When Companies Drown: Insolvency In The Era Of Climate Change
- IJLLR Journal
- 3 days ago
- 2 min read
Aditya Vidyarthi, NALSAR University of Law
ABSTRACT
Insolvency law is where climate realism meets capital distribution. The science sets the stage; markets move the props; law calls the cues. When companies “drown,” it is rarely from one wave but from rising tides interacting with old moorings - outdated infrastructure, brittle business models, weak controls, thin insurance. The task for boards and practitioners is to convert foreseeable climate risk into governable business plans before defaults accumulate. Where defaults do occur, legal systems must allocate loss in ways that are predictable, fair, and future‐proof—ensuring that environmental obligations are honoured, victims compensated, and viable enterprises restructured to withstand what’s coming.
Climate change has become an accelerating threat to living beings in more ways than it could’ve been deciphered. Environmental degradation is no longer limited to peripheral concerns, but it has become central determinants of business continuity and solvency as well. Climate-induced risks such as resource scarcity, regulatory pressures and physical damages affect climate- exposed industries, driving them towards financial distress. Carbon- intensive industries, agriculture, real estate and energy are particularly exposed to these shocks related to the climate. Despite the transnational nature of both change of climate and insolvency, existing frameworks have largely overlooked environmental externalities.
The intersection of climate change and insolvency raises pressing questions for legal and policy frameworks. Traditional insolvency regimes, designed to address financial mismanagement or market fluctuations, are now confronted with climate-induced defaults that are systemic and recurrent.
This paper argues for the emergence of a “green insolvency regime” – a framework that explicitly integrates climate and environmental imperatives into insolvency law. By embracing a public-interest view, such a regime would ascertain that the restructuring and reallocation of distressed assets align with sustainability goals rather than perpetuating adverse practices. The paper puts forward a taxonomy of proposals demonstrating how liquidation and restructuring mechanisms can be altered to alleviate environmental risks. Moreover, it delves into the cross-border dimensions of insolvency, accentuating the need to reshape private international law standards to integrate climate-conscious preferences.
The paper, thus, participates in the discussion on harmonizing insolvency standards with extensive sustainability objectives, prompting a radical shift towards a globally harmonized, climate-responsive insolvency framework.
