Perspective | The “Break” and “Protection” of Ecological Rights in Bankruptcy Proceedings

The implementation of the “ecological civilization” concept in bankruptcy law is a practical requirement for putting into practice the new development philosophy, advancing the achievement of the “dual carbon” goals, and fulfilling corporate social responsibility. According to the principle of “the polluter pays,” enterprises that have caused environmental pollution bear the primary obligation to clean it up. After a company goes bankrupt, addressing environmental pollution becomes an indispensable part of the bankruptcy proceedings. The author believes that the ecological rights and interests of bankrupt enterprises generally fall into two categories: First, ecological and environmental pollution issues already existing within the bankrupt enterprise itself—i.e., environmental pollution problems that predated the company’s bankruptcy; second, ecological rights and interests arising from the enterprise being brought under the scope of environmental protection policies or regulations—for example, bankruptcy cases involving enterprises that have been included on the negative list for industrial access in key ecological function zones and are thus required to shut down or restructure.

Bankruptcy is a complex process that not only involves the interests of the company’s creditors but also requires the coordinated management of multiple stakeholders’ rights and interests—a requirement inherent in the very nature of bankruptcy itself. Bankruptcy, as a collective rather than an individual enforcement mechanism, must prioritize maximizing the company’s overall value. As for ecological rights and interests, these primarily concern the public interest and extend beyond just the company’s creditors; they are more akin to public-interest claims similar to tax claims. Therefore, in practice, it becomes crucial for administrators to carefully consider how to handle, protect, and balance the pros and cons of ecological rights and interests associated with bankrupt enterprises.

With regard to the protection of ecological rights and interests, there are no explicit legal provisions in bankruptcy law. However, China has been continuously exploring this issue at both the policy and judicial levels, as detailed below:

The report of the 18th National Congress of the Communist Party of China first proposed a “five-in-one” overall layout encompassing economic development, political development, cultural development, social development, and ecological civilization development. Essentially, this is aimed at effectively safeguarding the people’s comprehensive rights—economic, political, social, cultural, and ecological—in an integrated manner. On September 22, 2021, the CPC Central Committee and the State Council issued the "Opinions on Fully, Accurately, and Comprehensively Implementing the New Development Philosophy and Doing a Good Job in Peaking Carbon Emissions and Achieving Carbon Neutrality." In the 14th Five-Year Plan for National Economic and Social Development and the Visionary Goals for 2035 of the People's Republic of China, adopted in 2021, the eleventh chapter explicitly states the need to promote green development and foster harmonious coexistence between humanity and nature.

On November 4, 2022, the Intermediate People's Court of Guiyang City issued the "Guiding Opinions of the Intermediate People's Court of Guiyang City on Handling Environmental and Ecological Issues in the Adjudication of Enterprise Bankruptcy Cases," reflecting the court’s ongoing trend of strengthening judicial efforts to protect the environment.

On February 17, 2023, the Supreme People's Court issued the "Opinions on Fully, Accurately, and Comprehensively Implementing the New Development Philosophy and Providing Judicial Services for Actively and Prudently Promoting Carbon Peak and Carbon Neutrality." Part III, "Ensuring Deep Adjustment of Industrial Structure," stipulates that disputes over capacity replacement shall be adjudicated in accordance with the law. Specifically, it calls for the lawful handling of bankruptcy reorganization, bankruptcy reconciliation, or bankruptcy liquidation cases involving debtors whose ongoing projects have been included in national industrial plans or capacity-replacement schemes in relevant sectors. The court is encouraged to actively guide debtors and creditors to engage in negotiations and coordinate solutions to corporate merger and acquisition issues, thereby improving the mechanisms for rescuing and exiting market entities and promoting the achievement of industrial structure adjustment goals.

On March 10, 2023, the Qingbaijiang Court of Chengdu City and the Qingbaijiang Bureau of Ecological Environment jointly issued the "Opinions (Trial) on Establishing a Mechanism for Protecting Environmental Rights and Interests of Bankrupt Enterprises to Support the Construction of the Park City Demonstration Zone."

On June 28, 2023, the third session of the Standing Committee of the 14th National People's Congress decided to designate August 15 as National Ecological Day. The state will carry out ecological civilization publicity and education activities through various forms.

