Territorial Truce or Turf War? NCLAT Cements NCLT’s Supremacy Over Frozen Demat Accounts

The Never-Ending Clash Between Insolvency and Securities Law

For practicing corporate lawyers, the intersection of the Insolvency and Bankruptcy Code (IBC) and securities regulations has always felt like a jurisdictional minefield. When a Corporate Debtor (CD) goes into insolvency, what happens when its most liquid assets—shares held in demat accounts—are frozen by stock exchanges or the Securities and Exchange Board of India (SEBI)?

Until now, Resolution Professionals (RPs) have been forced into a bureaucratic quicksand, running between the National Company Law Tribunal (NCLT) and securities regulators to unlock value. But in a massive win for the IBC's underlying objective of value maximization, the NCLAT has finally drawn a hard line.

The Appellate Tribunal recently upheld the NCLT’s power to direct the de-freezing of demat accounts belonging to corporate debtors, dismissing a direct challenge by the Bombay Stock Exchange (BSE). This isn't just a procedural update; it is a definitive ruling that recalibrates the balance of power between market regulators and insolvency courts.

Section 60(5) Flexes Its Muscles Again

The NCLAT’s rationale hinges on the ever-expansive Section 60(5)(c) of the IBC, which grants the NCLT jurisdiction to entertain any question of law or fact arising out of or in relation to the insolvency resolution process. The Appellate Tribunal correctly diagnosed that when undisputed assets are locked up by securities-side restraints, it fundamentally obstructs the Corporate Insolvency Resolution Process (CIRP).

Why does this matter for your practice? If you are advising an RP, this ruling is your new battering ram. You no longer need to file separate appeals with the Securities Appellate Tribunal (SAT) to lift exchange-level freezes, provided the ownership of the shares is undisputed.

"The NCLT is not usurping SEBI's regulatory mandate; it is simply ensuring that the Corporate Debtor's undisputed estate is available for realization. A frozen demat account in an insolvency scenario is a dead asset, which is anathema to the very soul of the IBC."

This ruling breathes life into the non-obstante clause of Section 238 of the IBC. While SEBI and BSE have legitimate interests in preventing market manipulation, those interests cannot indefinitely paralyze a time-bound CIRP. The NCLAT has essentially stated that once the insolvency commencement date hits, the objective of asset realization overrides procedural market freezes.

Expanding NCLT Powers... With a Catch

While the NCLAT is expanding the NCLT’s reach over assets, it is simultaneously pulling the reins on procedural fairness in investigations. In another critical order dated May 15, 2025, the NCLAT clarified the NCLT’s power to order investigations into a company’s affairs under Section 213 of the Companies Act, 2013, read with Rule 11 of the NCLT Rules, 2016.

Often, warring factions in a CoC or aggressive RPs will push the NCLT to order a sweeping SFIO (Serious Fraud Investigation Office) probe into the CD’s past affairs as a pressure tactic against promoters. The NCLAT held that while the NCLT absolutely possesses the jurisdiction to order such probes during insolvency proceedings, it cannot do so arbitrarily.

The procedural safeguard is non-negotiable: The NCLT must afford a reasonable opportunity of being heard to the affected parties before directing an investigation. For litigators, this means you can successfully challenge ex-parte investigation orders directed against erstwhile promoters or directors if the tribunal skipped the fundamental principles of natural justice.

The Macro View: 12,000 Pending Cases and FinMin’s Impatience

You cannot look at these jurisdictional expansions in a vacuum. The NCLT is being empowered precisely because the system is buckling under its own weight. As of December 31, 2024, a staggering 12,351 IBC cases are pending before various NCLT benches.

The government recently highlighted a silver lining: 28,818 insolvency applications involving roughly ₹10 lakh crore were resolved prior to admission. While pre-admission settlements are keeping the system afloat, the actual CIRP pipeline is clogged. This has prompted the Finance Ministry to step in and direct public sector banks to fast-track IBC matters, demanding that bank CEOs personally monitor top pending resolutions.

What this means for your daily practice: Expect a highly aggressive posture from Financial Creditors. Banking lawyers should anticipate strict mandates from Committees of Creditors (CoCs) to file Section 7 applications faster and push for rapid NCLT hearings. The pressure from the FinMin on bank CEOs will trickle down directly to the empanelled law firms. If you are representing a CD, expect less leniency and fewer adjournments in the coming quarters.

The Verdict

The NCLAT’s recent jurisprudence is sending a clear message: The IBC is the apex economic legislation, and the NCLT is its sole custodian. By striking down BSE’s challenge on demat freezes and streamlining investigation protocols, the appellate tribunal is trying to clear the brush for RPs to do their jobs.

However, an empowered NCLT is only half the battle. Unless the infrastructural bottlenecks at the tribunal level are addressed, giving the NCLT more jurisdictional authority over SEBI or the MCA will only mean more complex interim applications piling up in an already overwhelmed docket. The law is evolving exactly as it should—but the machinery executing it needs a desperate overhaul.