Sustainability Becoming Key in Debt Resolution for Distressed Firms
Introduction
The Insolvency and Bankruptcy Code (IBC) in India is undergoing a significant change that could make the country a pioneer in rescuing distressed businesses. Sustainability is set to become a central consideration in the decision-making process of debt resolution, providing an opportunity to explore sustainable business rescue options and mitigate environmental risks. The Insolvency and Bankruptcy Board of India, along with the Ministry of Corporate Affairs, has initiated discussions on this proposal, which is gaining momentum. This article delves into the potential impact of integrating sustainability into debt resolution and its implications.
Enhancing Debt Resolution Criteria
Traditionally, debt resolution in the IBC has primarily focused on financial and legal aspects of distressed firms. However, considering sustainability factors would expand the parameters for selecting the winning bidder during bankruptcy proceedings. These new technical criteria would require exploring strategies and technologies that mitigate environmental risks and pave the way for a more sustainable business trajectory. By incorporating sustainability considerations, the resolution plan takes into account all potential risks, including market-related, technological, and environmental.
Valuation and Environment-related Liabilities
In the bidding process for distressed companies, the documentation could seek information on the environment-related liabilities of the company. This aspect can impact the valuation of the business and prompt a valuation professional to bring sustainability considerations into debt resolution. By factoring in the cost of reducing emissions and the investment in new machinery and technology throughout the project’s lifecycle, prudent investors can make more informed decisions.
A Guiding Principle for Professionals and Stakeholders
Many experts agree that sustainability should be a fundamental guiding principle for professionals, investors, and all stakeholders involved in debt resolution, regardless of whether it is explicitly specified in the bankruptcy code. By considering environmental, social, and governance (ESG) criteria, future risks associated with projects can be accounted for. A successful and sustainable resolution plan must incorporate these potential risks and balance them against financial considerations.
Boosting India’s Ranking and Challenges Ahead
Implementing sustainability in debt resolution can have far-reaching implications beyond individual cases. If India takes these steps, it has the potential to boost the country’s ranking in the World Bank’s proposed global ‘Business Ready’ report, which will replace the ‘Doing Business’ ranking. However, the journey of bringing this new dimension to debt resolution won’t be easy. Significant groundwork is necessary to move from the initial ideation stage to reality.
Conclusion
Sustainability is poised to play a crucial role in debt resolution for distressed firms under the Insolvency and Bankruptcy Code in India. By incorporating sustainability considerations, the selection of winning bidders can take into account strategies to mitigate environmental risks and chart a more sustainable business trajectory. This shift towards sustainability can enhance the overall value and resilience of the companies involved, ultimately contributing to a more sustainable future.
Disclaimer:
The material in this article was compiled using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. The completeness and correctness of the material ensured with due diligence. It is required of users of this material to consult the relevant, applicable legislation. The data given may change without prior notice and does not constitute professional advice. As a result, Estabizz Fintech disclaims all liability for the results of using such material.
