Environmental claims under Indian insolvency law: concepts and challenges

Abstract

The intersection between claims arising from environmental liability and insolvency of the entity concerned has grown increasingly complex. Over the years, India has seen enactment of several laws and proactive judicial decisions to ensure liability from environmental harm is addressed through application of no-fault and absolute liability principles. A consequence of these principles is, if an entity harms the environment, they must bear the cost of clean-up. If the entity defaults on the compensation payment or is unable to pay, then, under the Insolvency and Bankruptcy Code 2016 (IBC) they may be able declare insolvency. When admitted under insolvency, a moratorium on all claims is imposed. Once resolution has taken place, the corporate debtor is provided with a “fresh start”, relieving the debtor from all its previous debts and liabilities. If the debtor goes into liquidation through the waterfall mechanism, financial creditors are given priority over environmental claimants who would mostly be categorized either as contingent claimants or decree holders. In these scenarios, insolvency law supersedes environmental law/policy by design, creating a visible human rights implication. While the IBC seems to be agnostic to social causes, there are other avenues to deal with social causes, such as the Public Liability Insurance Act which deals with hazardous environmental accidents in a limited way. In the paper, we argue that insurance, compared to insolvency, provides a better framework to resolve environmental liabilities and that the insurance schemes should remain intact regardless of a fresh start.