Unlocking Demat Accounts and Curbing Tribunal Overreach: How NCLAT is Redrawing the NCLT's Jurisdictional Lines

The Endless Tug-of-War: IBC vs. Sectoral Regulators

For insolvency practitioners, the intersection of the Insolvency and Bankruptcy Code (IBC) and securities law has always been a minefield. When a Corporate Debtor (CD) goes into insolvency, Resolution Professionals (RPs) frequently discover that the CD’s securities and demat accounts are frozen due to parallel regulatory actions. Until now, unlocking these assets meant getting bogged down in endless bureaucratic loops with depositories or the Securities and Exchange Board of India (SEBI).

That paradigm has just shifted. In a highly consequential recent ruling, the National Company Law Appellate Tribunal (NCLAT) has expanded the horizon of the NCLT’s residuary jurisdiction, ruling that the Adjudicating Authority can direct the de-freezing of a corporate debtor’s demat accounts, provided the shares are undisputed and intrinsically connected to the insolvency process.

De-freezing Demat Accounts: A Major Win for RPs under Section 60(5)

To understand why this matters, we must look at the mechanics of Section 60(5)(c) of the IBC. This section empowers the NCLT to entertain any question of priorities or any question of law or facts arising out of or in relation to the insolvency resolution process. Historically, there has been judicial hesitation to use this section to override securities regulations, often forcing RPs to approach the Securities Appellate Tribunal (SAT).

The NCLAT’s recent decision cuts through this red tape. By holding that the IBC acts as the primary law where securities restrictions are blocking asset realization, the Tribunal has breathed fresh life into Section 238 (the overriding effect of the IBC).

"When the core objective of the IBC is the maximization of asset value, allowing a frozen demat account to stall the Corporate Insolvency Resolution Process (CIRP) defeats the very purpose of the statute. The NCLAT has rightly recognized that asset consolidation under Section 18 cannot be held hostage by procedural freezes when ownership is undisputed."

Practice Pointer for Lawyers: If you are advising an RP or a Committee of Creditors (CoC), you no longer need to litigate parallel defreeze applications before SEBI or SAT if the underlying asset ownership is undisputed. You can now aggressively file applications under Section 60(5) before the NCLT to release these shares, citing this precedent to establish the necessary "nexus" to the insolvency process.

Putting the Brakes on Section 213 Investigations

While the NCLAT expanded the NCLT’s reach in asset recovery, it simultaneously delivered a sharp rebuke to the Tribunal’s growing tendency to act as an investigative trigger. In a pivotal May 2025 order, the Appellate Tribunal modified an NCLT directive that had summarily forwarded a rejection order to investigative agencies.

Under Section 213 of the Companies Act, 2013, the Tribunal has the power to order an investigation into a company’s affairs by the Serious Fraud Investigation Office (SFIO) or other agencies. However, some NCLT benches have developed a habit of passing these drastic orders almost routinely when they suspect foul play, often bypassing due process.

The NCLAT has firmly clarified that Section 213 is not a blunt instrument. It requires strict compliance with statutory preconditions—chiefly, providing a reasonable opportunity of being heard (audi alteram partem) to the concerned parties. For corporate litigators, this is a crucial shield. It means you can successfully challenge NCLT orders that direct penal or investigative probes without first issuing a show-cause notice and conducting a preliminary hearing on the merits of the alleged fraud.

The MCA Impleadment Fiasco: Stopping Judicial Legislation

In another necessary course correction, the NCLAT recently struck down a bizarre NCLT directive that sought to make the Ministry of Corporate Affairs (MCA) a mandatory party to all insolvency and company matters nationwide.

This was a classic case of judicial overreach. Had the blanket order survived, it would have created an absolute bureaucratic nightmare, forcing the MCA to appear in thousands of routine IBC petitions, thereby exacerbating the very delays the IBC was enacted to cure. The NCLAT rightly held that impleadment must be decided on a case-by-case basis, strictly governed by the principles of necessary and proper parties under Order I Rule 10 of the Code of Civil Procedure, 1908.

The Bigger Picture: A Tribunal Gasping for Air

These jurisdictional clarifications come at a critical time. Recent reports emphasize the continued, crippling pressure on the NCLT’s capacity. The NCLT President has publicly pleaded for more manpower, noting that the strict 330-day resolution timeline under the IBC is now routinely breached, rendering the timeline directory rather than mandatory in practice.

When the NCLT issues blanket impleadment orders or trigger-happy investigative directives, it clogs its own docket with frivolous interim applications and appeals. The NCLAT’s recent jurisprudence is doing the heavy lifting of maintaining systemic hygiene—empowering the NCLT where it matters (asset recovery under IBC) and restraining it where it strays (procedural overreach under the Companies Act).

For the practicing advocate, the message from the appellate bench is clear: the IBC is a powerful tool for resolution, not a playground for parallel punitive investigations or administrative overreach. Draft your Section 60(5) applications with a clear nexus to CIRP objectives, and do not hesitate to appeal when the Adjudicating Authority forgets the fundamental tenets of natural justice.