IBC's Non-Obstante Muscle: NCLAT Backs NCLT's Power to Unfreeze Demat Accounts Amid Rising Pre-Admission Recoveries

The Turf War Continues: IBC vs. Sectoral Regulators

In the ongoing jurisdictional tug-of-war between India's sectoral regulators and the insolvency regime, the Insolvency and Bankruptcy Code (IBC) has just landed another heavy blow. The National Company Law Appellate Tribunal (NCLAT) recently dismissed a plea by the BSE, upholding the NCLT's authority to order the de-freezing of demat accounts in insolvency matters. This development is not merely a procedural blip; it is a vital reinforcement of the NCLT’s residuary powers under Section 60(5) of the IBC and a stark reminder that the Code’s non-obstante clause (Section 238) takes no prisoners.

For practicing lawyers, particularly those advising Resolution Professionals (RPs) and Committee of Creditors (CoCs), this ruling is a critical weapon. We are constantly seeing cases where a Corporate Debtor enters the Corporate Insolvency Resolution Process (CIRP), only for the RP to discover that critical assets—bank accounts, property, or, in this case, demat accounts—are frozen by other regulatory bodies like SEBI, the Enforcement Directorate (ED), or the Customs Department due to past transgressions of the promoters.

De-coding the NCLAT's Stance on Demat Accounts

The BSE's challenge essentially hinged on the argument that securities market regulations and compliance mechanisms should operate independently of the CIRP. If a corporate debtor’s demat account was frozen for regulatory non-compliance, unfreezing it, they argued, bypasses the penal framework of securities law.

The NCLAT rightly saw through this fragmented approach. By treating the de-freezing of demat accounts as a necessary part of insolvency administration, the Tribunal leaned heavily into Section 60(5)(c), which grants the NCLT jurisdiction to entertain any question of law or fact arising out of or in relation to the insolvency resolution or liquidation proceedings.

"If sectoral regulators are allowed to maintain asset freezes during a CIRP, the very objective of the IBC—value maximization and keeping the corporate debtor as a going concern—is dead on arrival."

This holding sits perfectly in line with the landmark 2022 Supreme Court precedent in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, where the Apex Court definitively ruled that the IBC overrides the Customs Act during the Section 14 moratorium period. The NCLAT is sending a clear message: whether it is the taxman or the stock exchange, once the insolvency regime is triggered, the collective resolution process supersedes individual regulatory punitive measures that lock up the debtor's estate.

Why This Matters for Your Practice

If you are representing an RP, this ruling streamlines your asset recovery strategy. You no longer need to litigate endlessly before SEBI or the Securities Appellate Tribunal (SAT) to lift regulatory freezes on a corporate debtor's securities. Instead, you can file an Interlocutory Application (IA) directly before the NCLT under Section 60(5), citing this NCLAT decision, to pull the demat accounts back into the insolvency estate.

However, if you are advising regulatory bodies or stock exchanges, the writing is on the wall: you must proactively file claims with the RP rather than relying on statutory attachments or freezes to secure your dues or enforce compliance.

The Pre-Admission Settlement Phenomenon: ₹10 Lakh Crore and Counting

While the NCLT consolidates its jurisdiction, the reality of how the IBC is being used by creditors is shifting dramatically. According to recent data presented to the Lok Sabha, a staggering 28,818 insolvency applications involving ₹10 lakh crore were resolved before admission.

Let that sink in. Despite the Supreme Court’s repeated admonition in Swiss Ribbons that the IBC is a mechanism for resolution, not a mere recovery tool, the ground reality for banking and commercial lawyers is different. The mere threat of a Section 7 or Section 9 petition has become the most potent debt recovery mechanism in Indian corporate history.

Promoters, terrified of losing control of their companies under Section 29A and being ousted by an RP, are scrambling to settle at the pre-admission stage. For corporate counsel, this means your litigation strategy at the NCLT should heavily price in the "settlement window" between the issuance of a demand notice (in operational debt) or the filing of the petition, and the actual admission order.

The Finance Ministry's Push: Faster Admissions on the Horizon

With 12,351 IBC cases pending as of December 31, 2024, the government's patience with NCLT bottlenecks is wearing thin. The Finance Ministry’s recent directive to public-sector banks to fast-track IBC cases and for CEOs to personally monitor top pending resolutions signals an incoming wave of aggressive litigation.

What to expect in practice:

• Fewer adjournments: Bank counsels will fiercely oppose the customary delays and deferments sought by corporate debtors at the NCLT pre-admission stage.
• Strict adherence to timelines: We can expect a renewed push to enforce the 14-day statutory timeline for admission under Section 7, which the Supreme Court in Vidarbha Industries had previously softened by interpreting the word "may" as discretionary. Banks will likely push back hard against any NCLT reluctance to admit cases where default is established.

The Bottom Line

The Indian insolvency landscape is tightening. On one end, the NCLAT is ensuring that once a company is in CIRP, the NCLT holds absolute sway over its assets, brushing aside sectoral regulators like BSE and SEBI. On the other end, the sheer volume of pre-admission settlements proves that the fear of the IBC is as effective as the Code itself. For practitioners, the mandate is clear: weaponize Section 60(5) to protect the debtor's estate, and leverage the pre-admission phase strategically, because once the CIRP train leaves the station, the regulators can't stop it.