Treatment Of Environmental Liabilities In Insolvency Resolution: Clean Slate Or Continuing Burden?

Introduction

Corporate entities dominate the number of debtors admitted into CIRP and numerous of these come with environmental liabilities left outstanding: in the form of pending consents/closures, contaminated soil or pending liabilities payable to the pollution control bodies. The IBC was conceived with the private law logic of value maximisation and providing a “clean slate” to the applicant; while environmental law rests on the public law logic of strict/absolute liability and the “polluter-pays” principles, ensuring liabilities stick to the activity or site. This blog explores how this interaction plays out - are environmental liabilities discharged as ‘claims’ on approval of a resolution plan, is environmental liability attached to the assets of the corporate debtor irrespective of changes in ownership, how it influences the feasibility of the plan and what steps the potential resolution applicant should take when acquiring a contaminated industrial asset.

Legal provisions

1. The Insolvent and Bankruptcy Code, 2016 - Section 3(6) (definition of "claim"), Section 5(21) ("operational debt" i.e. dues owed to government authorities), Section 30(2) and Section 31 (contents and bindings of resolution plan), Section 32A (extinguishment of Corporate Debtor's liability in relation to offenses before CIRP and immunity from attachment of assets, upon a genuine change in management), Section 33 in the context of Liquidation Process Regulations (unpaid debts after resolution), Section 53 (liquidation priority order where government dues are lower than secured dues, workmen's dues) and Section 238 (overriding effect to other laws) and as applied by the judgement(s).
2. Environment (Protection) Act, 1986 Sections 5, 15 empowering issuance of directions for closure, prevention or regulation of the industry or undertaking involved in causing the pollution or imposing punishment for non-compliance.
3. Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control of Pollution) Act, 1981 - the consent-to-establish/consent-to-operate regime being operated by the SPCBs and their powers to order cessation of power/water supply
4. National Green Tribunal Act, 2010 - Section 15 and 17 have, as part of the adjudication for environment damages and compensation, enshrined the polluter-pays and no-fault principle (absolute liability).
5. Public Liability Insurance Act, 1991 - insurance for mines in case of an accident causing damage, mandatory for mines carrying hazardous materials
6. Mines and Minerals (Development and Regulation) Act, 1957 - the duty and obligation for closing and progressively rehabilitating a closed mining lease vest with the lease holder/lessee.

Legal analysis

The principal question of doctrine for an investor would then be whether environmental liabilities constitute 'claims' that are crystallised, filed in and wiped out in CIRP, or whether they survive as continuous regulatory duties tied to the activity or asset rather than a monetary claim against past promoters. When read unconstrained with the Supreme Court's "clean slate" philosophy from Essar Steel, Ghanshyam Mishra and other cases -- that once a resolution plan is approved all claims not included will stand extinguished including claims in favour of any Central Government or State Government authority, due to the obvious difficulty and impossibility in expecting a resolution applicant to assume unidentified liabilities if they're to be able to make success out of a functioning of the corporate debtor -- suggests that the unquantified remediation costs will merely be wiped out simply because they were not quantified in time before the regulator to be filed for a moratorium inCIRP.

The principal question of doctrine for an investor would then be whether environmental liabilities constitute 'claims' that are crystallised, filed in and wiped out in CIRP, or whether they survive as continuous regulatory duties tied to the activity or asset rather than a monetary claim against past promoters. When read unconstrained with the Supreme Court's "clean slate" philosophy from Essar Steel, Ghanshyam Mishra and other cases -- that once a resolution plan is approved all claims not included will stand extinguished including claims in favour of any Central Government or State Government authority, due to the obvious difficulty and impossibility in expecting a resolution applicant to assume unidentified liabilities if they're to be able to make success out of a functioning of the corporate debtor - suggests that the unquantified remediation costs will merely be wiped out simply because they were not quantified in time before the regulator to be filed for a moratorium inCIRP.

