write off) :-

a) Security Premium Reserve or

b) Profits of the company

> When Preference shares are proposed to be redeemed out of the profits of the company, a
sum equal to the nominal amount of the shares to be redeemed, should be transferred to Capital
Redemption Reserve Account.9

Note: – The Capital Redemption Reserve shall be treated as the paid up share capital of the
company for all purposes and can only be utilized for bonus issue of shares.

 Section 55 (3) states that

> If a company is not in a position to redeem any preference shares or to pay dividend, if any, on
such shares in accordance with the terms of issue, it may, with the consent of the holders of
3/4th in value of such preference shares and with the approval of the Tribunal on a petition
made by it in this behalf, issue further redeemable preference shares equal to the amount due,
including the dividend thereon, in respect of the unredeemed preference shares. [Section 55(3)]

> On the issue of such further redeemable preference shares, the unredeemed preference shares
shall be deemed to have been redeemed. [Section 55(3)]

> The Tribunal shall, while giving approval, order the redemption forthwith of preference shares
held by such persons who have not consented to the issue of further redeemable preference
shares. [Proviso to Section 55(3)]

> The issue of further redeemable preference shares or the redemption of preference shares under
this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share
capital of the company. [Explanation to Section 55(3)]

 Redemption of preference shares

It is a process of repaying an obligation, usually at the prearranged amount. These shares are
issued to the shareholders on terms that holders will at some future date be repaid the amount
which they invested in the company.

9
https://taxguru.in/chartered-accountant/issue-redemption-preference-shares.html.

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The redemption date is the maturity date, which specifies when repayment takes place and is
usually be mentioned in the agreement.10

Rule 9(6) of  companies (share capital and debentures) rules, 2014 states that a company may
redeem its preference shares only on the terms on which they were issued or as varied after due
approval of preference shareholders under section 48 of the Act and the preference shares may
be redeemed:-

(a) At a fixed time or on the happening of a particular event;

(b) Any time at the company’s option; or

(c) Any time at the shareholder’s option

According to Section 55 of the Act, a company (limited by shares) shall not issue any preference
shares which are irredeemable. A company (limited by shares) may, if so authorised by its
Articles of Association, issue preference shares which are liable to be redeemed within a period
not exceeding 20 years from the date of their issue subject to such conditions as may be
prescribed (i.e., in accordance with the Companies (Share Capital and Debentures) Rules, 2014).
A company may issue preference shares for a period exceeding 20 years for infrastructure
projects, subject to the redemption of such percentage of shares as may be prescribed on an
annual basis at the option of such preferential shareholders. This provision has been further
clarified in the Rules.11

Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014 relates to 'Issue and
redemption of preference shares by company in infrastructural projects'. According to rules, a
company engaged in the setting-up and dealing with infrastructural projects may issue preference
shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a
minimum 10% of such preference shares per year from the 21 st year onwards or earlier, on
proportionate basis, at the option of the preference shareholders. The Explanation to section 55

10
Id.
11
https://www.mca.gov.in/SearchableActs/Section55.htm.

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 of the Act states that the term 'infrastructure projects' means the infrastructure projects specified
in Schedule VI to the Act.12

The other provisions relating to redemption, sources of redemption, accounting treatment, etc.,
are applicable to all companies (private companies or public companies, whether engaged in
setting-up and dealing with of infrastructural projects or not).

Conditions for Redemption:

 Fully paid-up preference shares can only be redeemed.

 Preference shares can be redeemed only out of the profits available for distribution to
its shareholders or out of proceeds of fresh issue of Shares solely for the purpose of funding the
redemption of the preference shares
 Where the redeemable preference shares are redeemed out of the profits available for
distribution, a sum equivalent to the nominal amount of shares being redeemed shall be
transferred to the Capital Redemption Reserve. The CRR shall be treated as the paid-up share
capital of the company for all purposes and can also be utilized for bonus issue of shares.13
 In case of such class of companies as may be prescribed  under Sec 133 of the Companies
Act, 2013 and whose financial statements comply with the accounting standards.
(i) Premium payable on redemption shall be provided out of the profits of the company before
the shares are redeemed.

(ii) Premium payable on redemption of any preference shares issued on or before the
commencement of 2013 Act, shall be provided out of the profits of the company or out of the
company’s securities premium account, before such shares are redeemed.

