Environmental Liabilities in Corporate Insolvency: Rethinking the IBC Waterfall Mechanism

Abstract

The enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”), represents a significant step in reshaping India's bankruptcy regime, providing a defined time for resolving corporate insolvency and ensuring the maximum realisation of asset value by changing the overall process to a creditor-in-control structure. In addition, the Code seeks to restore a viable business by providing a "clean slate" to resolution applicants and to create a mechanism for resolving liabilities incurred as a result of prior actions. With the enactment of the IBC and, hence, the complex overlap between environmental law and insolvency law, the difficulties multiplied. The development of Indian environmental law has been guided by the ‘polluter pays' principle. Those responsible for pollution and/or environmental degradation are made to pay for the costs and damages incurred by this harm.

This dilemma centres on the waterfall mechanism in Section 53 of the IBC[1], which establishes the hierarchy of asset distribution during liquidation. Section 53 lists insolvency resolution costs, secured creditors, and workmen's dues as having priority, whereas government dues and all other unsecured claims fall behind. This is problematic because environmental responsibilities, including remediation costs, regulatory penalty costs, and ecological harm compensation, are not explicitly mentioned in the statute; therefore, they must be classified under one of the other categories, usually operational debts or statutory obligations, both of which fall lower on the priority list.

As a result, after secured creditors recover their claims, there may be little or no assets available to pay for the costs of environmental restoration. This means that companies can destroy entire ecosystems, declare insolvency, and emerge without any environmental responsibilities, leaving behind contaminated “brownfield” sites that require state and taxpayer-funded remediation.

[1] Insolvency and Bankruptcy Code, 2016, §53.