Regulator Turf War: NCLAT Cements IBC’s Supremacy Over SEBI in the Demat Defreeze Saga

The Eternal Clash of Regulators

For any insolvency practitioner navigating the turbulent waters of the Corporate Insolvency Resolution Process (CIRP), sectoral regulators acting as parallel power centers is a familiar nightmare. When a Corporate Debtor (CD) enters CIRP, it often brings a baggage of historical non-compliances. Historically, the Securities and Exchange Board of India (SEBI) and stock exchanges have jealously guarded their enforcement actions, arguing that securities law operates in a silo untouched by the Insolvency and Bankruptcy Code (IBC).

On April 14, 2026, the National Company Law Appellate Tribunal (NCLAT) delivered a decisive blow to this siloed thinking. In a landmark ruling, the NCLAT dismissed BSE's challenges to Mumbai NCLT orders, definitively ruling that the NCLT holds the jurisdiction to direct the defreezing of demat accounts frozen under securities laws (such as Sections 9(2) and 21 of the SCRA, or LODR Regulations).

Why This Matters for Your Practice

If you are advising a Resolution Professional (RP) or the Committee of Creditors (CoC), this ruling fundamentally alters your litigation strategy.

Previously, RPs faced a procedural quagmire when trying to take control of a CD's frozen assets or securities. SEBI and stock exchanges routinely argued that lifting a regulatory freeze required approaching the Securities Appellate Tribunal (SAT), not the NCLT. This led to forum shopping, agonizing delays, and a direct violation of the IBC’s mandate for time-bound asset maximization.

The NCLAT’s reasoning is an elegant synthesis of three core IBC provisions:

• Section 14 (Moratorium): The freeze acts as an encumbrance that defeats the purpose of the moratorium, which is to keep the CD as a going concern.
• Section 60(5)(c) (Residuary Jurisdiction): The NCLT has the broad power to entertain any question of law or fact arising out of or in relation to the insolvency resolution. A frozen demat account directly impacts the estate of the CD.
• Section 238 (Overriding Effect): The non-obstante clause of the IBC trumps conflicting provisions in the SCRA or SEBI regulations.

"This ruling empowers RPs to consolidate their legal battles within the NCLT. You no longer need to litigate on two fronts. File an Interlocutory Application (IA) under Section 60(5) before the Adjudicating Authority, cite this NCLAT precedent, and demand the immediate release of the demat accounts to maximize the CD's asset value."

Superseded vs. Suspended: The SC Draws a Line for NBFCs

While the NCLAT was handling SEBI, the Supreme Court was busy clarifying a highly nuanced, yet critical, aspect of IBC practice regarding Financial Service Providers (FSPs). The Court settled the debate on whether superseded boards of RBI-regulated NBFCs and HFCs have the right to attend CoC meetings under Section 24(3)(b) of the IBC.

The Court drew a sharp, pragmatic distinction between a "suspended" board under Section 17 of the IBC and a "superseded" board under the RBI Act. When an ordinary CD goes into CIRP, the board is merely suspended—the directors retain a residual interest in the company's fate, hence their statutory right to participate (without voting) in the CoC. However, when the RBI supersedes a board due to severe governance failures, those directors are legally stripped of their office entirely. They are legally dead to the company. Therefore, they have no locus standi to demand a seat at the CoC table.

For banking and finance lawyers, this shuts the door on ousted NBFC promoters trying to backdoor their way into the resolution process to create procedural hurdles.

Judicial Impatience: The NCLT Delay Crisis

We cannot discuss IBC developments without addressing the elephant in the room: the catastrophic delays at the NCLT level. On May 4, 2026, the Supreme Court issued a scathing reprimand regarding NCLT's inability to adhere to the 330-day timeline. Calling a specific 2-year pendency for approving a resolution plan "very unfortunate," the Apex Court has now directed a nationwide report on NCLT delays.

In the same breath, the Court dismissed Byju Raveendran’s appeal in the Think & Learn CIRP, upholding the NCLT’s restoration of the original CoC (which included Aditya Birla and Glas Trust) as a "perfect order."

The takeaway here is clear: The Supreme Court is running out of patience with the Adjudicating Authorities. While the IBC's legal framework is being interpreted robustly to favor the CD's revival (as seen in the SC's parallel ruling that corporate guarantees backed by hypothecation unequivocally qualify as "financial debt" under Section 5(8)), the infrastructural bottlenecks of the NCLT threaten to undo this jurisprudential progress.

The Road Ahead: Cross-Border Insolvency

Looking forward, the legislative machinery is finally moving. The IBBI's proposed 68-70 amendments—currently fresh off a select committee report—are setting the stage for the much-awaited cross-border and group insolvency frameworks. With plans underway for a Special NCLT Bench dedicated exclusively to cross-border cases, India is signaling its intent to align with the UNCITRAL Model Law.

For Indian corporate lawyers, the message from the tribunals and the Supreme Court this May is unequivocal: The IBC is the supreme economic legislation of the land. It will not bow to SEBI, it will not entertain ousted NBFC promoters, and it will not tolerate bad-faith delays. Practitioners must adapt to this aggressive, creditor-centric reality or risk being left behind.