The Regulatory Turf War Reaches the Apex: How Section 238 is Turning the IBC into a 'Super-Statute' at SEBI's Expense

The Collision Course: Market Regulation vs. Creditor Maximization

The corporate insolvency landscape in India has historically been a fragmented battlefield, but 2026 is shaping up to be the year we finally decide who holds the ultimate trump card. The escalating jurisdictional clash between the Securities and Exchange Board of India (SEBI) and the National Company Law Tribunal (NCLT) has reached a boiling point, culminating in a high-stakes Supreme Court showdown scheduled for July 2026.

At the heart of this dispute is a fundamental philosophical question: When a company goes belly-up, does the need to rescue the corporate debtor and pay off creditors override the market regulator’s mandate to penalize fraud and protect investors? If recent NCLT and NCLAT rulings are any indication, the answer is a resounding yes.

Weaponizing Section 238 and Section 60(5)

The linchpin of the NCLT's aggressive expansion of power is Section 238 of the Insolvency and Bankruptcy Code (IBC), which contains a non-obstante clause giving the Code overriding effect over any other inconsistent law. We are now seeing Resolution Professionals (RPs) and Liquidators successfully wield this section to bulldoze through regulatory hurdles.

Take the recent appellate ruling dismissing BSE Limited's appeals. SEBI and stock exchanges routinely freeze the demat accounts of errant promoters and corporate debtors to prevent asset stripping. However, the NCLAT has firmly upheld that the NCLT possesses the residuary jurisdiction under Section 60(5) of the IBC to direct the defreezing of these accounts during insolvency and liquidation.

"The statutory mandate of the IBC is corporate revival and value maximization. Regulatory freezes, while vital for market integrity, cannot be allowed to paralyze the CIRP or liquidation process."

For practicing lawyers representing RPs, this is a green light. It confirms that you do not need to fight parallel, protracted battles before the Securities Appellate Tribunal (SAT) to release assets. NCLT is your one-stop shop. The IBC is effectively being treated as a 'super-statute' that forces regulators to take a backseat once the insolvency commencement date is triggered.

The Absolute Sanctity of the Liquidation Commencement Date

The NCLAT’s ruling in the Annies Apparel (Religare Finvest) matter further cements this hierarchy. SEBI attempted to recover a penalty imposed for fund diversion after the liquidation process had commenced. The NCLAT shut this down entirely, ruling that the IBC "clearly freezes all claims" on the liquidation commencement date.

Why does this matter for your practice? It establishes the "inviolable sanctity" of the liquidation commencement date. If you are advising statutory authorities—whether it’s SEBI, the Enforcement Directorate (ED), or the Income Tax Department—the advice must be clear: File your claims before the cutoff, or lose them permanently. Liquidators are now legally shielded from entertaining regulatory penalty claims that crystallize post-liquidation commencement. Regulators are, for all practical purposes, being treated merely as operational creditors who must stand in line under the Section 53 waterfall mechanism.

Ripple Effects: Simultaneous CIRP, D&O Insurance, and Section 29A

While the SEBI vs. IBC battle dominates the headlines, several other vital 2026 developments demand a shift in litigation strategy:

1. Simultaneous CIRP Proceedings: Following the Supreme Court’s stance in ICICI Bank v. Era Infrastructure, lawyers can confidently initiate simultaneous CIRPs against both the principal corporate debtor and its corporate guarantor. There is no longer a need to sequence these filings, accelerating the recovery process for financial creditors.

2. The Section 29A Nuance: The NCLAT has clarified that former promoters and directors—even undischarged insolvents in specific contexts—can submit resolution plans, provided they do not squarely hit the disqualification triggers of Section 29A. Litigators challenging resolution plans can no longer rely on blanket "promoter taint" arguments; they must strictly prove Section 29A ineligibility.

3. Section 66 and D&O Insurance Scrutiny: With SEBI now mandating Directors and Officers (D&O) insurance for independent directors of the top 1000 listed companies, expect a surge in Section 66 (Fraudulent Trading) applications. RPs will increasingly target directors, knowing there is a deep insurance pocket to recover from. Corporate lawyers must rigorously audit board minutes to build "due diligence" defenses for independent directors long before a CIRP is ever triggered.

Looking Ahead: The July Showdown and NCLT Expansion

The incoming Insolvency and Bankruptcy Code (Amendment) Act, 2026 aims to iron out procedural bottlenecks, but its true test will be how it interacts with the Supreme Court's impending judgment in July. SEBI has correctly identified that if the NCLT can routinely override its asset-freeze orders, its regulatory teeth are significantly blunted in cases involving Collective Investment Schemes (CIS).

Simultaneously, the government’s move to inject 100 new members into the NCLT signals an intent to drastically reduce pendency. For the bar, this means faster listing of interim applications (IAs) and less reliance on "systemic delay" as a defensive tactic for suspended management.

The Bottom Line: The era of regulatory ring-fencing is ending. As we await the Supreme Court's verdict this July, the prevailing legal wind is clear: The IBC is the apex economic legislation in India. Market regulators must adapt to the discipline of the Code, rather than expecting the Code to yield to their regulatory mandates.