What if India’s path to net-zero by 2070 crumbles under climate-driven insolvencies?
As extreme weather ravaged crops and lives in 2025, corporations teeter, yet IBC favours financial creditors over environmental fixes, can simple reforms save both economy and ecology?
Climate Change is the defining issue of the 21st century. India faces an unprecedented climate emergency, with extreme weather events struck on 99% of days in the first nine months of 2025 alone affecting nearly every day of this year, causing massive crop losses, deaths, and displacement of millions. These environmental damages pose a threat not only to life and livelihood but also to business sustainability across industries. In response, India has pledged to reach carbon neutrality by 2070 and has mapped out an ambitious pathway through its Long-Term Low-Carbon Development Strategy and shorter-term targets such as raising non-fossil fuel energy production capacity to 50% by 2030. However, increasing climate risk has also seen a surge in corporate insolvencies, wherein the existing Insolvency and Bankruptcy Code2016 (IBC) framework tends to favour financial creditors at the cost of overlooking environmental liabilities and remediation. This article examines the issue of how insolvency laws can be rearranged to include the concerns of climate and the environment for aligning the bankruptcy resolutions with the goals of sustainability.
Increase in Climate Change-related Litigation and Debt Defaults
Climate Change litigation has witnessed global surge of cases doubling between the period of 2017-2022. The exponential growth of claim against non-compliance and failure to adapt climate regulation resulted from considerable damage by corporations over past several years.
National Green Tribunal(NGT), India’s designated environment court established under theNational Green Tribunal Act 2010[1], has imposed significant compensation on defaulting entities. The State of Meghalaya was directed to pay an interim compensation of ₹100 crores for coal mining threats in South Garo Hills. While authorities in Uttar Pradesh were subjected to multiple environmental compensation orders including sums of ₹7.5 crores and ₹100 crores for serious violations.[2]
Source- The Financial Express
These penalties, coupled with the substantial cost of environmental remediation and regulatory compliance, materially erode the cash flows and push financially vulnerable enterprises close to insolvency, that intensifies when climate exacerbated events simultaneously disrupt operations and destabilize supply chain.
IBC in India and Climate Change
The IBC, enacted in 2016, is a landmark reform in insolvency framework of India. It was designed to consolidate and streamline the insolvency laws for corporate, individual debtors and partnership.The primary objectives of the IBC include maximizing the value of distressed assets, improving credit availability, fostering financial discipline, and promoting entrepreneurship by ensuring the timely resolution of insolvency cases.[3]The National Company Law Tribunal (NCLT), a quasi-judicial authority, plays a crucial role in supervising the Corporate Insolvency Resolution Process(CIRP)and admitting insolvency applications. The IBC grants primacy to financial creditors, who initiate and control insolvency resolutions and, often sidelining operational and other non-financial creditors. TheHon’ble Supreme Court in the case of Swiss Ribbons Pvt. Ltd. v. Union of India (2019)[4]held the constitutional validity of the IBC and emphasized that financial creditors should have primacy in the resolution process, given their expertise in assessing viability and feasibility.The Major amendments in 2025 to the IBC bring about not only addressing delays in the procedural mechanism but also introducing new mechanisms like the Creditor-Initiated Insolvency Resolution Process(CIIRP), which enables certain financial creditors to initiate insolvency proceedings outside traditional court mechanisms. These amendments further reinforce regulatory oversight, provide for smoother liquidation, and also enable group and cross-border insolvency mechanisms.
Yet, these improvements notwithstanding, the IBC lacks explicit provisions enabling climate-related and environmental liabilities consequent to corporate insolvency. With India’s intensifying commitments to SDGs, the Environmental, Social, and Governance (ESG) principles have gained prominence. The ESG is a framework used to assess an organization’s business practices and performance on various sustainability and ethical issues.[5]It also provides a way to measure business risks and opportunities in those areas. Its ideal aim is to mitigate the adverse long term financial consequences.
The Climate Change stands as E in ESG, which focusses on how company’s operations impact the environment. SEBI’s attempt towards ESG disclosure is to bring about transparency in companies but, quite often, remains investor-centric, creating gaps in how it fits with insolvency proceedings and misses the focus on a company’s unique climate risks.This leads to the emerging need of the integration of the ESG into the IBC to balance creditor rights and drive environmental sustainability in corporate restructurings.
Balancing Public Interest with Creditor’s Rights
Balancing public interest with creditor’s rights is one of the biggest challenges especially in the cases where the climate-related liabilities and environmental harms are involved. As per the Section 53 waterfall of the IBC, it strongly protects the interest of the financial creditors by giving them primacy in the Committee of Creditors (CoC), but this most of the times overlook the unpaid remediation costs and environmental harm. The National Green Tribunal (NGT) decisions to impose penalties, and the Polluter’s Pay Principle- “If you make a mess, it’s your duty to clean up” indicates towards a good step, but these unpaid remediation costs shift the burden onto state that affects communities.