 In a case not falling under the class of Companies as mentioned above, the premium, if
any, payable on redemption shall be provided for out of the profits of the company or out of the
company’s securities premium account, before such shares are redeemed.14

12
https://www.researchgate.net/publication/328262628_A_CONCEPTUAL_VIEW_ON_COMPANIES_ACT_2013
_WITH_SPECIAL_REFERENCE_TO_SHARE_CAPITAL.
13
https://www.academia.edu/12018015/Preference_shares_role_in_Indian_Companies.
14
 Anjali Pandey, All About Issue of Preference Share on Preferential basis, 2019, https://taxguru.in/company-
law/redeemable-preference-shares.html.

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 Inability to redeem the redeemable Preference Shares

 Where a company is not in a position to redeem any preference shares or to pay dividend,
if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as
unredeemed preference shares), it may, with the consent of the holders of three-fourths in
value of such preference shares and with the approval of the Tribunal on a petition made
by it in this behalf,issue further redeemable preference shares equal to the amount due,
including the dividend thereon, in respect of the unredeemed preference shares, and on the issue
of such further redeemable preference shares, the unredeemed preference shares shall be deemed
to have been redeemed:
 The Tribunal shall order the company to immediately redeem the preference shares held
by the shareholders dissenting to such arrangement.
 The issue of preference shares for purpose of redemption of unredeemed preference
shares (along with the dividend) shall not be considered as an increase in the share capital of the
company15

Analysis of NCLAT on Redemption of Preference Shares

The National Company Law Appellate Tribunal (NCLAT) in Brij Bhushan Singhal v Bhushan
Steel Ltd. (August 10, 2018) allowed the preference shares to be redeemed outside the purview
of section 55 of the Companies Act, 2013 when required by the resolution plan. In this case, with
Tata Steel Ltd. The appellate tribunal also rejected the claims of engineering and construction
major L&T, an operational creditor of Bhushan Steel Ltd, opposing Tata Steel’s resolution plan
seeking a higher priority in debt resettlement. An NCLAT bench headed by Chairman Justice S J
Mukhopadhaya rejected the claims of its promoters Neeraj Singal that Tata Steel was ineligible
to bid for Bhushan Steel under section 29 A of the Insolvency & Bankruptcy Code (IBC). As the
resolution applicant, the appellant, a preference shareholder of Bhushan Steel (corporate debtor),
filed an appeal that the resolution plan sought to automatically redeem and cancel his preference
shares, in contravention of section 55 of the Companies Act, 2013. That provision mandates that
preference shares can only be redeemed in the manner, and after fulfillment of the conditions,
prescribed in the terms of issue. According to section 30(2)(e) of the Insolvency and Bankruptcy
15
taxmann-article-‘Infrastructure-Projects’-‘Infrastructure-Facilities’-under-Companies-Act-2013.pdf

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Code, 2016 (IBC), a resolution plan cannot be approved if it contravenes any provision of law.
However the NCLAT, without a consideration of the question raised regarding section 55 of the
Companies Act, 2013, upheld the impugned order of the National Company Law Tribunal
(NCLT), which approved the resolution plan on April 17, 2018. Further, Paragraph 98 of the
judgment states:  “The ‘Resolution Plan automatically does not amount to transfer or reduction
of shares, including preferential shareholding. It is merely a proposal of one or other ‘Resolution
Applicants’ and once it is approved by the ‘Committee of Creditors’ and thereafter by the
‘Adjudicating Authority’ under Section 31, will be binding on all the stakeholders, including the
‘Corporate Debtor’, ‘Members’ (shareholders), ‘Financial Creditors’, ‘Operational Creditors’ etc.
If the provision of Section 55 of the Companies Act, 2013 is to be complied, it can be complied
only after the approval of the ‘Resolution Plan’. Before the approval of the ‘Resolution Plan’ is
approved by the Adjudicating Authority, the ‘Resolution Plan’ being mere a proposal, the
question of following Section 55 of the Companies Act, 2013 does not arise.”  The decision
considered the resolution plan to be a mere proposal that could not affect the position of Bhushan
Steel’s preference shareholders until it was approved by the committee of creditors and the
adjudicating authority. However, in order for it to be approved by the adjudicating authority, the
resolution plan cannot contravene a position of law. Thus, it was essential for the NCLAT to
decide upon the applicability of section 55 of the Companies Act, 2013 for the resolution plan to
be approved in the first place. As a result, the contravention of section 55 of the Companies Act,
2013 was allowed without any consideration. If such a position is held to be valid, a resolution
plan may propose contravention of any law in force with full immunity and, if it receives
approval like it did in Brij Bhushan Singhal, then, an aggrieved party may have no recourse at all
since before approval it was merely a proposal, and after approval, it cannot be challenged.16