On August 15, 2023, the Supreme People's Court held a press conference to release the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in Adjudicating Cases Involving Tort Liability for Ecological and Environmental Damage" and the "Several Provisions of the Supreme People's Court on Evidence in Civil Litigation for Ecological and Environmental Torts."

Article 20 of the “Company Law of the People’s Republic of China,” issued on December 29, 2023, newly includes a provision requiring companies engaged in business activities to assume social responsibilities toward stakeholders, ecological and environmental protection, and other public interests.

On April 30, 2025, the 15th Session of the Standing Committee of the 14th National People's Congress reviewed the Draft Ecological and Environmental Code of the People's Republic of China.

For Shandong Province, since the Supreme People's Court issued the “Opinions on Providing Judicial Services and Guarantees for Ecological Protection and High-Quality Development of the Yellow River Basin” in 2020, and subsequently released the “Minutes of the Meeting on Promoting Work to Provide Judicial Services and Guarantees for Ecological Protection and High-Quality Development of the Yellow River Basin” in 2021, important legal foundations have been laid for advancing ecological protection and high-quality development in the Yellow River Basin.

The aforementioned laws, regulations, and related documents all provide clear guidance on the protection of ecological rights and interests. But in bankruptcy proceedings, how should these rights and interests be treated?

1. The theory of bankruptcy claims

From a comparative law perspective, the Bankruptcy Court in the New Jersey District of the United States once held in a case that, since the environmental hazard involved did not pose an imminent threat to public health, the former landlord’s claim for cleanup costs related to that hazard was not entitled to the status of either bankruptcy expenses or administrative expenses. The court’s reasoning was as follows: First, the hazardous waste pollutants had been well controlled throughout the period prior to their removal; second, no regulatory agency had ordered the debtor to remove the waste; and third, at the time the cleanup was undertaken, the debtor had already rejected the leased property nearly two years earlier.

The view in the above-mentioned case focuses primarily on environmental claims arising before the acceptance of a bankruptcy application that pose a threat to public health. If such claims fall within a manageable scope and no emergency situation exists, they should be recognized as bankruptcy claims.

2. The theory of common benefit debts

Although the current “Enterprise Bankruptcy Law of the People’s Republic of China” does not explicitly provide for “ecological claims,” in accordance with the principle of “liability for damage” established in the Tort Liability Section of the “Civil Code of the People’s Republic of China” and the “Environmental Protection Law of the People’s Republic of China,” debts incurred by enterprises due to environmental pollution or ecological damage should be regarded as statutory debts. In bankruptcy proceedings, the priority of repayment of these debts is crucial to ensuring that ecological restoration can be effectively implemented. Currently, judicial practice tends to classify such debts as common benefit debts, on the grounds that environmental remediation serves the overall preservation and realization of bankruptcy assets, thus aligning with the legislative spirit of Article 42 of the “Enterprise Bankruptcy Law of the People’s Republic of China,” which defines debts arising from “common interests of creditors.” However, if the enterprise’s assets are insufficient to cover these common benefit debts, funding for ecological restoration will still fall short. Therefore, some scholars advocate adopting the priority ranking of tax claims, granting ecological claims a higher priority in repayment, or establishing a special environmental liquidation fund to advance emergency remediation costs.

3. “Limited Priority + Differentiated Treatment”

The author believes that, with regard to historically accumulated ecological and environmental restoration debts existing prior to bankruptcy filing—debts that are neither urgent nor uncontrollable—their nature as claims should be clearly defined. Based on the type of pollution and its urgency, the costs of environmental restoration should be categorized accordingly to determine whether they qualify as common benefit debts or bankruptcy expenses. As for punitive damages or administrative fines, they should be classified as subordinated claims.

As summarized in the article “Environmental Liability Issues in Corporate Bankruptcy,” published by Xu Yangguang and Chen Yiran in “People’s Justice,” China’s judicial authorities have categorized the priority of repayment for different types of environmental claims in bankruptcy proceedings into four major categories:

(1) With regard to claims for compensation for ecological and environmental damage that arise after the acceptance of a bankruptcy application—such as emergency cleanup costs for pollution, environmental remediation costs, and costs incurred to prevent or mitigate further damage—in practice, these costs are typically classified as either joint debts or bankruptcy expenses.

(2) Compensation claims for personal injury arising from environmental torts shall be repaid in priority following the order of employee claims.

