In a significant ruling that resolves a long-standing conflict between insolvency law and market regulation, the National Company Law Appellate Tribunal (NCLAT) has made it clear that regulatory restrictions cannot obstruct insolvency proceedings. The tribunal dismissed appeals filed by the Bombay Stock Exchange (BSE), upholding the authority of the National Company Law Tribunal (NCLT) to order the defreezing of Demat accounts of companies undergoing insolvency.
IBC Supremacy Over Securities Law
The ruling once again establishes the supremacy of the Insolvency and Bankruptcy Code (IBC). NCLAT observed that under Section 60(5) of the IBC, NCLT has wide-ranging powers to adjudicate any matter arising out of or in relation to insolvency resolution, even if it overlaps with securities laws.
Future Corp, Liz Traders Demat Freeze
The case relates to two companies—Future Corporate Resources and Liz Traders and Agents—whose Demat accounts had been frozen by BSE due to regulatory non-compliance, including non-payment of listing fees and penalties. This freeze prevented the companies from accessing their shareholdings, thereby affecting asset monetisation and recovery for creditors.
During the insolvency process, resolution professionals and liquidators approached NCLT seeking defreezing of these accounts. They argued that without access to these shares, it would be impossible to maximise asset value and ensure timely recovery for lenders. Accepting this argument, NCLT passed orders in 2024 and 2025 directing BSE to lift the freeze on the accounts.
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BSE Jurisdiction Argument Rejected
BSE challenged these orders before NCLAT, contending that matters related to Demat accounts fall under securities laws regulated by the Securities and Exchange Board of India (SEBI), and therefore, NCLT had exceeded its jurisdiction.
However, NCLAT rejected this argument outright. The tribunal held that once insolvency proceedings are initiated, the IBC framework takes precedence over all other laws. It emphasized that any issue connected to insolvency resolution—directly or indirectly—falls within the jurisdiction of NCLT.
Section 238 invoked for IBC Override
In its detailed order, the tribunal noted that the purpose of defreezing the Demat accounts was directly linked to the insolvency resolution process. Allowing the sale of shares held in these accounts would help generate funds and facilitate repayment to creditors, which is the core objective of the IBC.
Importantly, NCLAT invoked Section 238 of the IBC, which provides the Code with overriding powers in case of any inconsistency with other laws. The tribunal observed that in situations of conflict between the IBC and securities regulations, the provisions of the IBC would prevail to ensure that the resolution process is not disrupted.
“The adjudicating authority acted within its jurisdiction,” NCLAT noted, adding that it found no legal infirmity in the orders passed by NCLT. It also clarified that there was no dispute regarding the ownership of shares held in the Demat accounts, strengthening the case for their use in the insolvency process.
The ruling is expected to have far-reaching implications, particularly in cases involving listed companies where regulatory restrictions often hinder asset monetisation. Legal experts believe the judgment brings much-needed clarity to the interplay between insolvency law and securities regulations.
By reaffirming the supremacy of the IBC, the tribunal has ensured that procedural or technical barriers do not delay resolution or reduce recoveries for creditors. At the same time, the decision highlights the need to balance regulatory compliance with the broader objective of reviving distressed assets.
The verdict also sends a strong message that insolvency proceedings cannot be obstructed by parallel regulatory frameworks. As more complex cases emerge at the intersection of financial markets and bankruptcy law, this ruling is likely to serve as a key precedent.
Overall, the NCLAT’s decision strengthens the insolvency ecosystem by prioritising value maximisation and timely resolution, ensuring that distressed companies are not weighed down by regulatory hurdles during the recovery process.
About the author – Ayesha Aayat is a law student and contributor covering cybercrime, online frauds, and digital safety concerns. Her writing aims to raise awareness about evolving cyber threats and legal responses.
