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Need for an environmental friendly insolvency regime

The environmental authorities fall under the category of operation creditors under the Insolvency and Bankruptcy Code. The sequence of claims, as explained for liquidation, is strictly not applicable to the insolvency resolution process for corporates. However, in reality, the operational creditors are entitled to higher the liquidation value of their debt or the amount that would have been paid to such creditors if the amount to be divided under the resolution plan had been distributed in accordance with the order of priority as given under section 53 of the IBC.

The CIRP regulations mention that where the amount claimed by a creditor is not precise due to any contingency or other reasons, the resolution professional must make an appropriate estimate of the amount claimed according to the available information. However, in the case of CoC of Essar Steel India Limited v. Satish Kumar Gupta and Others, REED 2019 SC 11505, it was mentioned that the resolution professional was right in admitting the claim of a notional value of INR 1 due to the pendency of disputes. The importance of the environment in today’s era, the claims related to the environment have a greater priority in the pecking order. Several environmental laws are applicable to a range of industries. Moreover, the corporate debtor had either directly or indirectly, not kept its part of a bargain for remediation of pollution. Hence, the cost will be on the government in some form in future even after the approval of the resolution plan. Therefore, the scenario where real money should be spent and is in the larger public interest can take shelter by way of wider interpretation of IBC and environmental claims as a priority. CIRP costs as defined in IBC includes “any costs incurred at the expense of the Government to facilitate the insolvency resolution process”.

Hence, the financial creditors are completely informed about the business of the corporate debtor and they also have periodic reports submitted by the corporate debtor, tend to be silent about the environmental claims imposed by regulatory authorities. The demotion of secured creditors in the priority is that the credit market will suffer. However, such a step may be beneficial to the credit market in long term, where the financial creditor follows the environmental norms in accordance with Equator Principle. The stakeholders require a strong inclination towards environmental norms to create a secured future.

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