Who Bears Environmental Remediation Costs After IBC Resolution

Environmental remediation costs after resolution under the Insolvency and Bankruptcy Code, 2016 fall on whoever the approved resolution plan assigns them to; if the plan is silent, the clean slate principle confirmed by the Supreme Court in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited extinguishes the corporate debtor's pre-resolution environmental liabilities, leaving the cost largely with the government or unaddressed. Section 53 of the Code ranks environmental claims as residual dues, behind secured creditors, workmen and government dues, so pollution control boards recover little or nothing in most liquidations. This post examines how CIRP treats environmental claims and the reform proposals that follow.

Environmental Liabilities and the Structure of the IBC

How Does the IBC Classify Environmental Claims?

The IBC does not mention environmental liabilities or pollution remediation as a distinct category of claim. Environmental dues owed to pollution control boards or government authorities are not classified as either financial debts (under Section 5(8)) or operational debts (under Section 5(21)) in any direct sense. They are tortious and regulatory in nature. This classification gap means that environmental claims fall into the residual category under Section 53(1)(f) of the IBC, which covers "any remaining debts and dues" after all higher-ranking creditors are satisfied.

Section 53 prescribes a strict waterfall for distribution of liquidation proceeds. Insolvency resolution process costs and liquidation costs are paid first. Secured creditors who relinquish their security interest and workmen dues for 24 months rank second. Other employee dues for 12 months rank third. Unsecured financial creditors rank fourth. Government dues rank fifth. Environmental remediation claims, treated as residual dues, effectively rank last. In most liquidations, they receive nothing.

The Moratorium and Enforcement Stays

Once CIRP commences, the moratorium under Section 14 of the IBC stays all suits, proceedings, enforcement actions, and recovery proceedings against the corporate debtor. This expressly includes regulatory enforcement. The moratorium prevents a State Pollution Control Board from enforcing an order for environmental remediation or recovering the cost of clean-up against the corporate debtor during CIRP. The practical effect is that pollution remediation is frozen for the duration of the insolvency process, which may extend to 330 days.

The Clean Slate Principle and Environmental Liabilities

What Does the Clean Slate Principle Mean?

Section 31(1) of the IBC provides that on approval of a resolution plan by the NCLT, the plan is binding on the corporate debtor, its employees, members, creditors, guarantors, and all other stakeholders. The Supreme Court in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657] confirmed that once the plan is approved, all claims not included in the plan stand extinguished. In theory, environmental remediation liabilities that are not separately provided for in the resolution plan are extinguished upon approval.

The Problem This Creates

If environmental liabilities are extinguished upon resolution, the resolved company takes over a contaminated site with no legal obligation to clean it up, and the pollution control board has no enforceable claim against it. The contamination remains. The cost of remediation falls on the government or, in many cases, on no one. This creates what commentators have called a structural environmental black hole in the IBC: high-value financial creditors benefit from a quick resolution, while the environmental cost is externalised to the public.

Empirical analysis of Indian insolvency cases suggests that environmental liabilities are rarely included in resolution plans. Resolution applicants, who bid against competitors to acquire distressed assets, have strong incentives to exclude or minimise environmental obligations. A higher environmental liability provision reduces the attractiveness of the bid and lowers the asset's commercial value.

Pollution Control Board Claims During CIRP

Filing Claims and the Adjudicatory Gap

A State Pollution Control Board or the Central Pollution Control Board may file a claim before the RP during CIRP in respect of remediation costs or penalties under the Environment (Protection) Act, 1986, the Water (Prevention and Control of Pollution) Act, 1974, or the Air (Prevention and Control of Pollution) Act, 1981. However, since these claims are not clearly classified as financial or operational debts, the RP faces difficulty in admitting and valuing them. The RP may include an estimate under Regulation 14 of the CIRP Regulations, but the amount is often uncertain.

Can Environmental Enforcement Continue Despite the Moratorium?

This remains an open question in Indian law. The moratorium under Section 14 is broad, but some High Courts have taken the view that regulatory actions of a public law character, including those by environmental authorities, may not be entirely stayed where there is an ongoing threat to public health or safety. No definitive Supreme Court ruling has settled this question in the environmental context. In practice, enforcement by pollution control boards is typically suspended during CIRP, with the boards filing claims with the RP instead.

