The IBC Turf War: Why SEBI Keeps Losing to Section 238 and What It Means for Creditors

The Endless Regulatory Tug-of-War

If there is one consistent theme defining Indian corporate insolvency jurisprudence in early 2026, it is the fierce, ongoing turf war between market regulators and the Insolvency and Bankruptcy Code (IBC). And once again, the IBC is winning.

Recent rulings from the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court highlight a continuing friction: the Securities and Exchange Board of India (SEBI) attempting to enforce its regulatory mandate, only to be stonewalled by the overarching primacy of the IBC. For practicing corporate lawyers, Resolution Professionals (RPs), and liquidators, these developments are not just academic—they are the tactical blueprint for unlocking distressed assets trapped in regulatory crosshairs.

Section 238 Remains the Ultimate Trump Card

The most consequential development comes from an April 2026 NCLAT ruling involving the BSE and frozen demat accounts. The appellate tribunal emphatically held that the IBC prevails where securities-regulatory restrictions interfere with insolvency administration and asset realization. This mirrors a parallel NCLAT decision where SEBI was barred from pursuing the recovery of a penalty once the liquidation process of a corporate debtor had commenced.

The statutory basis for these defeats is Section 238 of the IBC, the non-obstante clause that overrides inconsistent laws.

"The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

Why this matters for your practice: If you are advising an RP or a Liquidator, SEBI and Enforcement Directorate (ED) attachments are often the biggest absolute roadblocks to a successful resolution or liquidation. The NCLAT’s strict interpretation means you can confidently litigate to unfreeze demat accounts and bypass regulatory attachments. SEBI’s claims for penalties are, at best, operational debts. Under the Section 53 waterfall mechanism, regulatory penalties sit near the bottom. The tribunals are sending a clear message: market regulators cannot jump the queue by relying on their special statutes.

Strict Guillotine on Liquidation Claims

The NCLAT’s recent refusal to let SEBI recover penalties post-liquidation commencement reinforces a fundamental tenet of insolvency law: the freezing of claims. As the tribunal noted, the IBC "clearly freezes all claims" as of the liquidation commencement date under Section 33(5).

This is a critical reminder for creditors' counsels. The moment the liquidation order is passed, the estate is crystallized. Attempting to initiate or continue recovery proceedings outside the IBC framework is not just a waste of client funds; it borders on an abuse of process. Regulators need to adapt to the reality of the Ghanshyam Mishra "clean slate" doctrine rather than repeatedly litigating settled law.

Supreme Court Clamps Down on SRA "Buyer's Remorse"

While the NCLAT was busy fending off SEBI, the Supreme Court addressed another systemic headache: Successful Resolution Applicants (SRAs) trying to back out of approved plans.

In May 2026, the apex court reaffirmed the binding nature of Committee of Creditors (CoC)-approved resolution plans under Section 31 of the Code. The Court held that an SRA cannot later object to accepted terms or attempt to wriggle out of the resolution plan once the CoC has stamped its approval.

The practical takeaway: M&A teams and restructuring lawyers must ensure their due diligence is entirely watertight before submitting a resolution plan. The Indian insolvency regime does not entertain "buyer's remorse" or post-facto material adverse change (MAC) walk-aways. If your client bids and wins the CoC vote, they are legally bound to fund the plan. Failure to do so risks forfeiture of performance bank guarantees and potential prosecution under Section 74 of the IBC.

Corporate Guarantees as Financial Debt

In a significant structuring clarification, the Supreme Court also recently ruled that a corporate guarantee backed by security arrangements can amount to a financial debt under Section 5(8) of the IBC.

For banking and finance lawyers, this is a crucial validation of standard lending structures. It confirms that invoking a corporate guarantee grants the guarantee-holder a rightful seat at the CoC table as a financial creditor, ensuring their voting rights are protected during the Corporate Insolvency Resolution Process (CIRP).

Personal Insolvency: Tactical Use of Moratoriums

Finally, we are seeing crucial jurisprudence solidify around the Personal Insolvency Resolution Process (PIRP). Recent NCLAT guidelines clarified the mechanics of moratoriums under Chapter III of Part III of the Code:

• Section 95: The interim moratorium starts automatically upon the filing of the application, subject to jurisdictional validity. Debtors' counsels are increasingly using this as an immediate shield against personal guarantor asset attachments.
• Section 101: While the statutory moratorium is strictly capped at 180 days, the NCLAT noted there is no statutory bar on extending the PIRP itself in appropriate cases.

The litigation strategy: For creditors targeting personal guarantors, speed is everything. Because the Section 95 moratorium triggers automatically, creditors must be prepared to immediately challenge the jurisdictional validity of the debtor's filing at the NCLT to prevent continuous stalling.

The Bottom Line

The overarching narrative from the NCLT, NCLAT, and the Supreme Court in 2026 is one of strict adherence to the IBC's procedural timelines and asset-maximization goals. Whether it is SEBI trying to enforce securities law, or an SRA trying to renegotiate a bad deal, the judicial consensus is absolute: the IBC is a comprehensive code, its timelines are sacred, and its non-obstante clause takes no prisoners.