EDIT: updated to avoid multiple CODE tags
Try this:
<?php
// test data
$textToScan = "Hi <code>test12</code><br>
Line 2 <code><br>
Test <b>Bold</b><br></code><br>
Test
";
// debug:
echo $textToScan . "<hr>";
// the regex pattern (case insensitive & multiline
$search = "~<code>(.*?)</code>~is";
// first look for all CODE tags and their content
preg_match_all($search, $textToScan, $matches);
//print_r($matches);
// now replace all the CODE tags and their content with a htmlspecialchars() content
foreach($matches[1] as $match){
$replace = htmlspecialchars($match);
// now replace the previously found CODE block
$textToScan = str_replace($match, $replace, $textToScan);
}
// output result
echo $textToScan;
?>