Introduction
The world is pushing towards green technologies and sustainability, & India has also declared its commitment to achieve net-zero carbon emissions by 2070. And this goal demands a legal framework that does not allow companies to evade their environmental responsibility.
However, the Insolvency and Bankruptcy Code, 2016 (“Code”) does not address this issue, allowing corporate debtors to slip through the cracks. The code focuses on value maximisation for creditors and revival of the entity, but this framework inadvertently overlooked the environmental concerns arising at this stage, when accountability matters the most.
Impact Of Insolvency On Environmental Liability
When an entity enters the Corporate Insolvency Resolution Process (“insolvency”), the moratorium under section 14 protects it against any legal claim – including environmental claims – and afterwards, the doctrine of a “clean slate” under section 31 protects the entity from any past liability, thereby relieving it from paying any environmental debt whatsoever.
Since the environmental dues are not separately recognised in the waterfall mechanism under section 53, they consequently end up being treated like any other operational debt, having no chance of repayment.
Key Legal Issues Under The Insolvency And Bankruptcy Code
| Legal Provision | Issue Created | Impact On Environmental Liability |
|---|---|---|
| Section 14 – Moratorium | Protection from legal proceedings | Environmental claims cannot be effectively enforced during insolvency |
| Section 31 – Clean Slate Doctrine | Extinguishes past liabilities after resolution | A corporate debtor may escape environmental obligations |
| Section 53 – Waterfall Mechanism | No separate recognition of environmental dues | Environmental claims treated as operational debt with minimal recovery chances |
Global Perspective On Environmental Liability And Insolvency
India is not the only jurisdiction facing this challenge. Similar concerns have also emerged in countries such as the United States (“US”) and the United Kingdom (“UK”).
However, certain jurisdictions have developed mechanisms to address this issue. For instance, under the CERCLA framework in the United States, environmental liabilities can survive even after insolvency or liquidation proceedings.
Why Environmental Liability Should Survive Insolvency
Against this backdrop, this blog argues that the liability of corporate entities for environmental damage should remain independent of the outcome of proceedings under the Insolvency and Bankruptcy Code and must continue to survive despite the conclusion of the insolvency process.
Key Takeaways
- India aims to achieve net-zero carbon emissions by 2070.
- The Insolvency and Bankruptcy Code, 2016, currently lacks a dedicated framework for environmental liabilities.
- Sections 14 and 31 may indirectly shield corporate debtors from environmental accountability.
- Environmental dues are treated as operational debt under section 53.
- International frameworks such as CERCLA in the US provide stronger protection for environmental claims.
- Environmental liability should survive insolvency proceedings to ensure sustainable corporate accountability.
India’s IBC: A Silent Code on Environmental Debt
When an entity is sound and flourishing, the chances of it following environmental norms are high. But as the company accumulates financial stress, the focus of stakeholders shifts from environmental responsibility to their own private concerns, & with the initiation of insolvency or liquidation, the environment takes a back seat, thereby causing environmental apathy.
It is specifically in these situations that the question of ownership of environmental harm repayment becomes complicated due to the absence of any substantial guidelines on this aspect, conferring the fate of Mother Earth to a few players primarily concerned with the recovery of their own dues.
Environmental Claims Under the IBC
Even if environmental authorities attempt to pursue claims or litigate the dispute, all proceedings against the debtor come to a halt due to the moratorium under section 14 of the IBC.
Environmental claimants are left with the only option to file their claims before the Resolution Professional (RP) under the category of “contingent claims”, whose duty under regulation 13 of the Insolvency Resolution Process Regulations 2016 is to ascertain the true value of these claims.
Valuation of Contingent Claims
However, in practice these claims have often been assigned a very nominal value by the RP—even as little as one rupee, as in the case of Essar Steel India Ltd, and were upheld by the Supreme Court in the interest of the revival of the entity.
| Issue | Position Under IBC | Impact on Environmental Claims |
|---|---|---|
| Moratorium under Section 14 | All proceedings against the debtor were halted | Environmental litigation cannot continue |
| Contingent Claims | Filed before Resolution Professional | Often assigned nominal value |
| Resolution Process | Focus on revival of corporate debtors. | Environmental liabilities sidelined |
Clean Slate Principle and Environmental Liability
Moreover, these claims lose all enforceability once the insolvency is successfully resolved due to the principle of clean slate, which extinguishes all previous liabilities of the Corporate Debtor (CD).
The only exception is when such a contingent claim forms part of the resolution plan—but data reported from previous insolvencies suggests that these liabilities are rarely included in the resolution plans.
Position of Decree Holders Under IBC
Additionally, environmental claimants who have obtained any judicial decree in their favour do not qualify as “creditors” u/s 3(10) of the Code under the Code and instead form a separate category of “decree holders”.
And the decree holders fall far below in the waterfall mechanism, alongside contingent claimants, thereby deriving no added benefit from their decree.
| Category | Status Under IBC | Priority in Waterfall Mechanism |
|---|---|---|
| Financial Creditors | Recognized creditors | Higher priority |
| Operational Creditors | Recognized creditors | Moderate priority |
| Decree Holders | Separate category | Low priority |
| Contingent Claimants | Limited recognition | Low priority |
Environmental Liabilities After Insolvency
Although the primary objective of the IBC is value maximisation and recovery for creditors, the framework does not sufficiently address environmental liabilities that continue to exist even after insolvency proceedings.
