Indian Government, over the years, has been taking steps to adapt and mitigate the effects of climate change. These include binding commitment to reduce greenhouse gases, focus on renewables, enhance investments for adaptation and legislating new environmental laws or strengthening the existing ones. One of the steps was introducing circularity i.e., reduce, reuse and recycle in environmental laws and rules. Circularity gave birth to the concept of Extended Producer Responsibility (EPR). EPR makes the producers i.e., manufacturers, assembler, importer, or a seller of the goods, responsible for the entire life cycle of their goods. The rules that have been notified for EPR pertain to E-waste including electric, electronic, and photovoltaic, Batteries including all its components metals, plastics, and chemicals, Plastics that contain polymers in any form, Tyres, and Lubricant Oil including the base oil.
Violation of EPR rules results in a environmental fine or a penalty. More importantly, the fine does not absolve the person from EPR. This creates couple of interesting conundrums in case a company having EPR obligations becomes insolvent. The first, claims by environmental authorities for the unpaid amount of fines and the second, the treatment to be accorded by the Successful Resolution Applicant (SRA), to the corporate debtor’s unfulfilled EPR obligations. Will the corporate debtor be entitled to a clean-slate principle i.e., all the past liabilities for non-compliances are wiped clean?
The debate on the treatment of environmental claims in insolvency has commenced in many jurisdictions including India. In Canada, if such claims fall under the realm of public duty, they have been awarded a super-priority status, and in the United States, in exceptional circumstances, specifically for remediation of polluted sites, that may cause harm to public health or safety, such claims may be treated as an administrative expense i.e., a cost of bankruptcy resolution. Most countries treat such claims as an unsecured claim though with growing climate awareness this may change in the near future.
Vis-à-vis the second issue of treatment of obligations under EPR by the SRA a debate hasn’t ensued. The closest adjacency in other jurisdictions relate to end-of-life obligations either for remediation of polluted land or an asset retirement, for example an oil or a gas well. Should we follow the precedent set up in the case of Apex Oil in the United States? The judgement pertains to remediation of polluted site, where it was held that since “the government only requires to clean up the contaminated site,” but “does not authorize any form of monetary relief”, a right of payment does not arise, and thus it is not a claim dischargeable in bankruptcy.
Admittedly, the Apex judgement is not in context of EPR but provides a template for similar matters. Moreover, asking the SRA to fulfil past EPR obligations will not result in uncertainty of amounts payable; no “hydra-heads popping up”. Based on historical data, the obligations of EPR can be calculated. This would also be in consonance with, the right to healthy environment and the right to be free from adverse effects of climate change, as recently articulated by the Hon. Supreme Court in the case of MK Ranjitsinh.Finally, to obviate uncertainty a legislative framework needs to be crafted, for EPR obligation in insolvency, especially considering the nature of industries that Government is encouraging. Electrolysers for hydrogen, electric vehicles, solar panels, semiconductors, mobiles etc. will have EPR obligations. It is inevitable that some of the companies venturing into the aforesaid sectors will face distress, especially when the incentives and the subsidies are withdrawn.Thus, appropriate clauses in the legislation, will ease the passage through insolvency for such stressed companies, enabling a quicker resolution, which otherwise will be marred in endless litigation.
The author is an INSOL Fellow & Restructuring Advisor
