Regulatory Hubris Meets the IBC: Why NCLAT is Stripping SEBI and Stock Exchanges of their Freezing Powers

The Endless Turf War: IBC vs. Market Regulators

For practicing insolvency lawyers, the friction between the Insolvency and Bankruptcy Code (IBC) and market regulators is a tale as old as the Code itself. From the SEBI vs. Bhanu Ram days to the current landscape of 2026, the turf war has fundamentally been about one question: Does a statutory regulator’s penal power trump the IBC’s mandate for value maximization? Recent rulings from the NCLAT provide a resounding, unequivocal no.

In a pair of defining decisions this year, the appellate tribunal has systematically dismantled the attempts of SEBI and stock exchanges to bypass the IBC framework. For Resolution Professionals (RPs) and Liquidators, these rulings are potent ammunition. For regulators, it is a harsh reminder that the non-obstante clause of Section 238 is an immovable object.

Expanding Section 60(5): Unfreezing Demat Accounts

The most significant development for corporate practitioners comes from the April 14, 2026, NCLAT ruling dismissing the BSE's challenge against NCLT Mumbai. The core issue was jurisdictional: Can the NCLT order the de-freezing of demat accounts that were frozen by a stock exchange under the Securities Contracts (Regulation) Act (SCRA) and SEBI (LODR) Regulations?

The BSE argued that actions taken under SCRA Sections 9(2) and 21, and LODR Regulations 14 and 98, operate in a separate regulatory silo, immune to NCLT interference. NCLAT rightly called their bluff. Relying on the residuary jurisdiction under Section 60(5)(c) of the IBC—which empowers the NCLT to entertain any question of law or fact arising out of or in relation to the insolvency resolution—the NCLAT ruled that NCLT absolutely has the power to unfreeze these accounts.

"When an asset undisputedly belongs to the Corporate Debtor, regulatory freezes cannot operate to defeat the core objectives of the IBC, namely asset maximization and the Section 14 moratorium."

Why this matters in practice: If you are advising an RP, you know how frustrating it is to hunt down the CD’s liquid assets only to find them locked up by a stock exchange compliance freeze. This ruling effectively establishes that Section 60(5) is the ultimate skeleton key. You no longer need to litigate unfreezing orders before the Securities Appellate Tribunal (SAT). You can drag the exchanges directly before the NCLT, citing that frozen demat accounts hinder the CIRP process and violate the Section 14 moratorium. This drastically reduces forum shopping and consolidates the RP's control over the CD's estate.

SEBI’s Late Homework: The Sanctity of the Liquidation Date

Statutory regulators often operate under the delusion that limitation periods are mere suggestions. The NCLAT's recent ruling in the Annies Apparel liquidation case shatters this notion.

SEBI attempted to recover a ₹21.80 lakh penalty from the liquidator. The problem? SEBI filed its claim a staggering 797 days after the liquidation commencement date. The NCLAT upheld the NCLT's rejection of the claim, pointing to the strict timelines embedded in the IBBI (Liquidation Process) Regulations, 2016.

From a doctrinal perspective, this reinforces the "inviolable sanctity" of the liquidation commencement date. The IBC is a time-bound mechanism; allowing a regulator to waltz in over two years late disrupts the waterfall mechanism under Section 53 and creates deep uncertainty for stakeholders.

Practice tip: Liquidators must take a hardline stance against late claims from government departments. The precedent is clear: statutory dues do not carry a "get out of jail free" card for procedural lapses. If SEBI, the tax department, or the EPFO misses the 30-day window under Regulation 16 of the Liquidation Process Regulations, reject the claim. The NCLAT will back you up.

The Elephant in the Room: Supreme Court Flags Systemic Delays

While the substantive law heavily favors the IBC, the procedural reality is grim. Substantive victories mean little if the institutional machinery is broken. The Supreme Court recently expressed severe exasperation over NCLT delays, terming it "very unfortunate" that a resolution plan approval was pending for nearly two years.

Under Section 31 of the IBC, the NCLT's mandate is merely to verify if the plan approved by the Committee of Creditors (CoC) complies with Section 30(2). It is not meant to be a sprawling, multi-year adjudicatory process. Yet, dockets are choked. The Supreme Court has now directed a nationwide report from NCLT benches regarding pending plans.

Adding to this institutional critique, the Supreme Court's order liquidating Jet Airways included sharp criticism of the NCLAT for disregarding prior apex court judgments on resolution plan compliance. This signals a growing judicial impatience with tribunals that either drag their feet or stray from settled jurisprudence.

The Verdict

For the Indian corporate lawyer, the current landscape requires a bifurcated strategy. Substantively, you must aggressively wield the IBC's overriding powers. Whether it is a pending defunct scheme under the Companies Act (which the SC recently confirmed cannot stall a Section 7 CIRP admission) or a demat freeze by the BSE, the IBC is the apex predator of corporate law.

Procedurally, however, litigators must manage client expectations. The government's plans to introduce a special NCLT bench for cross-border insolvency and increase NCLAT members are welcome, but they are band-aids on a gaping wound. Until the NCLT's infrastructural deficit is solved, the "time-bound" promise of the IBC will remain its most glaring fiction.