But extinguishment clean only works where the duty can be 'reduced' to a 'right to payment' of a sum as per Section 3(6). Ongoing statutory obligation to not contaminate and to treat effluents, to operate without a valid permit/licence is not for a sum due for something done past, but is a condition precedent to continue to operate the facility for which a licence is required. If anything Section 32A emphasizes the difference rather than diluting it - extinguishes the offence and liability in criminal terms & also prohibits attachment of property on that basis once genuine management is change, but does not say anything on the continued power of regulator to lay fresh terms or directing remedial of the soil found contaminated post the approval.

Only money liability of penal action done can be expunged, physical position does not improve just because the scheme approved and successor in Management of the Facility stands to continue to carry out its operational activity under various existing and newly imposed regulatory conditions and also inherit the problem of environmental cleanup.

The added complexity is the logistical impossibility faced by regulators in having their claims determined and crystallised to the degree possible during CIRP deadlines, particularly as tribunals have traditionally been reluctant to permit environmental compensation claims be considered admitted and as operating debt unless determined by some tribunal. More often than not, environmental compensation at that stage will be pending ongoing departmental review and/or appeal to the NGT, and this process will almost certainly fall outside the resolution period for CIRP, rendering such unadmitted and unprotected claims subject to becoming subject to eventual extinguishment to externalise costs on the environment and surrounding public - something that runs counter to the non-negotiable tenets of polluter pays and absolute liability in Indian environmental jurisprudence and an outcome quite problematic when the polluter in question may cease to exist in the same garb post resolution.

Case laws

Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., the apex court had held that following approval of a resolution plan, any claim which is not part of resolution plan including statutory dues payable to government Authorities are extinguished and no other proceeding could be initiated in respect of them.

Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta - The Court ruled the resolution applicant should step on a ‘clean slate’ since creditors require certainty regarding the amount of the debt. If not, no realistic buyers will come forth for distressed industrial units.

Ferro Alloys Corporation Ltd. v. Sub-Divisional Magistrate (Orissa High Court) - A petition brought under the Environment (Protection) Act against a unit for 2002-2009’s pollution was struck down once the resolution plan was approved and management of the units changed, the section 32A application being allowed notwithstanding the arguments for environmental crimes and the regulator being distinguished from financial crimes.

M.C. Mehta v. Union of India (Oleum Gas Leak case) - brought in the principle of absolute, non-delegable liability on an enterprise doing hazardous business - liability more strict than ordinary fault in tort and that is divorced from ownership and possession.

Vellore Citizens' Welfare Forum v. Union of India - interpolated the polluter pays and precautionary principles into Indian law with the concept of remediation as an ongoing duty arising from the enterprise of business and not a debt which subsists regardless of ownership.

Practical implications

Resolution applicants do not escape the need to obtain new or re-affirmed consents or the cost of dealing with any existing contamination after the resolution plan is implemented, both areas where the regulator is likely still to have claims or demands on the company. The Committee of Creditors and lenders should squarely build environmental remediation costs into the assessment of industrial assets and feasibility, since the negative value of a contaminated site could be a drag on a company’s resale and long-term viability. A lesson in terms of process for regulators should be to file and, ideally, obtain adjudicated orders resolving compensation claims during the CIRP timeline so they don’t face a problem of claims being extinguished under the clean slate.

There are already proposals circulating through industry debate on how best to reform the IBC (and this in general terms) that environmental remediation be treated like a workmen’s dues, to be an exception to environmental harm being the last liability to be eliminated.