(3) Claims for compensation for ecological and environmental damage, claims for property damage resulting from environmental torts, and claims for breach of environmental contracts that arose before the bankruptcy application was accepted shall be ranked and repaid as ordinary claims.

(4) Claims for punitive damages for environmental torts, administrative fines for environmental violations, and criminal fines for environmental offenses incurred prior to the acceptance of the bankruptcy application shall be satisfied as subordinated claims.

1. In bankruptcy cases, costs for protecting ecological rights and interests shall be listed as priority common benefit debts for protection.

When an enterprise enters bankruptcy proceedings, the management of environmental pollution is generally handled by the bankruptcy administrator who takes over the enterprise. According to Article 42 of the Enterprise Bankruptcy Law of the People’s Republic of China, debts arising from damage caused to others by the debtor’s property are classified as common benefit debts. By analogy with this provision, debts incurred by the debtor enterprise due to environmental damage can also be recognized as common benefit debts.

2. In bankruptcy cases, there are various protection mechanisms for ecological rights and interests.

(1) Joint Protection Mechanism of the Government and the Court

As in the case of “the bankruptcy liquidation of Hangzhou Fukan Racket Co., Ltd.,” during the asset clearing and verification process, the administrator discovered that a large quantity of hazardous wastes—such as waste paint, waste phosphoric acid, and waste organic solvents—remained on the company’s premises. These hazardous wastes are characterized by flammability, corrosivity, and extreme toxicity. If not properly handled, they not only seriously jeopardize the safety and realization value of the enterprise’s bankruptcy assets, putting the disposal of these assets in a passive position, but also pose a high risk of leakage and other incidents that could severely pollute the surrounding ecological environment. The administrator immediately brought this issue to the attention of the court, which then proceeded via “ Bankruptcy Smart Review The Intelligent Collaboration Application (a digital system for coordinated efforts between bankruptcy courts and government agencies) pushes bankruptcy case information to the government’s Environmental Protection Bureau. In turn, the Environmental Protection Bureau promptly feeds back to the People’s Court and the bankruptcy administrator any environmental issues identified in the bankrupt enterprises. After the bankruptcy administrator entrusts a qualified disposal agency to classify and handle hazardous waste, the government’s Environmental Protection Bureau organizes on-site acceptance inspections. As a result, during the bankruptcy process, an organic and integrated collaborative mechanism involving the “administrator—court—government” has been established to jointly address environmental issues.

(2) The administrator fully implements the early warning mechanism.

In the case of “Bankruptcy Liquidation of Wukuang (Guizhou) Ferroalloy Co., Ltd.,” the administrator publicly solicited, via the National Bankruptcy and Reorganization Information Network, disposal units for large quantities of expired and discarded chemical substances that had been stored for a long time. In the case of “Bankruptcy Liquidation of Mianzhu Jinshengyuan Biochemical Co., Ltd.,” the administrator similarly used the National Bankruptcy and Reorganization Information Network to publicly select, through a competitive bidding process, entities with environmental impact assessment qualifications and wastewater discharge permits to handle the waste materials—such as waste liquids and sludge—left behind at the former factory site. The court served as the supervisory body in this process.

3. Practical Cases of Ecological Rights Protection in Bankruptcy Proceedings

When a company faces bankruptcy, it actually represents another form of protection for its production-related rights and interests. This is because, in the company’s normal state, these rights and interests can no longer be adequately safeguarded; however, under bankruptcy proceedings, ecological rights and interests are explicitly designated as those requiring special protection. In bankruptcy cases that I have handled—such as the bankruptcy liquidation case of Yanzhou Coal Mining Group Continental Machinery Co., Ltd. and the bankruptcy reorganization case involving the merger of eleven companies including CITIC Guoan Chemical Co., Ltd.—issues related to the protection of ecological rights and interests have consistently arisen.

(1) Disposal of hazardous waste in bankruptcy cases

During the bankruptcy liquidation of Yanzhou Coal Mining Group Continental Machinery Co., Ltd., hazardous waste hydraulic oil HW08 was identified. In accordance with relevant regulations, including the "Law of the People's Republic of China on the Prevention and Control of Environmental Pollution by Solid Waste" and the "Administrative Measures for the Joint Manifest for the Transfer of Hazardous Waste," the administrator, after reporting to the Yanzhou District Branch of the Jining Municipal Bureau of Ecology and Environment, entered into a "Contract for Entrusted Disposal of Hazardous Waste" with Jining Lvhang Environmental Protection Technology Co., Ltd., thereby entrusting a third party to carry out harmless disposal.