Schedule VI to the Act relates to 'Infrastructure Projects/Infrastructural Facilities'

According to the Schedule VI to the Act, the term 'infrastructural projects' or 'infrastructural
facilities' includes the following projects or activities:

(1)   Transportation (including inter-modal transportation), includes the following:—

(a)   Roads, national highways, State highways, major district roads, other district

16
https://nishithdesai.com/information/news-storage/news-details/article/preferential-transactions-under-insolvency-
code-investors-lenders-to-exercise-caution.html.

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 roads and village roads, including toll roads, bridges, highways, road transport
providers and other road-related services;
(b)   Rail system, rail transport providers, metro-rail roads and other railway related
services;
(c)   Ports (including minor ports and harbours), inland waterways, coastal shipping
including shipping lines and other port related services;
(d)   Aviation, including airports, heliports, airlines and other airport related services;
(e)   Logistics services.
(2)   Agriculture, including the following, namely:—
(a)   Infrastructure related to storage facilities;
(b)   Construction relating to projects involving agro-processing and supply of inputs
to agriculture;
(c)   Construction for preservation and storage of processed agro-products, perishable
goods such as fruits, vegetables and flowers including testing facilities for
quality.
(3)   Water management, including the following, namely:—
(a)   Water supply or distribution;
(b)   Irrigation;
(c)   Water treatment.
(4)   Telecommunication, including the following, namely:—
(a)   Basic or cellular, including radio paging;
(b)   Domestic satellite service (i.e., satellite owned and operated by an Indian
company for providing telecommunication service);
(c)   Network of trunking, broadband network and internet services.
(5)   Industrial, commercial and social development and maintenance, including the
following, namely:—
(a)   Real estate development, including an industrial park or special economic zone;
(b)   Tourism, including hotels, convention centres and entertainment centres;
(c)   Public markets and buildings, trade fair, convention, exhibition, cultural centres,
sports and recreation infrastructure, public gardens and parks;
(d)   Construction of educational institutions and hospitals;
(e)   Other urban development, including solid waste management systems, sanitation
and sewerage systems.
(6)   Power, including the following:—
(a)   Generation of power through thermal, hydro-nuclear, fossil fuel, wind and other
renewable sources;
(b)   Transmission, distribution or trading of power by laying a network of new
transmission or distribution lines.

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(7)   Petroleum and natural gas, including the following:—
(a)   Exploration and production;
(b)   Import terminals;
(c)   Liquefaction and re-gasification;
(d)   Storage terminals;
(e)   Transmission networks and distribution networks including city
gas infrastructure.
(8)   Housing, including the following:—
(a)   Urban and rural housing including public/mass housing, slum rehabilitation,
etc.;
(b)   Other allied activities such as drainage, lighting, laying of roads, sanitation
and facilities.
(9)   Other miscellaneous facilities/services, including the following:—
(a)   Mining and related activities;
(b)   Technology related infrastructure;
(c)   Manufacturing of components and materials or any other utilities
or facilities required by the infrastructure sector like energy saving devices and
metering devices;
(d)   Environment related infrastructure;
(e)   Disaster management services;
(f)   Preservation of monuments and icons;
(g)   Emergency services (including medical, police, fire and rescue).17
(10)   Such other facility service as may be prescribed.
The scope of 'infrastructure projects' or 'infrastructural facilities' is very wide. Importantly,
the projects or activities mentioned in the Schedule VI to the Act are inclusive in nature. It does
not relate to manufacturing activities only. It relates to transportation, agriculture, water
management, telecommunication, industrial, social development (which includes real estate
development, including an industrial park or special economic zone), power, petroleum, natural
gas, housing (which includes urban and rural housing including public/mass housing, slum
rehabilitation, etc.).

