[Zoya and Digvijay are students at National Law University Odisha.]
Unprecedented temperatures, pernicious hurricanes and melting icebergs in the guise of climate change have resulted in governments opting for various approaches to facilitate greener policymaking. One such approach is the extended producer responsibility (EPR) which seeks to hold companies accountable for the entire lifetime of the commodity exposed to the process of “reduce, reuse, and recycle" and eventually to its final disposal. While India has been impressively keeping up with the global race, it seems that the current insolvency regime has been ignorant of accommodating EPR claims in its corporate insolvency resolution processes.
We start the blog by first understanding the concept of EPR to know how it differs from general environmental claims. Further, after pointing out how the Insolvency and Bankruptcy Code 2016 (IBC) fails to recognize the concept of EPR, we subsequently study how foreign jurisdictions have uniquely accommodated EPR compliances within their respective regimes. Finally, we formulate constructive opinions on how India can make room for EPR claims in case companies enter insolvency.
Understanding Extended Producer Responsibility
In a circular economy, a commodity produced by a producer in the market, traces its lifespan not only until the same is bought by one consumer and sold to another, but until the very moment the commodity is disposed of in the environment through the procedure of reduce, reuse and recycle. As per the abstraction of EPR, a producer in such a circular economy must be financially accountable for the environmental effects precipitated during the lifespan of the commodity. Such a producer must also bear the final costs of disposing of the commodity. It is apparent that the objective of such conceptualization is to prevent manufacturers from evading responsibility after the sale of a commodity with potential environmental ramifications like photovoltaic cells, automobile motors etc.
In India, the EPR regime has been enforced under the E-Waste (Management) Rules 2016 and Plastic Waste (Management) Rules 2016 that lay down myriad of EPR compliances and annual targets for producers, importers and brand owners (PIBOs). Under the current regime, PIBOs are subjected to a strict requirement of registration into EPR portal formulated by the Central Pollution Control Board (CPCB) for the purposes of receiving EPR certificates and real-time monitoring of transactions of PIBOs with waste processing organizations. A failure to comply with rules attracts financial penalties to fund the procedures of ‘reuse, reduce and recycle’ and the final disposal procedure of the commodity.
The EPR regime stands on a different footing from the general environment protection regulations. Fines collected by authorities like the State Pollution Control Board (SPCB) and the CPCB in view of the powers conferred to them under the Air (Prevention and Control of Pollution) Act 1981, the Water (Prevention and Control of Pollution) Act 1974 and the Environment (Protection) Act 1986 are supposed to be utilized by the authorities for compensating stakeholders affected due to non-compliance of the regulations as well as the revival of the environment.
Hence, while the defaulter must pay for non-compliance in both the cases, in furtherance of the polluter pays, the difference lies in their resoluteness. Where in the latter case penalties seek to mitigate an undesired outcome in the guise of an environmental crisis that has resulted due to non-compliance of pollution-control legislations, EPR penalties seek to prevent subsequent environmental ramifications by funding the successful disposal of the commodity.
Making Room for EPR in IBC
Recently, India has leveled up on its environmental promises in the international arena. One such initiative working towards clean energy transition is Leadership for Industry Transition. This initiative aims to assess the plans of the existing industrial players to adopt greener operating methods. This has increased the accountability of the companies with regards to the environment. Considering the increasing number of manufacturing industries entering insolvency, the onus of responsibility for environmental compliance and to deal with the aftermath in case of failure to fulfil it is the place of predicament in this scenario.
While environmental claims for damages caused by non-compliance with existing guidelines have seldom found a place in the resolution plan submitted to courts, environmental claims are broadly categorized into two. Firstly, the claims which are not determined or are in legal dispute are called contingent claims. The resolution professional (RP) is mandated to estimate the value of contingent claims and accordingly include in the resolution plan.