(2) The government and courts will work in tandem to protect the environment by disposing of chemical enterprises through liquidation procedures.

In the bankruptcy and restructuring case involving eleven companies, including CITIC Guoan Chemical Co., Ltd., one of the bankrupt enterprises—Jiangsu CITIC Guoan New Materials Co., Ltd.—is located within the first-level protection zone of Taihu Lake. According to the "Implementation Plan for Addressing Feedback from the Central Environmental Protection Inspection 'Look Back' and Special Inspection on Air Pollution Issues," issued by the General Office of the Jiangsu Provincial Party Committee and the Provincial Government, it is required to complete the closure or relocation of chemical enterprises within the first-level protection zone of Taihu Lake. As Jiangsu CITIC Guoan New Materials Co., Ltd. is an enterprise with restructuring potential in the bankruptcy and restructuring case, it would normally continue to operate. However, due to environmental protection requirements and policy directives, the administrator, in accordance with relevant regulations and the actual situation, is actively cooperating with government demands and assisting in the completion of the closure and demolition work.

(3) In addition to compensation for damages, environmental disputes shall also include an apology.

In the soil pollution liability dispute case (2017) Lu 01 Min Chu 1467, involving the Shandong Provincial Department of Environmental Protection and Shandong Jincheng Heavy Oil Chemical Co., Ltd., among others, the Intermediate People’s Court of Jinan City, Shandong Province, ruled that the defendants, Shandong Hongju New Energy Co., Ltd. and Shandong Jincheng Heavy Oil Chemical Co., Ltd., not only bear the costs of emergency response, losses in service functions during ecological restoration, compensation for ecological damage, and appraisal fees, but also were ordered to publicly issue an apology. However, at the time, Shandong Hongju New Energy Co., Ltd. had already entered bankruptcy proceedings. Since liabilities such as public apologies, which are inherently personal in nature, cannot be converted into monetary claims for property compensation, they do not fall within the scope of bankruptcy claims. This case thus highlights the complex nature of environmental liability.

As Hobbes argued in his book "Leviathan," the state is a colossal monster. To safeguard the interests of the collective—or, more precisely, those of the sovereign—the state must establish corresponding laws based on a social contract, compelling the collective to relinquish certain freedoms in exchange for stability and rights. In other words, in order to protect ecological interests, it is appropriate to give up some economic privileges. In 2023, I came across a video on "Douyin" that recounted the case of Jiangxi Guohua Industrial Co., Ltd., which had contaminated a thousand acres of farmland in Gangdong Village, Jinxi County, Jiangxi Province, with heavy metals. From an economic standpoint, the company indeed served as a major taxpayer, contributing significantly to the local government’s economic development. However, for the local residents and the environment, the impact was nothing short of devastating.

The balancing of economic interests and ecological interests during corporate bankruptcy is a complex and critical issue that requires consideration of multiple factors in a comprehensive manner. The following are the key points for such balancing:

1. Protection of Creditors’ Interests: The core objective of bankruptcy proceedings is to fairly settle creditors’ claims and debts, thereby safeguarding the legitimate rights and interests of creditors. The realization of economic rights directly affects whether creditors’ interests can be adequately met—such as repaying debts and recovering investments. If ecological interests are overly emphasized, it could lead to a substantial portion of bankruptcy assets being allocated to environmental governance or ecological restoration, leaving creditors unable to receive full satisfaction of their claims and potentially triggering social instability.

2. Corporate Rebirth and Economic Value: For enterprises with reorganization potential, protecting economic rights and interests helps facilitate their rebirth, restore their production and operational capabilities, and generate economic benefits and employment opportunities. The purpose of bankruptcy reorganization procedures is to revitalize enterprises by optimizing resource allocation and enabling them to make meaningful contributions to economic development. If, due to ecological rights issues, an enterprise is unable to secure sufficient funding or resources for reorganization, it may miss the opportunity for rebirth, resulting in a waste of economic resources.

1. Public Interest and Sustainable Development: The ecological environment is the foundation for human survival and development, and the protection of ecological rights is closely linked to both public interest and sustainable development. During corporate bankruptcy proceedings, if ecological rights are neglected, environmental pollution and ecological damage may fail to be addressed in a timely manner, severely impacting the surrounding environment and residents’ health. For example, untreated industrial wastewater, exhaust gases, and waste residues could continue to be discharged, contaminating soil, water sources, and air quality, thereby endangering public health.

