The Turf War Ends here: NCLAT Weaponizes Section 60(5) to Override Securities Freezes in CIRP

The Eternal Turf War: IBC vs. Regulators

If there is one perennial headache for a Resolution Professional (RP) managing a Corporate Insolvency Resolution Process (CIRP), it is the inevitable jurisdictional turf war. The moment a Corporate Debtor (CD) goes into insolvency, every sectoral regulator—from the Enforcement Directorate to Customs, and notably, the Securities and Exchange Board of India (SEBI)—suddenly remembers their pending claims and slaps freezing orders on the CD's assets.

For practicing insolvency lawyers, this usually means months lost in appellate tribunals trying to lift attachments just so the RP can perform their statutory duty under Section 18 of the Insolvency and Bankruptcy Code (IBC) to take control of the assets. But a recent National Company Law Appellate Tribunal (NCLAT) ruling on the intersection of securities law and insolvency is changing the game, delivering a massive shot in the arm to the NCLT’s residuary jurisdiction.

The NCLAT Ruling: Unlocking Frozen Demat Accounts

The recent NCLAT ruling confronted a classic conflict: What happens when a CD’s demat accounts are frozen due to securities-regulatory restraints, preventing the RP from accessing uncontested assets? Historically, regulators have argued that the NCLT cannot interfere with their statutory orders, directing RPs to approach the Securities Appellate Tribunal (SAT) or High Courts.

The NCLAT has firmly rejected this siloed approach. It upheld the NCLT’s power to direct the de-freezing of demat accounts where the shares were undisputedly owned by the corporate debtor. The Tribunal categorized the unfreezing as a matter inherently connected to the insolvency resolution process, bringing it squarely within the ambit of Section 60(5) of the IBC.

"When a regulatory restraint merely blocks the use or sale of debtor assets and no longer decides an active regulatory question, the IBC’s mandate for value maximization and asset consolidation must prevail."

This is a brilliant, pragmatic interpretation of the law. It draws a clear line between a regulator's right to determine a penalty (an active regulatory question) and a regulator's right to indefinitely paralyze an asset (a mere restraint). Once a company is in CIRP, the latter must yield to the IBC.

The Legal Bedrock: Sections 60(5) and 238

Why does this development matter so much for your everyday practice?

Because it expands the tactical utility of Section 60(5)(c), which allows the NCLT to entertain or dispose of any question of law or facts arising out of or in relation to the insolvency resolution. For years, the Supreme Court in judgments like Gujarat Urja Vikas Nigam Ltd. warned against the NCLT usurping the jurisdiction of other forums. Regulators weaponized this to keep RPs locked out of frozen assets.

However, this NCLAT ruling harmonizes Section 60(5) with Section 238 (the overriding non-obstante clause of the IBC). It establishes that if an asset is uncontested property of the CD, maintaining a regulatory freeze directly frustrates the CIRP. By treating the de-freezing as a "question arising out of insolvency," the NCLAT has given RPs a direct, single-window remedy before the NCLT, bypassing the labyrinth of SAT or writ courts.

What This Means for the Practicing Insolvency Lawyer

If you are representing an RP, this ruling changes your litigation strategy immediately:

• Stop forum shopping: You no longer need to advise your RP clients to file tedious applications before SEBI or SAT to lift protective freezes on demat accounts.
• File an IA under Section 60(5): Draft your Interlocutory Application clearly demonstrating that the frozen shares are undisputed property of the CD and that the freeze is a mere asset-blocking restraint, not an active adjudication of a securities violation.
• Cite the overriding effect: Argue that under Section 238, the mandate to consolidate assets for the Committee of Creditors (CoC) supersedes the regulatory freeze.

For lawyers representing SEBI or opposing creditors, the defense just got much harder. You will now have to prove that the demat freeze is tied to an ongoing, active adjudication of title or fraud, rather than just a protective measure for regulatory recovery.

The Macro View: Fast-Tracking in the Shadow of Pre-Admission Settlements

This judicial push to remove bottlenecks aligns perfectly with the executive's current panic over IBC delays. The Finance Ministry recently issued an urgent directive to banks to fast-track IBC cases, demanding that bank CEOs personally monitor the top 20 admission-stage cases and 10 accounts awaiting resolution.

The government's internal data, cutting off at December 2024, reveals a fascinating dichotomy. On one hand, the IBC is a spectacular deterrent: 28,818 applications involving Rs 10 lakh crore were resolved even before admission. The mere threat of losing control to an RP forces promoters to pay up.

But on the other hand, the actual machinery is clogged. With over 12,351 cases pending under the IBC, the Finance Ministry's directive for banks to "coordinate closely with counsel and ensure timely filing" is a direct message to the legal fraternity: Stop the endless procedural delays.

When you view the NCLAT's de-freezing order alongside the Finance Ministry's mandate, the trajectory of Indian corporate law in 2025-2026 is crystal clear. The tolerance for parallel regulatory litigation that stalls CIRP timelines is zero. The NCLT is being cemented as the absolute focal point for all matters touching a distressed company's assets. As practitioners, it is time to stop fighting regulatory battles in multiple forums and start centralizing your asset-recovery strategies under the wide umbrella of Section 60(5).