The Section 60(5) Juggernaut: NCLAT Backs NCLT’s Power to Override SEBI Rules, But Hits the Brakes on Procedural Overreach

The Unstoppable March of NCLT's Residuary Jurisdiction

For insolvency practitioners, Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) has become the ultimate Swiss Army knife. It is the residuary clause that allows the National Company Law Tribunal (NCLT) to entertain any question of law or fact arising out of or in relation to the insolvency resolution of a Corporate Debtor. This week, the National Company Law Appellate Tribunal (NCLAT) delivered two massive rulings that define the exact borders of this jurisdiction in 2026—expanding it in one direction, while firmly curbing it in another.

The core message from the appellate tribunal is clear: The IBC is a special, overriding code that will bulldoze sectoral regulations if they obstruct asset maximization. However, the NCLT cannot use this power to bypass fundamental principles of natural justice, particularly when ordering corporate investigations.

Defreezing Demat Accounts: IBC Trumps Securities Law

In a major setback for the Bombay Stock Exchange (BSE), the NCLAT has dismissed pleas challenging the NCLT’s power to defreeze demat accounts of corporate debtors. The BSE had argued that demat freezes, often initiated due to non-compliance with SEBI listing obligations, fall squarely within the domain of securities law and cannot be undone by an insolvency tribunal.

The NCLAT fundamentally disagreed. By treating the defreezing of demat accounts as an issue intrinsically connected to the Corporate Debtor’s assets and the Corporate Insolvency Resolution Process (CIRP), the NCLAT invoked the broad umbrella of Section 60(5)(c).

Why does this matter for practicing lawyers?

If you are advising a Resolution Professional (RP), you already know the nightmare of taking control of a Corporate Debtor’s assets only to find them locked down by other statutory authorities. We have seen this battle fought and won against the taxman and the customs department—most notably in the Supreme Court’s landmark ruling in Sundaresh Bhatt v. CBIC, which cemented the supremacy of Section 238 of the IBC over the Customs Act.

This latest NCLAT ruling extends that supremacy to securities market regulations. It arms RPs with the exact precedent needed to approach the NCLT and force depositories (NSDL/CDSL) and stock exchanges to lift asset freezes. The takeaway is absolute: If a regulatory freeze obstructs the CIRP or prevents the realization of the insolvency estate, the non-obstante clause of the IBC will prevail.

The Procedural Brake: Investigations Under the Companies Act

While the NCLAT was happy to expand the NCLT’s reach into securities law, it took a surprisingly strict stance on the tribunal's investigative powers. In a separate ruling dated May 15, 2026, the NCLAT held that while the NCLT does have the power to direct investigations into a company’s affairs under the Companies Act, 2013 during insolvency proceedings, it cannot do so arbitrarily.

"The power to direct an investigation into the affairs of a company is a drastic measure. It cannot be ordered as a matter of routine merely because a Corporate Insolvency Resolution Process is underway. Statutory preconditions must be met, and the parties must be afforded a reasonable opportunity of being heard."

For years, RPs and angry Committees of Creditors (CoCs) have used Section 66 of the IBC (fraudulent or wrongful trading) in tandem with requests for broader investigations under Section 210 or 213 of the Companies Act to corner suspended management. Tribunals have occasionally been trigger-happy, ordering sweeping probes based on preliminary forensic audits without giving promoters a chance to defend themselves.

The strategic shift for litigators:

If you represent suspended directors or promoters, this ruling is your new shield. You can now successfully challenge any NCLT order that directs a Serious Fraud Investigation Office (SFIO) or Central Government probe if the NCLT failed to issue notice and conduct a hearing specifically on the necessity of the investigation. Audi alteram partem has been firmly injected back into the intersection of the IBC and the Companies Act.

The Pre-Admission Bottleneck: A Systemic Crisis

While appellate jurisprudence evolves, the ground reality at the NCLT remains grim. This month, the Finance Ministry directed public-sector bank CEOs to personally monitor top pending IBC matters to fast-track resolutions. This policy push coincides with a staggering government disclosure in the Lok Sabha: over 28,818 insolvency applications involving roughly Rs 10 lakh crore have been resolved before admission.

Let’s be brutally honest—this is not a sign of the IBC working flawlessly. It is evidence that Section 9 applications by Operational Creditors have turned the NCLT into a glorified debt recovery agency. Companies are settling at the pre-admission stage under the sheer terror of losing board control to an RP.

While out-of-court settlements are generally positive, they are clogging the NCLT dockets. Genuine financial creditors (like the PSU banks the Finance Ministry is currently prodding) are forced to wait in line behind thousands of operational creditors using the threat of insolvency to recover minor trade dues. Until the legislature increases the default threshold again or penalizes frivolous Section 9 filings, the Finance Ministry's directive to "fast-track" will remain a pipe dream.

The Bottom Line

The jurisprudence of 2026 is solidifying the NCLT as a super-regulator of distressed assets, capable of swatting away SEBI/BSE restrictions to keep the CIRP moving. However, the NCLAT is finally drawing a line in the sand regarding procedural fairness. As a practitioner, your strategy is clear: use Section 60(5) aggressively to consolidate and protect the estate, but ensure your procedural groundwork is flawless when alleging fraud or seeking investigations. The days of ambush litigation in insolvency courts are slowly coming to an end.