IBC Trumps Dalal Street: NCLAT Cements NCLT’s Power to De-Freeze Demat Accounts Under Section 60(5)

The End of a Regulatory Turf War?

For years, Insolvency Professionals (IPs) have faced a uniquely frustrating procedural nightmare: stepping into the shoes of a Corporate Debtor (CD), only to find the company’s demat accounts frozen by market regulators or stock exchanges. The ensuing jurisdictional tug-of-war between the Securities and Exchange Board of India (SEBI) or exchanges like the BSE, and the National Company Law Tribunal (NCLT) often derailed the strict timelines of the Corporate Insolvency Resolution Process (CIRP).

Those days of regulatory gridlock may finally be over. In a highly significant recent ruling, the National Company Law Appellate Tribunal (NCLAT) dismissed appeals by the BSE, unequivocally upholding the NCLT’s jurisdiction to direct the de-freezing of a corporate debtor's demat accounts. This isn't just a procedural win; it is a profound reaffirmation of the IBC’s supremacy over peripheral statutory restrictions when it comes to insolvency administration.

The Legal Crux: Section 60(5) vs. Securities Law

The core of the BSE’s challenge rested on the premise that securities market restrictions—often imposed for non-compliance with listing norms or other regulatory infractions—operate in a distinct legal silo, immune to the NCLT's summary jurisdiction. The NCLAT dismantled this argument.

By upholding the NCLT's orders from 2024 and 2025, the Appellate Tribunal reinforced the true scope of Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016. This provision grants the NCLT "residuary jurisdiction" to entertain or dispose of any question of priorities or any question of law or facts arising out of or in relation to the insolvency resolution.

"Where the ownership of the shares by the Corporate Debtor is undisputed, a regulatory freeze cannot be allowed to obstruct the statutory duties of a Resolution Professional under the IBC."

Crucially, the NCLAT drew a sharp line between a genuine title dispute over securities and a mere regulatory freeze. Because the CD’s ownership of the demat shares was not in question, the freeze was purely an administrative roadblock. Under Section 18(f) of the IBC, the Interim Resolution Professional (IRP) is statutorily mandated to take control and custody of any asset over which the CD has ownership rights. The NCLAT rightly concluded that the NCLT must have the power to enforce this mandate, overriding exchange-level freezes.

Why This Matters for Practicing Lawyers

If you are advising a Resolution Professional, a Committee of Creditors (CoC), or even a prospective Resolution Applicant, this ruling fundamentally alters your strategic playbook.

1. The End of Forum Shopping: Previously, market infrastructure institutions (MIIs) would argue that an RP must approach the Securities Appellate Tribunal (SAT) or SEBI to lift a freeze. This fragmented the legal process, bleeding time and resources. The NCLAT has effectively shut down this defense. You can now confidently file an IA (Interlocutory Application) before the NCLT under Section 60(5) to unlock demat assets without stepping outside the insolvency ecosystem.

2. Expanding the "Non-Obstante" Umbrella: This ruling aligns perfectly with the overarching jurisprudence of Section 238 of the IBC, which dictates that the Code shall have an overriding effect over any other inconsistent law. We saw this previously when the Supreme Court ruled that the IBC prevails over the Customs Act regarding moratorium and claims handling. The NCLAT is simply applying that same ironclad logic to securities regulations.

3. Asset Maximization: Frozen shares often represent significant value. Whether they are shares of subsidiaries or market investments, the inability to liquidate them or transfer them as part of a Resolution Plan depresses the CD's valuation. Unlocking these accounts ensures higher recovery for creditors.

The Policy Backdrop: A Government Push for Speed

This judicial unblocking of CIRP bottlenecks comes not a moment too soon, especially given the intense political and economic pressure to speed up insolvency resolutions. The Finance Ministry recently directed CEOs of state-run banks to personally monitor the top 20 pending NCLT cases for admission and the top 10 accounts awaiting resolution.

The staggering backlog at the NCLT is no secret. Recently, the government informed Parliament that while 40,943 applications have been filed under the IBC, a massive 28,818 applications involving roughly Rs 10 lakh crore were resolved pre-admission.

What does this tell us? The IBC is currently functioning more effectively as an out-of-court settlement threat than as a timely resolution mechanism. The sheer terror of losing control to an RP forces promoters to settle before the NCLT admits the case. However, for the cases that do cross the threshold into formal CIRP, the delays are crippling.

The Bottom Line

The NCLAT’s decision to slap down the BSE’s appeals is a massive victory for the sanctity of the CIRP timeline. It sends a clear message to all sectoral regulators—whether it is SEBI, the Customs Department, or the EPFO: once a company enters the IBC hospital, the NCLT is the only doctor in charge of the assets.

For corporate and insolvency litigators, this development arms you with binding appellate precedent to aggressively pursue asset recovery and consolidation for your CD clients. Expect NCLT benches to be far less tolerant of statutory authorities weaponizing regulatory freezes to bypass the moratorium or obstruct the Resolution Professional moving forward.