Pollution Control Authorities Cannot Take Coercive Steps During IBC Moratorium: NCLT Bengaluru

The National Company Law Tribunal (NCLT) in Bengaluru has recently held that pollution control authorities cannot take coercive steps that disrupt the operations of a corporate debtor during the moratorium, even though they can continue regulatory oversight.

A bench of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada held,

“We are of a considered view that a distinction is required to be drawn between: Regulatory actions undertaken in public interest to ensure environmental compliance; and Coercive / enforcement actions which have the effect of recovery or adversely impact the assets and operations of the Corporate Debtor during CIRP. While the former cannot be completely interdicted in view of the law laid down in Embassy Property (supra), the latter would fall within the mischief of Section 14 of the Code if they have the effect of defeating the CIRP or disturbing the asset base of the Corporate Debtor.”

The bench was dealing with a plea by the resolution professional of Stellence Pharmscience Private Limited, which is undergoing insolvency resolution.

The company was admitted into the corporate insolvency resolution process on March 6, 2024, on a plea by financial creditor Religare Finvest Ltd, and a moratorium was imposed.

Before this, on January 30, 2024, the Karnataka State Pollution Control Board had refused consent for the company to operate and imposed environmental compensation of Rs.13.36 crore.

After the insolvency process began, the Board issued notices proposing action such as closure of operations, disconnection of electricity supply and seizure of the premises.

The resolution professional argued that these steps continued despite the moratorium and were effectively recovery and enforcement measures that disrupted the company's operations during the resolution process.

On the other hand, the Board maintained that the company, classified as a “red category” industry, could not operate without valid consent and that its actions were regulatory under environmental laws. It also argued that the refusal of consent, issued before insolvency began, could not be challenged before the Tribunal.

The tribunal observed that statutory authorities are not stripped of their regulatory powers during insolvency and can act to ensure environmental compliance but drew a clear line when such actions begin to affect the insolvency process.

“Such actions during the moratorium period directly impact the CIRP and value maximization process, which is the underlying objective of the Code. But simultaneously a polluting industry cannot be allowed to operate to achieve such objectives.”

Applying this principle, the tribunal held that the refusal of consent to operate dated January 30, 2024, having been issued prior to commencement of CIRP, is not interfered with and can be challenged only under the relevant environmental law mechanism.

At the same time, it directed that during the subsistence of the moratorium, the authorities shall not take any coercive steps including closure, disconnection of essential services, seizure of assets, or any action that would have the effect of disrupting the Corporate Debtor as a going concern or defeating the CIRP process.

The tribunal further observed that the company may approach the authorities for revoking the consent refusal order upon achieving environmental compliance, which may be positively considered without insisting on payment of the environmental compensation.

For Applicant: Advocate Shashank Nagendran

For Respondent: Advocate A Mahesh Choudhary