Whalesbook
NCLAT Upholds IBC Over Exchange Powers
India's National Company Law Appellate Tribunal (NCLAT) has dismissed appeals from the Bombay Stock Exchange (BSE), reinforcing the National Company Law Tribunal's (NCLT) authority to unfreeze Demat accounts for companies in insolvency. The decision, dated March 29, 2026, emphasizes the Insolvency and Bankruptcy Code's (IBC) precedence over securities laws for distressed companies. The BSE argued that Demat account issues belonged to securities law, not the IBC. However, the NCLAT confirmed the NCLT's jurisdiction under Section 60(5) of the IBC to handle these cases. The case involved Future Corporate Resources and Liz Traders and Agents, whose Demat accounts were frozen by the BSE for unpaid listing fees. Resolution Professionals (RPs) and liquidators needed to unfreeze these accounts to sell shares for creditors. Initial NCLT orders to unfreeze them were upheld by the NCLAT.
Navigating IBC and Securities Law Conflicts
This ruling is a significant development in the legal conflicts between the IBC and securities rules, an area that has drawn much court attention. Previous cases saw conflicting rulings on SEBI's powers versus the IBC's moratorium, especially regarding asset seizures for penalties. The NCLAT's consistent position, backed by Section 238 of the IBC, is that the Code takes precedence over other laws during insolvency or liquidation. The NCLAT clarified that if a dispute involves recovery affecting the insolvency process, jurisdiction moves to the insolvency court, even if the issue started under securities law. This trend empowers Resolution Professionals to manage company assets without interference from regulators or exchanges, supporting the IBC's goal of swift resolution.
Exchanges' Investor Safeguards and New Ruling
Both the NSE and BSE have implemented guidelines to protect investors when listed companies enter insolvency. These include alerts on companies in Corporate Insolvency Resolution Process (CIRP) and coordination to halt trading if plans involve delisting shares. While these guidelines aim to manage information gaps and investor impact, the NCLAT ruling may require exchanges to adjust their enforcement methods. The NCLAT decision in the Future Corporate Resources and Liz Traders cases, following earlier NCLT orders in July 2024 and October 2025, indicates that market infrastructure providers have limited options when their actions hinder insolvency proceedings. This sets a precedent that may complicate future disputes where exchanges try to use regulatory powers against distressed companies.
Impact on Exchanges and Creditor Claims
The ongoing assertion of IBC supremacy poses challenges for market infrastructure firms like BSE and CDSL. While the IBC aims for speed, limiting their jurisdiction in insolvency-related Demat account disputes could increase operational complexity. Exchanges might find it harder to enforce regulations and recover dues from defaulting listed companies once they enter insolvency. This could reduce their enforcement leverage, possibly forcing them to file claims as operational creditors within the IBC framework, where recovery prospects are often lower. This might also lead to lengthy legal disputes if exchanges view their regulatory mandates separately from insolvency matters, causing confusion for market participants.
IBC's Growing Dominance in Corporate Distress
The NCLAT's ruling reinforces a broader trend: the IBC is becoming the main framework for resolving corporate distress in India. Recent Supreme Court judgments have also highlighted the IBC's precedence and the need to avoid delays in insolvency, solidifying this approach. For market participants, this means a regulatory environment prioritizing timely debt resolution and corporate revival. While this aims for a more efficient financial system, it requires a clear understanding of the changing boundaries between insolvency law and securities regulation. Consistent judicial affirmation of the IBC's primacy suggests a policy to streamline distressed asset management, even if it requires adjusting the powers of market regulators and exchanges.