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2025 (3) TMI 1069 - Tri - IBCSeeking de-freezing of demat account of the Corporate Debtor frozen due to non-compliance with SEBI regulations - waterfall mechanism under Section 53(1) of the Insolvency Bankruptcy Code 2016 (IBC) - jurisdiction of the National Company Law Tribunal (NCLT) extends to adjudicating matters related to the freezing of demat accounts under SEBI regulations in light of Section 60(5) of the IBC - HELD THAT - SEBI issued a circular in order to ensure effective enforcement of the SEBI LODR. Further it was the obligation of all the recognized stock exchanges to intimate the depositories of non-compliance of SEBI LODR on part of any listed entity and on receipt of such intimation it is the obligation of the depositories to freeze or unfreeze as the case may be the entire shareholding of the promoter and promoter group in such non- compliant listed entity as well as all other securities held in the demat account of the promoter and promoter group. Further due to non-compliance of various regulations of SEBI (LODR) Regulations 2015 demat accounts of Cox and Kings Limited Cox and Kings Financial Services Limited and Tulip Stars Hotels Ltd. were put on freeze on 19.11.2019 and 31.12.2019. Since Liz Traders and Agents Private Limited/ Corporate Debtor was disclosed as Promoter of the above mentioned companies in the shareholding pattern filed by them demat account of Corporate Debtor was also put on freeze on 19.11.2019 and 25.02.2020. Since the Corporate Debtor is under liquidation and Liquidator s request to defreeze the demat account has not yielded any result the Applicant has filed the present application seeking directions against Respondent nos. 1 2 and 3 to defreeze the demat account of the Corporate Debtor in order to enable the Applicant to take immediate custody of the shares to sell the same and distribute the proceeds as per the waterfall mechanism under section 53(1) of the Code to the stakeholders of the Corporate Debtor. In the facts and circumstances of the case it does not bar the jurisdiction of this Tribunal. Further the aforementioned shares of 6 companies are assets of the Corporate Debtor and under liquidation it s the duty of the liquidator to liquidate the Corporate Debtor expeditiously and maximise the recovery. The Hon ble Supreme Court in Gujrat Urja Vikas 2021 (3) TMI 340 - SUPREME COURT have observed that if a nexus with the insolvency of the Corporate Debtor exists then this Tribunal have jurisdiction to decide the dispute. The CIRP or liquidation process is a time-bound process. The continued freezing of demat accounts would cause delay in the liquidation process especially in the facts when the two defaulting listed entities are also under liquidation and compliances expected of them for defreezing of the Demat account of the Corporate Debtor is an impossibility. Further for an entity under liquidation this dispute or impasse cannot be of any benefit to anyone including the concerned regulators. Accordingly there is clear connection of the issue/dispute involved with insolvency of Corporate Debtor. The protection of the corporate debtor s property from attachment and restraint in proceedings related to offenses committed before the initiation of the CIRP continues even during the liquidation process where the successful sale of assets is affected. In the present case the freezing of demat account is obstructing the Liquidator from selling the shares and obtaining their best value. In light of the aforesaid judgement such attachment and restraint cannot be allowed to be continued during the proceedings of liquidation under IBC. The Respondent No. 1 2 and 3 is directed to defreeze the demat account of the Corporate Debtor. Further Respondent no. 4 is directed to extend its co-operation to the Applicant by ensuring the proper functioning of the trading account. Conclusion - i) The IBC s provisions particularly regarding liquidation have an overriding effect over conflicting SEBI regulations when they impede the liquidation process. ii) The CIRP or liquidation process is a time-bound process. The continued freezing of demat accounts would cause delay in the liquidation process especially in the facts when the two defaulting listed entities are also under liquidation and compliances expected of them for defreezing of the Demat account of the Corporate Debtor is an impossibility. Application allowed.
