Turf War Settled: NCLAT Cements IBC Supremacy Over Securities Law in Demat De-Freezing Row

The End of the Regulatory Tug-of-War

For years, Resolution Professionals (RPs) taking over distressed listed entities have faced a frustrating administrative roadblock: frozen demat accounts. When a Corporate Debtor (CD) enters the Corporate Insolvency Resolution Process (CIRP), it usually brings a baggage of historical regulatory defaults—unpaid listing fees, delayed disclosures, or SEBI penal actions. The knee-jerk reaction of market infrastructure institutions, like the BSE and NSE, has been to freeze the promoter and corporate demat accounts. For an RP trying to take control of the CD’s assets under Section 18 of the Insolvency and Bankruptcy Code, 2016 (IBC), this freeze is a death knell to asset maximization.

Now, the National Company Law Appellate Tribunal (NCLAT) has delivered a decisive blow to this regulatory bottleneck. By dismissing the BSE's pleas and upholding NCLT Mumbai’s orders to de-freeze demat accounts, the NCLAT has forcefully reiterated a fundamental legal reality: when the IBC machinery is in motion, securities law must take a back seat.

The Jurisdictional Anchor: Reading Section 60(5) with Section 238

The BSE’s central argument was predictable: securities regulators and stock exchanges operate under distinct statutory frameworks (like the SEBI Act and SCRA) meant to protect investors, and the NCLT lacks the jurisdiction to override these specific market regulations.

However, the NCLAT’s reasoning is anchored firmly in the residuary jurisdiction granted by Section 60(5)(c) of the IBC, which empowers the NCLT to entertain or dispose of any question of priorities or any question of law or facts arising out of or in relation to the insolvency resolution. Let us be clear: a frozen demat account holding the CD's securities is not a peripheral issue; it is directly "in relation to" the insolvency resolution.

More importantly, this ruling breathes life into the non-obstante clause of Section 238 of the IBC. The tribunal has reinforced that where securities-law restrictions frustrate the insolvency administration and asset realization, IBC remedies will prevail.

"The NCLAT’s order is a masterclass in statutory interpretation for corporate lawyers. It confirms that regulatory compliance cannot be weaponized by stock exchanges to freeze assets that rightfully belong to the creditor pool. The moratorium under Section 14 and the RP's duty to preserve assets under Section 25 cannot be held hostage by the CD's past listing defaults."

A Consistent Judicial Pattern

This development does not exist in a vacuum. It aligns perfectly with the Supreme Court’s broader jurisprudential arc regarding the IBC's overriding effect. We saw the exact same principle applied to the Customs Department. The Supreme Court recently held that during a moratorium, the IBC overrides the Customs Act; customs authorities cannot pursue recovery by confiscating or selling goods, though they are free to assess dues and file claims as operational creditors.

For practicing lawyers, the takeaway is unambiguous. Whether you are dealing with the BSE, SEBI, or the Customs Department, the defense strategy against asset-freezing actions during CIRP is now ironclad. Regulators must stand in line as creditors under Section 53 (waterfall mechanism) rather than using their statutory powers to bypass the resolution process.

The Reality Check: Legal Supremacy vs. Ground-Level Delays

While the NCLAT is clearing jurisprudential hurdles, the administrative reality of the IBC remains a severe concern. The Ministry of Finance recently directed Public Sector Bank CEOs to personally monitor the top 20 pending admission cases and 10 accounts awaiting resolution at the NCLT.

Why this sudden administrative whip? Because legal supremacy over SEBI or Customs means absolutely nothing if a Section 7 application languishes for 18 months before admission. The government’s recent statement in the Lok Sabha—that 28,818 insolvency applications involving a staggering Rs 10 lakh crore were resolved before admission—highlights a dual-edged sword. On one hand, the mere "threat" of the IBC is forcing pre-admission settlements (often via Section 12A withdrawals). On the other hand, it exposes the fact that creditors prefer to settle outside the system rather than risk the chronic delays of the NCLT dockets.

What This Means for Your Practice

For corporate lawyers and insolvency practitioners, these intersecting developments require a shift in practice strategy for 2026:

1. Aggressive Interlocutory Filings: If you represent an RP, do not waste months negotiating with the BSE or SEBI to lift demat freezes. Cite the NCLAT precedent and immediately file an application under Section 60(5) for a de-freezing order. The jurisprudence is now entirely in your favor.

2. Pre-Admission Strategy: For creditor counsels, the Finance Ministry's pressure on PSU banks means banking clients will demand faster filings and stricter monitoring. Expect less leniency from bank committees of creditors (CoCs) regarding timeline extensions. Leverage the threat of Section 7 admission to force settlements, as the Rs 10 lakh crore data proves this remains the most effective recovery tool.

3. Regulatory Claims: If you represent regulators or statutory authorities, advise your clients to promptly file their claims with the RP rather than defending turf wars over asset freezes. The courts have zero tolerance for actions that cause value destruction of the corporate debtor.

The IBC was designed to be a single-window, time-bound mechanism. By cutting down the BSE's attempt to operate outside this window, the NCLAT has protected the sanctity of the Code. Now, if only the NCLT infrastructure could match the speed of its appellate jurisprudence, the IBC's promise might finally be fully realized.