Who Bears Remediation Costs After Resolution?

If the Resolution Plan Is Silent

If the approved resolution plan makes no provision for environmental liabilities, the incoming resolution applicant (now the management of the resolved company) takes over the assets including any contaminated land or water bodies. The clean-slate principle means the pre-resolution environmental liabilities of the corporate debtor are extinguished. However, the resolved company remains subject to prospective environmental law obligations from the date it takes over. It cannot continue to pollute with impunity; it must comply with applicable environmental standards going forward.

The question of whether the incoming owner is liable for remediation of historical contamination caused by the previous management is governed by the environmental statutes, not the IBC. Indian environmental law traditionally fastens liability on the person responsible for the discharge, not the current owner of the land. However, if the contamination is ongoing or poses a present danger, regulatory authorities may direct the current operator to act.

If the Resolution Plan Includes an Environmental Provision

A growing practice in sophisticated CIRP transactions is for the resolution plan to include a specific provision for environmental remediation, either as an obligation on the incoming management or as a fund set aside for clean-up. This approach avoids post-resolution disputes with regulators and may be a condition imposed by pollution control boards as part of their no-objection in cases where their consent is required for the transfer of pollution-related consents. In such cases, the burden of remediation is contractually allocated in the plan itself.

Environmental Claims in Liquidation Under Section 53

Where CIRP fails and the corporate debtor enters liquidation under Chapter III of the IBC, the liquidator must realise the assets and distribute proceeds under the Section 53 waterfall. Environmental remediation claims rank at the bottom. If assets are insufficient to satisfy higher-ranking creditors, the environment bears the cost. The liquidator is not personally required to remediate the site but must not abandon it in a way that endangers public health. The interaction between the liquidator's duties and environmental law is an area of evolving judicial practice.

Reform Proposals and Comparative Perspective

Several commentators and policy submissions have advocated for an amendment to the IBC to insert environmental remediation costs at a higher priority in the Section 53 waterfall, similar to the approach taken in the United States under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and in the United Kingdom under the Environmental Liability Directive framework. A higher ranking would incentivise resolution applicants to price environmental liabilities into their bids and would ensure that pollution costs do not fall entirely on the public. As of mid-2026, no such amendment has been enacted in India.

Frequently Asked Questions

Can a pollution control board stop a CIRP by refusing to give a no-objection?

No regulatory authority can unilaterally stop a CIRP by withholding a no-objection certificate. The NCLT has jurisdiction over the resolution process, and regulatory approvals form part of implementation rather than a condition for plan approval. If a specific environmental consent is required for the operation of the business post-resolution, its procurement is part of the resolution applicant's implementation obligations.

Are penalties imposed under environmental law extinguished by the resolution plan?

Pre-commencement environmental penalties are extinguished on approval of a resolution plan under the clean-slate principle confirmed by the Supreme Court in Ghanashyam Mishra. Post-commencement penalties, imposed after the insolvency commencement date, are part of the insolvency resolution process costs and rank first in the Section 53 waterfall.

Is the resolution applicant liable for the corporate debtor's past pollution?

Under the IBC clean-slate framework, pre-resolution liabilities are extinguished. However, if the contamination is of an ongoing character or amounts to a continuing violation of environmental law, the current operator may be directed to remedy it by regulatory authorities. The outcome depends on the specific environmental statute and the nature of the contamination.

Can a creditor challenge a resolution plan that ignores significant environmental liabilities?

An environmental creditor, such as a pollution control board with an admitted claim, may challenge the plan on the ground that it violates Section 30(2) by not providing adequate payment for its admitted claim (at least the liquidation value). Beyond this specific ground, the commercial wisdom of the CoC in setting distribution terms is not open to challenge.

What happens to pollution consents and environmental licences during CIRP?

Environmental consents, licences, and authorisations issued under environmental statutes are typically held in the name of the corporate debtor. During CIRP, the RP operates the business and must maintain compliance with these licences. Post-resolution, the incoming management must either transfer or renew the licences in its name, as required by the applicable environmental statute. Some states and regulatory authorities have specific procedures for consent transfer in insolvency scenarios.

