Bad debt and green issues: Managing environmental risks in borrowers’ corporate insolvencies

This article uses interview data, collected from ‘elite’ banking respondents, to examine how secured lenders use insolvency practitioners as a form of post-loan due diligence. It is concerned with how effective insolvency practitioners are at obviating the risks that may be incurred where insolvency proceedings are caused or impeded by environment-related issues. It shows how the unique relationship between lenders and insolvency practitioners greatly reduces the likelihood of direct liability from environmental regulations transferring to the lender during the liquidation process. Two regimes are analysed in this article: the contaminated land regime, and the waste licensing system. Statutory provisions and judicial decisions have limited the power of environmental regulators. At the same time, however, this is good for secured lenders who are principally concerned with repaying the debt that is owed to them by a defaulting borrower. A more significant concern for lenders during borrowers’ insolvencies are the indirect risks (that is, credit and security risks). Environmental issues arising during a borrower’s insolvency may reduce the likelihood of the lender being repaid and, in the case of contaminated land, could severely limit the lender’s ability to exercise its security.