For limited purpose, it can be observed that the provisions of section 186(2) to section 186(10) of
the Act are not applicable to any loan made, any guarantee given or any security provided or any
investment made by a company established with the object of and engaged in the business of

17
https://www.mca.gov.in/SearchableActs/Section55.html.

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financing industrial enterprises, or of providing infrastructural facilities (i.e., as discussed
above).18

In the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd. v Axis Bank
Limited Etc.19 the Supreme Court of India (“SC”) has laid down detailed principles for
identification of a preferential transaction which could be voided under the Insolvency and
Bankruptcy Code, 2016 (“Code”). The judgment is of importance to investors and lenders, as the
approach of the SC in the case, highlights the risk of a transaction being set aside and the
diligence which should be exercised by investors and lenders going forward.

The corporate debtor JIL is a special purpose vehicle set up by its parent entity JAL for certain
construction and development and infrastructure projects. JAL holds approximately 71% of the
shares of JIL and had provided operational debt to JIL to the tune of 261 crores.

JIL mortgaged some of its properties to secure the loans advanced by certain banks to JAL
(“Impugned Transactions”). IDBI Bank Ltd., a creditor of JIL, filed an application to initiate
the CIRP in respect of JIL. Pursuant to this, the CIRP commenced and a resolution professional
was appointed to manage the affairs of JIL. The resolution professional upon noticing the
Impugned Transactions filed an application before the NCLT, seeking declarations that the
Impugned Transactions were fraudulent, undervalued and preferential transactions under the
Code. The NCLT allowed the application, and ordered (1) the release and discharge of the
security interested created by JIL and (2) the properties mortgaged by way of the Impugned
Transactions be deemed to be vested in JIL (“NCLT Order”). However, the lenders of JAL
preferred an appeal from the NCLT Order. The NCLAT allowed the appeals and set aside the
NCLT Order (“Impugned Order”). Various appeals were filed against the Impugned Order
before the Supreme Court, which brings us to the present judgment.20

The SC had held that certain security interests created by a corporate debtor Jaypee Infratech
Ltd. (“JIL”) in favour of the lenders of its holding company Jayprakash Associates Ltd. (“JAL”)
were preferential transactions. The SC viewed these transactions in a holistic manner to arrive at
its conclusion, and has laid down a precedent which would deter corporate entities from putting

18
L C Gupta, "Preference Shares and Company Finance", 1975, p 109.
19
Civil Appeal Nos. 8512 – 2019.
20
Supra Note 14.

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 in place complex and innovative structures to contract out of the preferential nature of
transactions.21

It is important to note that in this case the security interest was created in favour of JAL’s
lenders, however the ultimate beneficiary of the transactions was JAL. Accordingly, the SC has
not simply looked at the entity in whose favour security interest has been created, but also the
ultimate beneficiary of the transactions, to arrive at its conclusion.

The Supreme Court also held that in circumstances where the security provider and the borrower
are different persons/entities, then the lender would not qualify as a financial creditor of the
security provider during its insolvency unless the security provider is a guarantor or surety of the
borrower. This holding would deprive such lenders from exercising the rights of a financial
creditor during the corporate insolvency resolution process (“CIRP”), including being a part of
the committee of creditors and exercising the attendant rights.

Furthermore, while the SC has ordered that the security interest created by JIL be released and
discharged, it has not provided any clarity on the status of the loan amounts furnished by the
lenders on the strength of such security interest.

However, the SC held that JAL’s lenders could not be classified as financial creditors as follows:

1. Impugned Transactions lacked Ingredients of financial debt: The court relied upon the
case of Pioneer Urban Land and Infrastructure Ltd. & Anr. v Union of India & Ors22 in which
the SC had considered the elements of a 1) disbursement 2) borrowing and 3) consideration for
time value of money as essential ingredients of a ‘financial debt’ under the Code. The court
noted that the transactions listed in the definition of ‘financial debt’ under the Code could only
be considered financial debts if they carried these essential ingredients. The court held that
JAL’s lenders had 1) not disbursed any amounts in favour of JIL, nor 2) had such
consideration been for the time value of money. Therefore, JIL did not owe any ‘financial
debt’ to the lenders, and such lenders could not be classified as ‘financial creditors’ under the
Code.

http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/05._share_capital,_its_nature,_ki
21

nds,_rights_and_liabilities_of_shareholders/et/8137_et_et.pdf.

22
(2019) 8 SCC 416.