Does the IBC moratorium prevent a pollution control board from issuing closure directions?

The moratorium under Section 14 stays suits and proceedings for recovery of money and enforcement of security interests but is less clearly applicable to regulatory directions of a public law character, such as closure directions issued to prevent ongoing pollution. Courts have not conclusively resolved this, and the practice varies. In urgent situations involving imminent public health risk, regulatory authorities have continued to issue directions despite CIRP, and these have generally been upheld.

Can environmental remediation costs incurred during the CIRP itself be treated as insolvency resolution process costs?

Yes, in principle. Costs actually incurred by the resolution professional during the corporate insolvency resolution process to comply with an urgent environmental direction, such as preventing an ongoing hazard, can be claimed as insolvency resolution process costs under Section 5(13) of the Code, which rank first in the Section 53 waterfall. This is distinct from historical remediation liability for contamination that predates the CIRP, which falls into the residual category and ranks last.

What role does the National Green Tribunal play once a corporate debtor enters CIRP?

The National Green Tribunal, constituted under the National Green Tribunal Act, 2010, retains jurisdiction over environmental matters generally, but its ability to enforce an order for remediation or compensation against the corporate debtor during CIRP is constrained by the Section 14 moratorium in the same way as other enforcement proceedings. Pending applications before the Tribunal against the corporate debtor typically have to be pursued as claims before the resolution professional rather than through continued Tribunal enforcement during the moratorium.

Since both secured creditors and environmental claims can be residual, does one still rank above the other?

No. Secured financial creditors who relinquish their security interest rank second in the Section 53 waterfall, well above environmental claims, which fall into the residual category under Section 53(1)(f) along with any other unclassified dues. Environmental claims are not merely low priority; they are effectively last in line, after workmen dues, employee dues, unsecured financial creditors and government dues, which is why they are rarely paid in a liquidation.

Does the clean slate principle extinguish criminal liability for environmental offences committed before resolution?

The clean slate principle under Section 31(1) of the Code, as confirmed in Ghanashyam Mishra, extinguishes claims against the corporate debtor that are not part of the resolution plan, but criminal liability of individuals, such as directors or officers responsible for an environmental offence, is generally treated as personal and distinct from the corporate debtor's civil and financial liabilities. Whether the corporate entity itself can face continuing prosecution for pre-resolution conduct after a plan is approved remains a developing and contested area.

Can environmental dues be reclassified as operational debt if there was a specific contractual remediation obligation?

Possibly, where the environmental obligation arises from a genuine contract, such as a remediation agreement or a consent order structured as a binding undertaking with defined payment terms, rather than a purely regulatory or tortious liability. Whether a resolution professional will treat such a claim as an operational debt under Section 5(21) depends on the specific documentation, and claimants relying on this route should be prepared to establish the contractual character of the obligation clearly when filing their claim.

What happens to bank guarantees furnished to a pollution control board when the corporate debtor enters CIRP?

A bank guarantee furnished by a corporate debtor to a pollution control board as security for environmental compliance is generally treated the same as any other bank guarantee: since it is the issuing bank's independent obligation rather than the corporate debtor's own asset, its invocation by the board is not automatically barred by the Section 14 moratorium, subject to the established exceptions for fraud and irretrievable injustice. The proceeds of an invoked guarantee do not, however, guarantee full remediation if the guarantee amount is less than the actual cost.

Have Indian resolution plans included express environmental remediation provisions in practice?

A growing but still limited number of resolution plans in sectors such as mining, chemicals and heavy manufacturing have included a specific fund or obligation for environmental remediation, often at the insistence of the pollution control board as a condition for granting consents needed to operate the resolved business. These provisions vary widely in scope and are not yet standardised, reflecting the absence of a mandatory statutory requirement to address environmental liabilities in every resolution plan.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice at Mumbai-based law firm Vikrant D. Shetty & Associates, Advocates & Solicitors. The firm advises financial creditors, operational creditors, and corporate debtors in proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and represents parties in domestic and international commercial arbitrations seated in India and abroad, including enforcement and challenge proceedings before the Bombay High Court.

Related reading: 5 Mistakes Indian Banks and NBFCs Make That Lead to Overpaying for Arbitration Claims.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.