ISSUES PRESENTED and CONSIDERED
The Tribunal considered the following core legal issues:
ISSUE-WISE DETAILED ANALYSIS 1. Freezing of Demat Account Relevant Legal Framework and Precedents: The demat account was frozen under SEBI LODR Regulations and SEBI circulars, which mandate freezing promoter accounts for non-compliance by listed entities. The Applicant argued that Section 238 of the IBC provides the Code with an overriding effect over conflicting laws. Court's Interpretation and Reasoning: The Tribunal noted that the demat account was frozen prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) and liquidation proceedings. However, the Tribunal emphasized the liquidator's duty under IBC to liquidate assets expeditiously and maximize recovery. Key Evidence and Findings: The demat account was frozen due to non-compliance by entities in which the Corporate Debtor was a promoter. The Tribunal found that continuing the freeze would impede the liquidation process. Application of Law to Facts: The Tribunal applied Section 60(5) of the IBC, which allows it to adjudicate matters related to insolvency proceedings, and Section 238, which provides the Code with an overriding effect. Treatment of Competing Arguments: The Respondents argued that the freeze was a continuation of pre-existing proceedings and should not be lifted. The Tribunal, however, found that the freeze obstructed the liquidation process, which is a time-bound procedure under IBC. Conclusions: The Tribunal concluded that the demat account should be defrozen to allow the liquidator to perform her duties under the IBC. 2. Jurisdiction of NCLT Relevant Legal Framework and Precedents: Section 60(5) of the IBC grants the NCLT jurisdiction over matters related to insolvency proceedings. The Supreme Court in Gujarat Urja Vikas Nigam Limited v. Amit Gupta emphasized that NCLT's jurisdiction should not usurp that of other tribunals unless the matter relates to insolvency. Court's Interpretation and Reasoning: The Tribunal found a clear nexus between the issue of the frozen demat account and the insolvency proceedings, as the freeze impeded the liquidation process. Key Evidence and Findings: The Tribunal noted that the demat account's freeze was a significant obstacle to the liquidation process, which is inherently linked to insolvency proceedings. Application of Law to Facts: The Tribunal applied Section 60(5) to assert jurisdiction, highlighting the connection between the frozen account and the insolvency process. Treatment of Competing Arguments: The Respondents argued that the matter should be adjudicated under SEBI regulations. The Tribunal disagreed, citing the direct impact on the liquidation process. Conclusions: The Tribunal held that it had jurisdiction to order the defreezing of the demat account. 3. Overriding Effect of IBC Relevant Legal Framework and Precedents: Section 238 of the IBC provides the Code with an overriding effect over conflicting laws. The Tribunal referenced previous judgments affirming this principle. Court's Interpretation and Reasoning: The Tribunal determined that the IBC's provisions, particularly those related to liquidation, should prevail over SEBI regulations in this context. Key Evidence and Findings: The Tribunal found that maintaining the freeze would conflict with the IBC's objectives of maximizing asset value and expeditious liquidation. Application of Law to Facts: The Tribunal applied Section 238 to prioritize the IBC's provisions over SEBI's regulations, given the direct impact on the liquidation process. Treatment of Competing Arguments: The Respondents contended that SEBI regulations operated independently. The Tribunal found that the IBC's objectives necessitated an overriding effect in this case. Conclusions: The Tribunal concluded that the IBC's provisions should override the SEBI regulations, allowing the demat account to be defrozen. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning: "The CIRP or liquidation process is a time-bound process. The continued freezing of demat accounts would cause delay in the liquidation process, especially in the facts when the two defaulting listed entities are also under liquidation and compliances expected of them for defreezing of the Demat account of the Corporate Debtor is an impossibility." Core Principles Established: The Tribunal established that the IBC's provisions, particularly regarding liquidation, have an overriding effect over conflicting SEBI regulations when they impede the liquidation process. Final Determinations on Each Issue: The Tribunal ordered the defreezing of the demat account to allow the liquidator to fulfill her duties under the IBC, asserting its jurisdiction under Section 60(5) and the overriding effect of Section 238.
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