Thus, balancing public interest in this context requires readjustments how climate claims are treated without dismantling the creditor’s protection. The “real money” spent by state should qualify as priority insolvency cost. Thus, the design of insolvency law should accommodate public interest in its various aspects. The public interest would weigh in favour of reserving certain assets for climate remediation, rather than selling them to other extractive firms for the benefit of creditors, so that ecological integrity and public health are not compromised and sacrificed at the altar of short-term creditor recoveries.
Priority of Environmental Claims
Environmental claims carry profound significance beyond monetary aspect, they represent collective right to ecological public health protection,integrity and intergenerational justice.When environmental harm goes unchecked, communities bear the burden in the form of toxic water, fouled air, and decimated ecosystems, with taxpayers ultimately footing the bill for cleanup and restoration that insolvent polluters evade.
The current regime of Insolvency and Bankruptcy Code 2016, such remediation expenses are pushed to the bottom of the priority list and remain largely unenforced. The unpaid remediation cost inclusive of toxic waste cleanup, carbon offsetting obligations, and ecological restoration are classified as unsecured operation debts upon insolvency of climate affected enterprises. Such framework encourages strategic misconduct, corporation offload environmental liabilities during operations, aware that insolvency proceeding extinguishes these obligations while ensuring financial creditor recovery. The Polluter Pay Principle, enshrined in Indian Council for Enviro Legal Action v. Union of India (1996)[6], become toothless when environmental debts compete with operational creditors, and recoveries are poor, offering little actual accountability to the polluter.There are indeed international blueprints that serves to elevate remediation costs in priority, like, The United States Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) 1980[7] (CERCLA).
Adopting similar provisions could align insolvency outcomes with India’s net zero ambitions. In the absence of reform, the IBC may risks enabling private profit at the expense of the broader ecological and public health costs, diluting environmental accountability when the climate demands stronger corporate responsibility.
The Way Forward
The reform of the IBC structure in respect of climate liabilities need not destroy its fundamental architecture but rather build upon it to reflect modern environmental imperatives. The proposed reforms aim to achieve a balance wherein financial restructuring coexists with ecological accountability.
First, the waterfall mechanism inSection 53 could be amended to insert remediation cost in a distinct priority category, proximate to secured creditors. This elevation acknowledges the societal cost of ecological degradation ought not to be externalise onto taxpayers and affected communities.
Secondly, the CoC framework could be expanded to include representation from environmental regulatory authorities such as the Central Pollution Control Board and State Pollution Control Boards. Their involvement would ensure that resolution plans properly address environmentalliabilitiesand incorporate climate risk assessments while assessing enterprise viability.
Thirdly, companies undergoing a CIRPshould be made to comprehensively assess and disclose liabilities, carbon footprints, and climate-vulnerable events. This transparency would facilitate decision aligned with India’s Environmental, Social, and Governance commitments and Nationally Determined Contributions under the Paris agreement.
Finally, a predetermined percentage of the liquidation proceeds should be allocated exclusively for environmental remediation costs before any distribution to creditors. This safeguard would prevent distressed assets from being transferred to industries without addressing existing environmental damages, thereby preserving ecological integrity.
These reforms would evolve the IBC from a purely financial model into a comprehensive framework serving both economic recovery and environmental justice. Thereby, achieving a critical balance for sustainable development objectives in era of escalating climate challenges, demonstrating developing economies such as of India’s insolvency regime as pioneering model for climate conscious corporate restructuring.
[1]National Green Tribunal Act, No. 19, 2010.
[2]Dr. Raghav Pandey & Sumant Batra, A Thought Paper on Climate Change and Insolvency in India, Insolvency Law Academy, 1, 33 (2024), https://insolvencylawacademy.com/wp-content/uploads/2024/10/Final-_Thought-Paper-on-Climate-Change-and-Insolvency-in-India.pdf.
[3]Shekhar C, Bailing Businesses, Boosting Banks: The Evolution of Insolvency and Bankruptcy Law in India, International Journal of Research Publication and Reviews, 6(2),4908, 4909 (2025), https://ijrpr.com/uploads/V6ISSUE2/IJRPR39167.pdf.
[4]Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17, AIR 2019 SC 739.
[5]Dr. Raghav Pandey & Sumant Batra, A Thought Paper on Climate Change and Insolvency in India, Insolvency Law Academy, 1, 5 (2024), https://insolvencylawacademy.com/wp-content/uploads/2024/10/Final-_Thought-Paper-on-Climate-Change-and-Insolvency-in-India.pdf.
[6]Indian Council for Enviro-Legal Action v. Union of India (1996) 3 SCC 212.
[7]Comprehensive Environmental Response, Compensation, and Liability Act,1980 (United States).
Author Name- Mahee Chourasia, Second Year, BA LLB , Gujarat National Law University, Gandhinagar
Mahima Prasad, Second Year, BA LLB , Gujarat National Law University, Gandhinagar