Secondly, environmental claims also come as a court decree instructing the company to compensate the claimant. However, the moratorium stops the courts from executing any decree. As a result, environmental claim decree holders must file a claim before the RP. Recently, a Tripura High Court ruling held that the decree holders are to be classified as "other types of creditors". Practically, under the waterfall mechanism enshrined in Section 53 of IBC, categories of creditors falling below the financial creditors seldom get substantial returns, especially the ones falling in the "others" category, leaving the environmental claimants marooned.
While environmental claims have been mentioned in a handful of cases involving inadequately compliant companies embroiled in insolvency, EPR still lacks acknowledgment in this regard. There is no legal standpoint that specifies if the EPR obligations would be carried out by the successful resolution applicant (SRA) or the company would stand absolved of all claims considering the ‘clean slate principle’ under Section 31 of IBC. The category of “orphan” products, whose producer has disappeared in relation to EPR obligations due to insolvency or any other reasons, creates dubiety related to bearing of end-of-life-management costs. In hindsight, the commercial intention of the IBC to accord a last chance to a company to revive, keeping the debtor as a going concern, hence, is in the crosshairs with the environmental obligations of the same.
EPR in Insolvency Around the Globe
Europe, being at the forefront of the implementation of EPR schemes, has attempted to bring robust regulations to hold businesses financially accountable for disposal costs. For example, France has astoundingly enlarged the definitional ambit of ‘producers’ to bring online marketplace retailers under the EPR regime.
Germany has recently adopted the insolvency-proof guarantee model under the German Electronic Equipment Act to address the ‘insolvency’ question pertaining to EPR compliances. This model ensures the availability of financial resources for disposing orphan commodities identified under the EPR scheme in cases where the manufacturing company has not renewed its registration due to insolvency. It operates in business-to-consumer relationships (B2C) where the company deposits a guarantee at the depository of a German District Court, which must be annually renewed to fund the disposal of the commodity by public disposal agencies in case the business enters insolvency.
Environmental Insurance is encouraged these days as it provides industrial coverage against costs arising from claims in case of environmental damage caused, however, the privity of contract between the insurer and the insured often protects the insurer from being directly liable to the regulatory authorities in case the insured goes insolvent. Concerning this, New South Wales in Australia passed the Civil Liability (Third Party Claims Against Insurers) Act in 2017. This law, regardless of the insured party being insolvent, allows third-party claimants against the insured to sue the insurer directly. This ensures environmental adherence even in the face of bankruptcy.
In Singapore, EPR compliances are regulated under the Producer Responsibility Scheme (PRS). If a producer under the scheme exits the market or declares bankruptcy, the same is liable to pay recycling costs to PRS Operator, despite the termination of the PRS membership agreement. Hence, a company in Singapore cannot absolve its EPR obligations on grounds of bankruptcy or its absence in the marketplace.
Concluding Analysis and Suggestions
While the idea of availing environmental insurance for covering environmental claims seems lucrative under the Public Liability Insurance Act 1991 in India, the distressed company under Section 31(1) is given a fresh start wherein after the approval of the resolution plan, no new liabilities will be taken in account for the SRA giving it a clean slate to start with. When it receives a fresh start, the company is no longer accountable for any claims arising out of preceding environmental liability, implying that the insurance company has no “loss” to cover for the insured. This is where, taking inspiration from New South Wales, a statutory prescription should be inserted under Section 6 of the PLI Act wherein the insurer can directly be sued for the fulfillment of claims.
Further, introducing the concept of insolvency-proof guarantee can step up India’s EPR compliance game. Marketers or manufacturers of EPR-requisitioned-commodities in B2C relationships can be made to deposit guarantees at the CPCB or the SPCB which can be annually renewed to fund the disposal of the commodity by disposal agencies in case the business enters insolvency.
The crucial amalgamation of the insolvency framework with the environmental laws leads to an uncertain path the course of which can be decided by keeping the best interests of both the industries and the environment in mind through legislative instructions that are harmoniously constructed to cater to both.
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