That's my point, working clearance. The smaller panel is the one in operation. The larger panel overlapping the smaller panel is violating the working space requirements of 110.26
OK, I'm reading 110.26 to try to see what you are talking about and here is what I see.
110.26(A)(1) they still have the 3' so not a violation.
110.26(A)(2) they still have the 30" so not a violation.
110.26(A)(3) the still have the height so not a violation.
110.26(B) if it met this requirement, it still does.
Actually, installing a panel inside the panel just does not violate anything that I see in 110.26.
Now, I'm not saying this install is code compliant (and I'm not saying it isn't). I'm just saying I don't see where it violates 110.26.
I also would like to see a picture. I don't know how they can cover the wiring inside the old enclosure. I imagine from the OP that one must open the old cover to access the new panel and breakers. What I don't know is if there is a breaker cover on the new panel cover and how much space is between the opening on the old cover and the sides of the new panel cover. Other than exposed wiring in that space I don't see this as a hazard (assuming bonding of the old can was performed and the nipple is properly installed).
Just because it's not a hazard doesn't mean it's code compliant, but 110.26 is not violated as best as I can tell.