IBC Overrides Securities Law? NCLAT's Expanding Jurisdiction Over Frozen Demat Accounts

Can a stock exchange continue to freeze the assets of a corporate debtor even after the commencement of insolvency proceedings? More importantly, does such regulatory action survive the overarching framework of the Insolvency and Bankruptcy Code, 2016 (“IBC”), which seeks to preserve and maximize the value of the debtor's assets?

These questions recently came into sharp focus before the National Company Law Appellate Tribunal (“NCLAT”) in two appeals involving BSE Limited, wherein the Tribunal upheld the power of the National Company Law Tribunal (“NCLT”) to direct the de-freezing of demat accounts of corporate debtors. The ruling marks a significant development in the evolving jurisprudence at the intersection of insolvency law and securities regulation.

Dispute before the NCLAT

At a factual level, there were two appeals. In one, Future Corporate Resources Pvt. Ltd., a promoter group entity of Future Retail Ltd., was in the Corporate Insolvency Resolution Process (“CIRP”) and its demat account was frozen because of the Annual Listing Fee (“ALF”) default. In the other, Liz Traders and Agents Pvt. Ltd. was in liquidation and its demat account had been frozen because of defaults linked to listed group companies and securities-law compliance issues.

Following the initiation of the CIRP in one case and liquidation in the other, the Resolution Professional (“RP”) and liquidator sought de-freezing of these accounts to enable sale of shares held by the corporate debtors.

The NCLT allowed these applications, directing the stock exchanges and depositories to lift the freeze. Aggrieved by this, BSE Limited challenged these orders before the NCLAT, primarily on the ground of lack of jurisdiction.

IBC v. Securities Law: The Jurisdictional Conflict

The key issue before the NCLAT was “whether the NCLT, in exercise of its residuary jurisdiction under Section 60(5) of the IBC, could direct the de-freezing of demat accounts that had been frozen under the securities law framework.” This, in turn, raised broader questions as to the relationship between the IBC and the SEBI regulations, in particular, to which regime should prevail, the extent of the moratorium under Section 14, the scope of the jurisdiction of the NCLT in cases of regulatory action.

The Tribunal initially considered the securities law framework on which both BSE and SEBI had based their position, namely, the provisions of Section 9(2) and 21 of the Securities Contracts (Regulation) Act, 1956, and Regulation 14 and 98 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and of relevant SEBI and BSE circulars on non-compliance, and non-payment of Annual Listing Fees, in addressing this issue. Such provisions provide a system of enforcement, such as the ability to freeze the demat accounts to enforce the regulations.

The Tribunal then examined the IBC's framework, noting that Section 60(5)(c) of the Code confers upon the NCLT the jurisdiction to adjudicate questions of law or fact arising out of, or in relation to, insolvency or liquidation proceedings. Further, Sections 35 and 36 of the IBC place a duty on the liquidator to take control of and realise the assets of the corporate debtor. In this context, the Tribunal emphasised that the insolvency process cannot function effectively if undisputed assets remain inaccessible due to regulatory restraints.

The case, therefore, presented a clear conflict between securities regulatory enforcement and the objectives of insolvency resolution under the IBC.

Decoding the Reasoning

The NCLAT upheld the orders of the NCLT and dismissed the appeals. Its reasoning rests on several key principles.

First, the Tribunal emphasized the concept of “crystallized debt.” Since the ALF liability had already been determined and was not under dispute, the matter no longer involved regulatory adjudication but merely recovery. This distinction was critical in bringing the issue within the ambit of insolvency proceedings.

Reliance was placed on Embassy Property Developments Pvt. Ltd. v. State of Karnataka and ors., (2020) 13 SCC 308, wherein the Supreme Court while considering the jurisdiction of the NCLT under Section 60(5) of the IBC, has held that “The moment the dues to the Government are crystallised and what remains is only payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by the adjudicating authority, namely, the NCLT.” So, once the dues of the Government or its authorities are crystallized and arise from statutory obligations or services, they may, in appropriate cases, be treated as operational debt, thereby placing such authorities in the position of operational creditors under the IBC.

Along similar lines, reference was also made to ArcelorMittal India Private Limited v. Satish Kumar Gupta, (2019) 2 SCC 1, to emphasise that matters concerning the corporate debtor and its assets fall squarely within the jurisdiction of the Adjudicating Authority under the IBC. Accordingly, once such dues are crystallized and become recoverable, they are required to be dealt with in accordance with the resolution plan, rather than through parallel regulatory mechanisms.

Secondly, the Tribunal emphasised that the shares held in the demat accounts were undisputed assets of the corporate debtor. Preventing their realisation would directly undermine the objectives of the IBC, particularly in liquidation where asset monetisation is essential.

In this context, the Tribunal noted that the liability towards Annual Listing Fees had already been crystallized and no further proceedings in relation to such dues were pending under the securities regulatory framework. What remained was merely payment or recovery of the said amount. The freezing of the demat accounts, therefore, operated only as a consequence of non-payment and not as part of any ongoing regulatory determination. Given that the ownership of the shares by the corporate debtors was undisputed, the Tribunal held that the question of de-freezing such accounts was intrinsically connected to the insolvency process. Consequently, it fell within the jurisdiction of the NCLT under Section 60(5) of the IBC, and no illegality was found in the exercise of such jurisdiction by the NCLT.

Finally, the Tribunal distinguished precedents such as Embassy Property (supra) and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, 2021 INSC 163, noting that those cases involved disputes squarely within the domain of specialized regulatory authorities. In contrast, the present case concerned the administration of the corporate debtor's assets in insolvency.

Critical Analysis

This judgment clearly strengthens the position of the Insolvency and Bankruptcy Code as the primary law when it comes to dealing with a company's assets during insolvency. By allowing the de-freezing of demat accounts, the NCLAT has made it clear that once a liability is already fixed (crystallized), continuing regulatory restrictions only block the insolvency process instead of serving any real purpose. In such situations, the focus should move away from strict regulatory compliance and towards maximising the value of assets, which lies at the heart of the IBC.

The decision makes it clear that insolvency proceedings cannot be delayed or disrupted by parallel regulatory actions. If assets remain frozen, they lose their practical value for resolution or liquidation, ultimately harming creditors and defeating the very purpose of the insolvency process. Therefore, the judgment rightly prioritises the practical needs of insolvency over strict regulatory control.

At the same time, a clear limit must be maintained: IBC should prevail only when the regulatory action is no longer deciding any issue and is merely preventing the use or sale of the corporate debtor's assets.

Within this limit, the ruling sends a strong message that once insolvency begins, no authority should be allowed to block the use of assets in a way that defeats the entire purpose of the IBC.

The NCLAT's ruling marks an important development in clarifying the boundary between insolvency law and securities regulatory framework as it confirms that the IBC must prevail where regulatory policies hinder the efficient administration and realisation of the assets of a corporate debtor. By adopting a functional and result-driven solution pursuant to Section 60(5) of the IBC, the Tribunal turns attention to the effect of regulatory power on the insolvency process, hence prioritising value maximisation and creditor interests.

Simultaneously, it is clear that this ruling does not effectively override securities law but rather introduces a principled threshold beyond which such intervention is justified only where regulatory action no longer involves adjudication but acting as a mere restraint on the use of assets. Thus, it is a subtle balance between the primacy of the IBC and retention of the limited, but significant role of regulatory frameworks, and is likely to guide future adjudication on solving similar conflicts across legal regimes.

Author is a Law student at Lloyd Law College, Greater Noida. Views are personal.