Time to Integrate ESG into the Corporate Insolvency Resolution Process (CIRP)

ESG regulations in India are becoming increasingly important, with the government and regulatory bodies such as SEBI and RBI promoting sustainability and ethical practices in the corporate sector. 

The corporate sector is confronting the pangs of the Insolvency process due to the provisions of taking a corporation to NCLT if the default exceeds Rs.100 lacs. Presently, 19770 companies are undergoing the Insolvency process, with 10125 pending for over a year. Many insolvency resolution processes have been settled, but labour issues, emissions due to poor production processes and obsolete machinery, and lack of transparency in Corporate governance remain challenging. The NCLT Courts, as the key players, must address the ESG concerns while approving the Resolution plans of affected companies. 

Integrating ESG (Environmental, Social, and Governance) factors into the corporate insolvency process can ensure a more sustainable and ethical approach. 

While no law or statute governs ESG regulations in India, several pieces of legislation cover different aspects of ESG, including the Companies Act 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, and the Environment Protection Act 1986.

Recent developments include the introduction of the Business Responsibility and Sustainability Report (BRSR) in 2021, which replaced the Business Responsibility Report (BRR) and expanded its scope to include more companies and provide more detailed disclosures.

Additionally, SEBI has introduced a regulatory framework for ESG Rating Providers (ERPs) and has taken steps to prevent greenwashing and promote transparency in ESG disclosures.

The Reserve Bank of India (RBI) has also released a Framework for Acceptance of Green Deposits. It allows certain RBI-regulated entities to accept green deposits and deploy them in projects or activities that yield environmental benefits.

ESG regulations in India are evolving as companies prioritise sustainability and ethical practices to meet the growing demands of investors, regulators, and other stakeholders.

The Insolvency and Bankruptcy Code (IBC), 2016, governs India's insolvency process. The key objective is resolution to maximise asset value and promote business continuity. The Code also ensures timely debt recovery and Improves corporate governance and accountability.

A seamless process has existed to initiate the insolvency process. The creditor or debtor files an insolvency application with the National Company Law Tribunal (NCLT). An Interim Resolution Professional (IRP) is Appointed to manage the company's affairs and assess its financial situation. The IRP invites and evaluates proposals from potential resolution applicants, called Resolution Plans

After the Committee of Creditors (CoC) votes on the resolution plan, with 66% approval, an approved plan evolves, or the company goes into Liquidation. Typically, it takes 180 to 270 days to approve a resolution plan and 1 year (extendable to 2 years) for Liquidation. However, on average, 735 days are consumed in the NCLT process. 

The government introduced a cross-border insolvency Framework in 2019 to make it inclusive. It also introduced the MSME (Micro, Small and Medium Enterprises) debtors: Pre-packaged insolvency resolution process introduced in 2021.

With environmental concerns, labour problems and corporate governance missing from the NCLT-induced Resolution Plans, the following steps can achieve the national commitments on ESG compliance :

Environmental:

Consider the environmental impact of the insolvency process and prioritise sustainable practices.

Assess the company's environmental liabilities and ensure proper remediation.

Encourage the use of environmentally friendly technologies and processes.

Social:

Prioritise stakeholder engagement, including employees, customers, and local communities.

Ensure fair treatment of all stakeholders, including those the insolvency process may impact.

Consider the social implications of restructuring or Liquidation.

Governance:

Ensure transparency and accountability throughout the insolvency process.

Implement good corporate governance practices, such as board diversity and independence.

Encourage responsible decision-making and ethical business practices.

The Corporate Insolvency Process ( CIRP) under the Bankruptcy Code, 2016 (IBC) can be a game-changer if environmental, social, and governance factors drive the Resolution Plans. ESG integration into the CIRP enhances value, promotes long-term sustainability, and establishes an inclusive and ethical way of resolving inconsistencies in alliance with contemporary global best practices. 

Integrating the CIRP process with ESG compliance enables Stakeholders to thoroughly discern a company's environmental impact, social responsibility, and governance ambience by conducting due diligence during the CIRP process. Investors can also measure a Corporate debtor's capacity for repayment, compliance with the law, and sustainable development. This integration promotes transparency, accountability, and management ownership to safeguard the interests of society, labour, and the environment. 

ESG is a way of measuring corporate governance. CIRP is a medium to re-inject life into struggling companies. As more investors become aware of the importance of ESG and its role in investment decisions, it will become even more critical for companies to demonstrate that they are managing their ESG issues effectively.

NCLT Courts have a golden opportunity to link the two closely to make India a better place to live, work and prosper.