BSE Loses Double NCLAT Challenge on Demat Account Defreezing Jurisdiction

The National Company Law Appellate Tribunal rejected two separate BSE petitions challenging the National Company Law Tribunal’s authority to order the defreezing of demat accounts during insolvency proceedings. NCLAT’s ruling confirms that NCLT has jurisdiction under Section 60(5) of the Insolvency and Bankruptcy Code to direct such actions when necessary for the resolution of the corporate debtor.

Both BSE appeals targeted NCLT orders directing the exchange to unfreeze demat accounts of corporate debtors undergoing resolution processes. The exchange argued these orders exceeded NCLT’s statutory powers and interfered with market operations. NCLAT disagreed.

The tribunal’s reasoning centers on Section 60(5)’s broad grant of jurisdiction to NCLT over “any question of law or fact arising out of or in relation to the insolvency resolution or liquidation proceedings.” [VERIFY] This includes, according to NCLAT, directing market intermediaries to facilitate asset realization when frozen accounts contain securities material to the resolution process.

Directors navigating insolvency should note the jurisdictional clarity here. NCLT’s powers extend beyond traditional corporate law into securities regulation when necessary. The ruling establishes that market infrastructure entities cannot claim immunity from insolvency court directions simply because they operate under different regulatory frameworks.

BSE’s position reflected broader industry concern about regulatory boundary overlap. Stock exchanges operate under SEBI oversight with specific investor protection mandates. Demat account freezing typically occurs to prevent securities manipulation or protect investor interests. The exchange likely viewed NCLT’s defreezing orders as undermining these protective mechanisms.

Yet NCLAT’s interpretation suggests insolvency proceedings create a hierarchy of regulatory priorities. When corporate debtor assets include securities holdings essential for creditor recovery, resolution requirements override routine market protection measures. This principle could extend beyond BSE to other financial intermediaries holding debtor assets.

The double petition strategy itself signals BSE’s conviction that NCLT overstepped jurisdiction. Filing multiple challenges on similar grounds suggests that the exchange expected different NCLAT benches might reach different conclusions. That both failed indicates a consistent tribunal interpretation of the scope of Section 60(5).

Resolution professionals now have clearer authority to seek court intervention when financial intermediaries resist asset access requests. The ruling removes one procedural obstacle to maximizing recovery from securities portfolios held in frozen accounts. This matters particularly for corporate debtors whose primary assets are investment holdings rather than physical infrastructure.

What remains unclear is how this jurisdiction interacts with ongoing SEBI investigations that originally led to the account freezing. If securities violations are under investigation, defreezing for resolution purposes could complicate enforcement proceedings. NCLAT’s ruling doesn’t address this potential conflict between insolvency urgency and regulatory investigation timelines.

The broader governance implication concerns director awareness of asset accessibility during distress. Boards cannot assume that frozen demat accounts are permanently beyond resolution reach. Independent directors, in particular, need to factor potential court-ordered defreezing into their assessment of available assets for creditor satisfaction.

My Boardroom Takeaway: Directors may wish to review whether their companies’ securities holdings could become inaccessible during potential insolvency proceedings due to regulatory freezing actions. A prudent approach would include mapping all demat accounts and understanding the circumstances under which they might be frozen by market intermediaries. Boards should also consider whether resolution planning assumes access to securities portfolios, given that NCLAT has now confirmed NCLT’s authority to override such freezing when resolution requires it.