Unlike the position in the United States under the CERCLA framework, environmental claims in India often remain inadequately represented during the CIRP process, resulting in weak enforcement and unresolved environmental obligations.
Key Concerns in Environmental Debt Under IBC
- Absence of clear statutory guidance on environmental liabilities.
- Environmental claims treated as contingent claims.
- Nominal valuation of environmental damage claims.
- Moratorium restricting legal enforcement.
- Clean slate principle extinguishing prior liabilities.
- Low priority status of decree holders in the waterfall mechanism.
- Lack of inclusion of environmental liabilities in resolution plans.
- Weak environmental accountability during CIRP.
India’s Insolvency and Bankruptcy Code prioritises revival and creditor recovery but remains largely silent on environmental debt. The current framework creates a legal vacuum where environmental liabilities are often undervalued, delayed, or extinguished altogether. As insolvency proceedings continue to grow in India, there is an increasing need for a balanced framework that protects economic interests while also safeguarding environmental accountability and sustainable governance.
Closing the Green Loophole in IBC: What Needs to Change
A major reform needed in the Code is to allow environmental claimants to “perfect their claims”, even after the imposition of a moratorium. Perfecting claims allows the valuation process to conclude and enables a definitive amount to be recognised, thereby avoiding classification as mere “contingent claims”. While it does not permit immediate enforcement, these perfected claims should be given binding status, making it mandatory for the prospective resolution professional to include their treatment in the resolution plan.
Need to Perfect Environmental Claims
India should also incorporate the principle of “Green Creditor”, which advocates prioritising environmental claims over other creditors, even if that requires allocating payments from the creditors’ share.
Creditors, particularly financial creditors, are well-informed about the debtor’s business and often enjoy substantial influence over the debtor’s policies and business operations. Even at the stage of loan disbursement, financial lenders assess the feasibility of the business in great detail and have access to all key records throughout the debtor’s operational lifecycle.
Therefore, if they choose to remain silent and inactive despite knowing about the debtor’s environmental violations, they should bear the consequences of their ignorance, and environmental debts should be paid in priority over financial creditors.
Why the Green Creditor Principle Is Important
- Ensures accountability of financial creditors.
- Encourages environmentally responsible lending practices.
- Promotes sustainable industrial and business operations.
- Discourages companies from ignoring environmental compliance.
- Protects public resources from bearing pollution cleanup costs.
Impact on Credit and Investment Market
This practice would benefit the credit market in the long run, as it would set an example for companies intentionally remaining ignorant towards environmental concerns.
It would also lead to a substantial change in the credit dispensation market, wherein creditors would ensure that their investment goes into companies better equipped and genuinely committed to following environmental norms.
Moreover, creditors would remain vigilant in ensuring that the debtor complies with all environmental standards throughout its operations.
Expected Long-Term Benefits
| Area | Expected Benefit |
|---|---|
| Credit Market | Encourages responsible lending and environmental due diligence. |
| Corporate Governance | Promotes stronger compliance with environmental laws. |
| Investment Practices | Directs funding towards sustainable businesses. |
| Public Interest | Reduces burden on taxpayers for environmental cleanup. |
Public Interest and Environmental Exceptions
There have been instances where certain provisions of insolvency and bankruptcy law have not been implemented on the grounds of public interest, particularly in relation to larger environmental concerns.
Courts in these foreign jurisdictions have not allowed companies to take refuge under insolvency law to shield themselves from paying damages caused to the environment by their violations.
India should similarly specify certain exceptional circumstances in which a company cannot use the Code to shed its environmental liability and would be bound to pay environmental costs in priority over insolvency obligations.
Conclusion
As the world progresses towards a green economy, insolvency laws across the globe have presented a novel challenge—undermining environmental concerns by absolving polluters of their liabilities once admitted under insolvency or bankruptcy.
Once a moratorium is imposed, environmental claimants are left with no choice but to file their claims before the Resolution Professional (RP) under the category of contingent claims or as decree holders—both of which fall way below in the waterfall mechanism and rarely result in compensation, leaving no other option but to use taxpayers’ money to clean up the liability of a single entity.
Additionally, insolvency has increasingly become a mechanism for companies to shield themselves when faced with substantial environmental debts.
The PLI Act, too, remains very limited in its scope, protecting only persons and their property and not covering other aspects of environmental pollution caused by these entities.
Recommended Reforms
- Amend the Code to recognise perfected environmental claims.
- Introduce the “Green Creditor” principle within insolvency proceedings.
- Create exceptional circumstances where environmental liabilities survive insolvency.
- Strengthen the PLI Act to address modern environmental challenges.
- Ensure balance between economic growth and environmental protection.
Therefore, the Code should be amended to introduce extraordinary circumstances wherein creditors would be held responsible for paying environmental damages.
The PLI Act must also be amended to incorporate necessary changes, making it fully functional for present-day needs and to offer creative solutions that balance both environmental welfare and the objectives of the Code.
India, being a developing nation, has its own limitations when it comes to balancing business and the environment—two interests that are often perceived to be in conflict.
Nevertheless, India must strive to promote environmentally friendly technologies and sustainable business practices, harmonising environmental protection with economic growth.
