The Ultimate Trump Card: NCLAT Affirms IBC Overrides Securities Law on Frozen Demat Accounts

The Never-Ending Turf War: IBC vs. Sectoral Regulators

If there is one recurring theme in Indian insolvency jurisprudence, it is the reluctance of sectoral regulators to surrender their turf to the Insolvency and Bankruptcy Code (IBC). From the taxman to the enforcement directorate, every authority wants its pound of flesh, even when a corporate debtor is gasping for air. But the recent April 2026 decision by the National Company Law Appellate Tribunal (NCLAT) dismissing the BSE’s challenge regarding frozen demat accounts sends a blunt, decisive message: Once the Corporate Insolvency Resolution Process (CIRP) kicks in, the IBC is the sole sheriff in town.

The core issue litigated recently before the NCLAT was whether the National Company Law Tribunal (NCLT) has the jurisdiction to order the de-freezing of demat accounts that were locked down due to securities-law compliance actions initiated by stock exchanges (like the BSE) or SEBI. The NCLAT has emphatically answered in the affirmative, anchoring its reasoning in the residuary jurisdiction of the NCLT under Section 60(5) of the IBC.

Why This Matters for Practicing Lawyers and RPs

For Resolution Professionals (RPs) and transaction lawyers handling distressed M&A, this ruling eliminates a massive logistical nightmare. Consider the standard fact pattern: A distressed company inevitably defaults on its listing obligations under the SEBI (LODR) Regulations long before it defaults on its bank loans. In response, stock exchanges routinely freeze the demat accounts of the promoters and the corporate debtor.

Then, the NCLT admits the company into CIRP. The RP takes over, eventually finalizing a resolution plan that likely involves capital reduction, cancellation of existing promoter shares, or the transfer of shares to a successful Resolution Applicant (SRA). But how do you execute a share transfer or corporate restructuring when the demat accounts are frozen in NSDL or CDSL purgatory?

"A frozen demat account is a deadweight on a resolution plan. If the NCLT could not unfreeze these accounts, SEBI’s compliance mechanisms would effectively hold the IBC’s 'clean slate' principle hostage."

By upholding the NCLT’s power to de-freeze these accounts, the NCLAT has reinforced the supremacy of Section 238 of the IBC (the non-obstante clause). This aligns perfectly with the Supreme Court’s long-standing position—most notably in Sundaresh Bhatt v. CBIC—where the Court held that the IBC overrides the Customs Act. The jurisprudential DNA remains the same: statutory dues or compliance penalties under the SEBI Act or SCRA cannot disrupt the statutory timelines and mechanisms of the IBC.

The Section 60(5) Expansion: A Double-Edged Sword?

From a purely doctrinal standpoint, relying on Section 60(5)(c)—which allows the NCLT to entertain any question of law or fact arising out of or in relation to the insolvency resolution—is a powerful tool. It allows the NCLT to bypass parallel regulatory tribunals (like SAT) to achieve the objectives of the IBC.

However, practitioners must tread carefully. While the NCLT can unfreeze accounts to facilitate the CIRP and the implementation of a resolution plan, this does not grant the corporate debtor or its erstwhile promoters a blanket amnesty for securities fraud. As seen in SEBI’s aggressive 2025–2026 crackdowns on insider trading and pump-and-dump schemes, the regulator retains jurisdiction over the individuals involved. RPs must explicitly draft resolution plans to ensure that the de-freezing of accounts is strictly for the purpose of effectuating the plan, leaving the promoters to face SEBI’s music personally.

The Government's Push: Speed Over Everything

This NCLAT ruling arrives at a time when the government's patience with NCLT backlogs is wearing dangerously thin. According to recent 2026 parliamentary updates, while an impressive Rs 10 lakh crore involving 28,818 applications has been resolved prior to admission, there are still over 12,351 IBC cases pending.

In a drastic move, the Finance Ministry has reportedly directed the CEOs of state-run banks to personally monitor the top 20 admission cases and 10 accounts awaiting resolution. The government is essentially telling the Committee of Creditors (CoC): Stop hiding behind bureaucratic delays and push these cases through.

When you read the NCLAT’s aggressive stance on de-freezing accounts alongside the Finance Ministry’s directive, the practical takeaway for lawyers is clear. The ecosystem is pivoting back to speed. The tribunals are clearing regulatory roadblocks (like BSE's demat freezes) so that creditors have no excuse for delayed resolutions.

The Bottom Line

For corporate lawyers drafting resolution plans this year, the NCLAT ruling is a powerful precedent. Stop wasting time negotiating with stock exchanges to unfreeze accounts. File an Interlocutory Application (IA) under Section 60(5) of the IBC, cite the supremacy of Section 238, and compel the unfreezing directly through the NCLT.

Sectoral regulators like SEBI and the BSE need to accept a bitter pill: the IBC is a jealous code. Once the moratorium under Section 14 is triggered, regulatory enforcement that hampers the resolution of the corporate debtor must take a back seat. The economy cannot afford to let billions of dollars in distressed assets sit idle just because a listing compliance form was filed late.