The Section 238 Battering Ram: Why SEBI's Turf War with the NCLT Could Redefine Corporate Insolvency

The Non-Obstante Conundrum: Is the IBC Eating Sectoral Regulators Alive?

For insolvency practitioners, Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC) has long been the ultimate trump card. The non-obstante clause ensures that the IBC overrides any inconsistent laws. But in 2026, this provision has transformed from a shield for Resolution Professionals (RPs) into a battering ram against sectoral regulators—most notably, the Securities and Exchange Board of India (SEBI).

The prevailing legal trend this year is the unquestioned supremacy of the IBC over the SEBI Act regarding the realization of a corporate debtor’s assets. While the National Company Law Tribunal (NCLT) and the Appellate Tribunal (NCLAT) have consistently prioritized the insolvency resolution process, SEBI has finally drawn a line in the sand. With the market regulator moving the Supreme Court for a definitive ruling expected in July 2026, corporate lawyers need to brace for a watershed judgment that will dictate how competing statutory mandates coexist.

De-freezing Demat Accounts: A Major Win for RPs

The NCLAT recently expanded the practical jurisdiction of the NCLT by upholding its power to direct the de-freezing of demat accounts of corporate debtors, specifically in appeals involving BSE Limited. SEBI and the exchanges routinely freeze these accounts as a punitive or protective measure against securities law violations. However, the NCLAT has clarified that such regulatory freezes cannot impede the insolvency resolution process.

"Regulatory policies cannot hinder the efficient administration and realization of a corporate debtor's assets under the IBC. Where regulatory actions impede the process, the IBC must prevail."

Why this matters for practice: If you are advising an RP or a Liquidator, this ruling is a massive tactical advantage. RPs frequently face administrative paralysis when taking over a Corporate Debtor (CD) whose financial assets are locked down by SEBI or the Enforcement Directorate. This NCLAT ruling gives you the precedent needed to file an application before the Adjudicating Authority to immediately unfreeze demat accounts, bringing crucial liquid assets back into the CD’s estate to fund the Corporate Insolvency Resolution Process (CIRP) costs or facilitate a resolution plan.

The CIS Battlefield: Who Owns the Spoils of Fraud?

The most explosive conflict heads to the Supreme Court this July, centering on Collective Investment Schemes (CIS). When an entity runs an unregistered or fraudulent CIS, SEBI’s statutory mandate is to attach the assets and refund the duped investors. However, when that same entity is dragged into CIRP, the NCLT has been ruling that Section 238 prevails, pulling those attached assets into the IBC's liquidation waterfall under Section 53.

SEBI’s argument before the Supreme Court is fundamentally sound: assets pooled from investors in a fraudulent CIS are held in trust. They are not the proprietary assets of the Corporate Debtor, and therefore, under Section 18(1)(f) of the IBC, the RP should not be allowed to take control of them.

Our Take: The NCLT's blanket application of Section 238 here creates a dangerous moral hazard. If a CD's fraudulently acquired assets are thrown into the IBC waterfall, secured financial creditors (banks) will take the lion's share, leaving the actual victims—retail investors—with pennies on the rupee as unsecured operational creditors. The Supreme Court must carve out an exception for assets held in trust or acquired ex facie through statutory fraud. Section 238 was meant to resolve bad debt, not to launder the proceeds of securities fraud for the benefit of secured lenders.

Simultaneous CIRP and the Section 95 Moratorium

Beyond the SEBI clash, the Supreme Court and NCLAT have delivered critical clarifications on creditor strategies in 2026.

First, the Supreme Court has definitively ruled that simultaneous CIRP against a principal debtor and a corporate guarantor is maintainable. Relying on Section 128 of the Indian Contract Act, 1872, the Court reiterated that the liability of a surety is co-extensive with that of the principal debtor. For banking lawyers, this means you no longer need to sequence your IBC filings. You can, and should, hit both the company and the corporate guarantor simultaneously to maximize pressure and recovery prospects.

Second, regarding personal guarantors, the NCLAT has clarified the mechanics of the interim moratorium under Section 95. The tribunal observed that the interim moratorium commences automatically upon the mere filing of the application. However, there is a catch: if the filing is made before an Adjudicating Authority lacking territorial or subject-matter jurisdiction, the moratorium is void ab initio.

Cross-Border Insolvency: The Paper Tiger of 2026

Parliament has finally passed the Insolvency and Bankruptcy Code (Amendment) Act, 2026, introducing Section 240C to deal with cross-border insolvency proceedings. This is India's delayed nod to the UNCITRAL Model Law.

However, practitioners should temper their excitement. Section 240C is merely an enabling provision empowering the Central Government to draft rules for recognition and judicial cooperation. As of July 2026, these rules have not been notified. Until the Ministry of Corporate Affairs operationalizes this framework, Indian creditors chasing offshore assets of defaulting promoters will still have to rely on cumbersome bilateral treaties and letters of request, severely limiting the immediate practical utility of the amendment.

Conclusion

The first half of 2026 has aggressively entrenched the IBC as the apex economic legislation in India, often at the expense of market regulators. While this ensures a smoother CIRP, it sets up a high-stakes showdown at the Supreme Court. Litigators should watch the July SEBI vs. NCLT hearings closely—the outcome will determine whether the IBC remains an unstoppable force, or if the courts will finally build a regulatory wall it cannot breach.