The Ultimate Override: NCLAT Champions IBC Over Securities Law in the Demat Freeze Duel

The Turf War Continues: IBC vs. Market Regulators

For insolvency practitioners, the tug-of-war between the Insolvency and Bankruptcy Code (IBC) and other regulatory frameworks is a familiar headache. Whenever a Corporate Debtor (CD) enters into the Corporate Insolvency Resolution Process (CIRP), market regulators—particularly SEBI and the stock exchanges—often dig in their heels, treating their penal actions as sacrosanct. However, in a watershed ruling on April 14, 2026, the National Company Law Appellate Tribunal (NCLAT) delivered a decisive blow in favor of the IBC, ruling that the NCLT has the absolute jurisdiction to order the de-freezing of demat accounts frozen by the BSE and SEBI.

This isn't just a procedural footnote; it is a critical victory for Resolution Professionals (RPs) and the fundamental objective of asset maximization. When a company defaults on securities regulations—such as Sections 9(2) and 21 of the Securities Contracts (Regulation) Act (SCRA), 1956, or SEBI LODR Regulations 14 and 98—exchanges routinely freeze the promoter and CD's demat accounts. But what happens when that CD hits the NCLT?

Decoding the NCLAT Ruling: Why Section 60(5) is your Best Friend

BSE challenged the Mumbai NCLT’s earlier orders (from July 2024 and October 2025) that directed the unfreezing of these accounts. BSE’s argument rested on the premise that securities enforcement operates independently of insolvency proceedings. NCLAT, rightfully, threw this out.

By expanding its interpretation under Section 60(5) of the IBC—the residuary jurisdiction clause that allows the NCLT to entertain any question of law or fact arising out of insolvency—NCLAT affirmed that demat accounts are undisputed assets of the CD. Once the Section 14 Moratorium kicks in, keeping these shares frozen actively undermines the resolution and liquidation objectives.

"Shares in demat accounts cannot remain frozen post-CIRP commencement, as it fundamentally frustrates the statutory mandate of asset maximization and clean-slate resolution."

The Practitioner's Takeaway: We need to stop tip-toeing around market regulators during CIRP. The IBC's non-obstante clause under Section 238 possesses teeth for a reason. If you are advising an RP whose CD has assets locked up by SEBI or BSE penalties, this NCLAT ruling is your immediate ticket to file a Section 60(5) application. Furthermore, NCLAT’s December 2025 ruling—which held that SEBI penalties imposed post-liquidation commencement are inadmissible as claims—solidifies the stance that the IBC timeline waits for no regulator.

Supreme Court Reins in the NCLT on Section 9 Applications

While NCLAT was busy expanding NCLT's jurisdiction over assets, the Supreme Court stepped in on February 24, 2026, to actively curb NCLT's overreach regarding Operational Creditors under Section 9 of the IBC.

Over the last few years, a concerning trend emerged where NCLT benches essentially conducted "mini-trials" to assess the merits or the likelihood of success of a pre-existing dispute raised by a CD. The Supreme Court has now put a hard stop to this. The Apex Court clarified that the adjudicating authority cannot assess the merits of the dispute. A "plausible dispute" is entirely sufficient to reject the admission of a Section 9 application.

Why this matters: This is a massive relief for defense counsels representing Corporate Debtors. It strictly restores the spirit of the landmark Mobilox Innovations judgment. NCLTs are summary courts; they are not equipped, nor statutorily permitted, to weigh evidentiary merits of a contractual dispute. If your client has a documented, plausible dispute predating the Section 8 demand notice, the NCLT must dismiss the insolvency plea. Additionally, the SC clarified that the mere pendency of defunct Companies Act schemes or debt restructuring does not bar financial creditors from initiating CIRP under Section 7. The message is clear: Section 7 is an express train; Section 9 is a strict liability toll gate.

Looking Ahead: The 2026 IBC Reform Pipeline

The jurisprudence is settling, but the legislature is gearing up for a major overhaul in the upcoming Winter Session. Two proposed amendments should be on every corporate lawyer's radar:

• Voluntary Group Insolvency: Drawing from the 2019 UK Sinha and KP Krishnan panels, the Ministry of Corporate Affairs is finally introducing a framework for group entities. Crucially, this will be voluntary and will explicitly exclude solvent firms and financial service providers initially. It avoids the messy "substantive consolidation" route, focusing instead on procedural coordination between Committees of Creditors (CoCs). For law firms handling complex conglomerates, this will drastically change negotiation strategies, allowing entangled group assets to be resolved cohesively rather than in piecemeal fire sales.
• Specialized Cross-Border Benches: The government is planning a dedicated NCLT bench specifically for cross-border insolvency cases. By staffing this bench with specially trained members, India is signaling its readiness to adopt UNCITRAL Model Law principles more robustly. If you are practicing in cross-border M&A or restructuring, expect a massive uptick in specialized mandate opportunities.

The Bottom Line: The Indian insolvency landscape in 2026 is aggressively prioritizing speed and asset preservation over regulatory ego. With NCLAT forcing SEBI to yield to the IBC, and the SC preventing NCLTs from getting bogged down in operational dispute trials, the mandate is clear: maximize value, and do it fast. Practitioners must leverage these rulings aggressively to clear regulatory roadblocks the moment the moratorium drops.