A Due-Diligence Framework for Resolution Applicants

• Consent and compliance audit - validity of the Consent to Establish/Operate and the underlying conditions, check all pending show cause notices and status of Environmental Clearance under EIA regulations.
• Regulatory and litigation history - Scan records with SPCB, CPCB and NGT for anyclosure directions, penalty orders and pending prosecutions against the corporate debtor
• Site assessment - Commission Phase I/II environmental site assessment for soil and groundwater testing for all locations and storage areas for hazardous waste to estimate concealed contamination liability.
• Claims Register review - verify whether any claim has been filed with CIRP by an environmental authority (the absence or un-adjudicated nature of claims could represent future resurrected liability, either fully at the corporate debtor's cost or externally.
• Check for applicability of Section 32A - ascertain fulfillment of statutory prerequisites for changed management & control, enabling invocation of pre-CIRP prosecution immunity.
• Post - Acquisition Compliance Budget - The overall cost provisions shall include costs for remediaiton, fresh consents for renewed environmental activities and the environmental management system for economic restart of the venture.

Conclusion

Environmental liability can’t just go away by pretending it’s a normal debt to be wiped clean when the books are “cleaned up.” The clean-slate doctrine, aided by the specific statutory “reset button” under IBC Section 32A which formally extinguished all old pecuniary and punitive claims by “good old days” management, did restore real “enterpriseloss liability” protection once new management comes onboard, and such protection is necessary so that an ill-useable dirty old plant doesn’t sit forever as a ghost. However, the mere reality of contamination, which the environmental agencies would proactively be equipped to mandate cleanup costs from new management and enforce, can’t reasonably be assumed away as a pre-CIRP “claim.” Such a key nuance must be considered by bidders while they “do their dirty dance” when evaluating such acquisitions and, more appropriately, by lawmakers if ever they tackle the interface between CIRP and environment.

Endnote

^{1 The Insolvency and Bankruptcy Code, No.31 of 2016, s.3(6).}

^{2 The Insolvency and Bankruptcy Code, No.31 of 2016, s.5(21).}

^{3 The Insolvency and Bankruptcy Code, No.31 of 2016, s.30.}

^{4 The Insolvency and Bankruptcy Code, No.31 of 2016, s.32A.}

^{5 The Insolvency and Bankrupcty Code, No.31 of 2016, s.33.}

^{6 The Insolvency and Bankruptcy Code, No.31 of 2016, s.53.}

^{7 The Insolvency and Bankruptcy Code, No.31 of 2016, s.238.}

^{8 The Environment (Protection) Act, No. 29 of 1986, s.5.}

^{9 The Environment (Protection) Act, No. 29 of 1986, s.15.}

^{10 The Water (Prevention and Control of Pollution) Act, No. 6 of 1974.}

^{11 The Air (Prevention and Control of Pollution) Act, No. 14 of 1981.}

^{12 The National Green Tribunal Act, No. 19 of 2010, s.15.}

^{13 The National Green Tribunal Act, No. 19 of 2010, s.17.}

^{14 The Public Liability Insurance Act, No.6 of 1985.}

^{15 The Mines and Minerals (Development and Regulation) Act, No. 67 of 1957.}

^{16 Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657.}

^{17 Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531.}

^{18 Ferro Alloys Corp. Ltd. v. Sub-Divisional Magistrate, Champua [2026] LLBiz HC (ORI) 21.}

^{19 C. Mehta v. Union of India, (1987) 1 SCC 395.}

^{20 Vellore Citizens' Welfare Forum v. Union of India, (1996) 5 SCC 647.}

^{21 Nishith Desai Assocs., Ring-Fencing Antecedent Liabilities of Companies: IBC Saves the Investors, NDA Insolvency & Bankruptcy Hotline, (last visited Sept. 13, 2026).}

^{22 Mondaq, Section 32A of the IBC, Mondaq (2021), (last visited Sept. 13, 2026).}

^{23 IndiaCorpLaw, Section 32A of the IBC (Second Amendment) Bill, 2019: A Step in the Right Direction?, IndiaCorpLaw Blog (Jan. 6, 2020).}

^{24 LiveLaw, Claim of Compensation Cannot Become Part of Operational Debt Until the Liability Is Adjudicated by a Competent Authority: NCLT Mumbai, LiveLaw, (last visited Sept. 13, 2026).}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.