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2. Role of financial creditor: The court further relied upon the case of Swiss Ribbons Pvt.
Ltd. & Anr. v Union of India & Ors23 in which the court had elaborated upon the role of a
financial creditor. The court in Swiss Ribbons held that a financial creditor was a guardian
entity that was involved in the functioning of the corporate debtor from the beginning, and
whose interests were intrinsically interwoven with the well-being of the corporate
debtor.Keeping this in mind, the SC held that the position and role of an entity merely having a
security interest (i.e., JAL’s lenders) over assets of the corporate debtor could not be
considered financial creditors, as their only interest was realising the value of the security,
whereas a financial creditor would also be interested in the rejuvenation and revival of the
corporate debtor.

Accordingly, the court held that JAL’s lenders could not be considered financial creditors of
JIL. However, the court held that such lenders may fall within the definition of ‘secured
creditors,’ by virtue of the security created by the corporate debtor in their favour.

Ingredients of Preferential Transactions

The SC after a detailed analysis of Section 43 of the Code held that a transaction entered into
by a corporate debtor would be deemed to have given a preference to a creditor if:

(i) The transaction involved a transfer of property of the corporate debtor for the benefit of a
creditor, for or on account of an antecedent financial debt owed by the corporate debtor to the
creditor;

(ii) The transfer had the effect of putting the creditor in a more beneficial position than it
would have been, in the event of distribution of assets of the corporate debtor in the usual
course as per the liquidation waterfall provided under Section 53 of the Code;

(iii) Such transactions were entered into either (1) during the two year period preceding the
insolvency commencement date in case the beneficiary was a related party, or (2) during the
one year period preceding the insolvency commencement date in case the beneficiary was an
unrelated party. This time period was referred to as the ‘look back’ period.

(iv) The transactions were not excluded from the purview of preferential transactions on one of
the following two grounds:

23
(2019) 4 SCC 17.

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1. Any transfer made in the ordinary course of business/financial affairs of the corporate
debtor and the transferee;

2. The transaction creating a security interest secured a new value in the property acquired
by the corporate debtor, i.e., in monetary terms, or in terms of goods, services, new credit, or
secured the release of a previously transferred property.

The SC held that if a transaction satisfied the abovementioned ingredients, preference would
be deemed/presumed to have been given by the corporate debtor to a creditor.24

A deeming fiction would be created, whereby any such transaction would be considered
preferential in nature, irrespective of whether the parties to the transaction intended or even
anticipated to be so.  The court distinguished between (i) provisions under the Companies Act,
2013 which contained provisions on fraudulent preference (Section 328) and transfers not in
good faith (Section 329), and (ii) Section 43 of the Code, which did not contemplate a
requirement of intent/fraud to fall within the parameters of the provision.25

It is important to note that under the Companies Act, 1956 as well, there were provisions
on fraudulent preference (Section 531), and provisions for the avoidance of such preferential
transfers (Section 531 A). However, no deeming provision for preferential transfers akin to
Section 43 of the Code, under which the intent of a party is irrelevant for the purposes of
determining whether the transfer is preferential.

The SC further held that although the provisions relating to preferential transactions had to be
strictly construed, the underlying purpose and object of the provisions could not be lost while
interpreting it.

CONCLUSION

The Companies Act, 2013 provides for preferential shares & the issue and redemption of the
preferential shares can be done u/S. 55 of the act. S.55(2) provides that A company limited by
shares may, if so authorised by its articles, issue preference shares which are liable to be
24
Afra Afsharipour, Corporate Governance and The Indian Private Equity Model, National Law School of India
Review , 2015, Vol. 27, No. 1 (2015), pp. 17-48.
25
M Y Khan, 'New Issue Market and Company Finance', Review of Management, Eoanomic and Poli- tical Weekly,
February 1977, p M-20.

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redeemed within a period not exceeding twenty years. But the period of 20 years is extended
upto 30 years in the case of companies involved in infrastructure projects, this is given in the
proviso to s.55(2). This provides the infrastructure companies more time & helps the companies
in various ways. The topic of issue & redemption of preferential shares is discussed properly in
the entire project and the same is explained also in the context of infrastructure prejects.

BIBLIOGRAPHY

1. https://www.manupatrafast.in/
2. www.scconline.com
3. Heinonline
4. Westlaw

5. Lexis Nexis

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