2. Environmental Responsibility and Legal Obligations: As members of society, enterprises have an obligation to assume responsibility for environmental protection. Even if an enterprise enters bankruptcy proceedings, its environmental responsibilities cannot be exempted. The law requires enterprises to compensate for and restore any ecological damage they have caused—this is essential for upholding the authority of the law and ensuring social fairness and justice. If enterprises were allowed to evade their environmental responsibilities through bankruptcy proceedings, it would undermine the authority of environmental rule of law and encourage enterprises to disregard their environmental obligations.

1. Explore the “Law + Administration + Market” approach

Establish a collaborative mechanism involving multiple stakeholders—including government agencies, courts, administrators, and market participants—to enhance information sharing and coordinated cooperation. Relevant government departments can provide environmental technical support and policy guidance, assisting administrators in developing environmental governance plans. When adjudicating bankruptcy cases, courts should fully take into account ecological rights and interests, encouraging enterprises and all sectors of society to actively participate in ecological and environmental protection, thereby fostering a synergistic approach to governance. Through market participation—such as services provided by third-party professional institutions, environmental liability insurance coverage, and tax incentives—market practices will serve as a practical test of the reasonableness and scientific validity of these measures, providing empirical evidence for the continuous refinement of laws and policies.

2. Clearly define the order of repayment.

By clearly defining the priority of repayment for ecological and environmental claims through the legal system, we can both safeguard the fundamental interests of creditors and underscore the importance attached to ecological rights and interests. For example, emergency environmental remediation costs and claims for compensation for ecological and environmental damage could be classified as priority common debts or bankruptcy expenses, ensuring that environmental issues are addressed promptly. As for ordinary environmental claims, their ranking in the general creditor priority should be reasonably determined based on their nature and urgency.

3. Explore the “Limited Priority + Tiered Repayment” Model

In the bankruptcy asset distribution plan, a certain proportion of priority repayment may be allocated to ecological claims, with any amount exceeding this threshold treated as ordinary claims and participating in the distribution accordingly. Alternatively, environmental remediation costs could be stratified according to the type of pollution and its urgency, with separate repayment priorities established for each stratum.

As a bankruptcy administrator, how to address and handle the environmental issues that may be left behind by bankrupt enterprises requires, on the basis of the existing coordination between government departments and courts, the promotion of the following mechanisms:

From a comparative law perspective, both the United States and Germany have established mandatory environmental liability insurance systems, whereas the United Kingdom and France have adopted an environmental liability insurance mechanism that primarily relies on voluntary insurance, with mandatory insurance serving as a supplementary measure. Given these experiences, China could also encourage enterprises to obtain environmental liability insurance during their operational periods, with the insurance benefits serving as security for the fulfillment of environmental debts in bankruptcy proceedings. Moreover, administrators could assist enterprises in filing claims for insurance compensation and allocate the claim proceeds exclusively to environmental remediation efforts.

It is recommended that a portion of funds be proportionally allocated from the bankruptcy estate of enterprises, or that local governments and industry organizations jointly contribute to establish a regional ecological and environmental restoration fund, which would serve as a safety net for handling cases where bankrupt enterprises are unable to fully restore the environment.

Incorporate corporate environmental credit into bankruptcy review and investor selection criteria, strengthen environmental law and technical training for bankruptcy administrators, promote the inclusion of reasonable costs associated with environmental governance in administrators’ remuneration, and incentivize them to actively assume their environmental protection responsibilities.

According to the Law of the People’s Republic of China on Environmental Protection Tax, enterprises, institutions, and other business operators that directly discharge taxable pollutants into the environment within the territory of the People’s Republic of China and other maritime areas under its jurisdiction are taxpayers of the environmental protection tax. Since the entire environmental protection tax is treated as local revenue, after a company goes bankrupt, local governments should pay close attention to this issue. At the same time, they may refer to relevant documents such as the “Opinions on Promoting and Guaranteeing Administrators’ Lawful Performance of Duties in Bankruptcy Proceedings and Further Optimizing the Business Environment” (Fa Gai Cai Jin Gui [2021] No. 274) and the “Announcement on Continuing to Implement Policies Related to Land Value-Added Tax for Enterprise Restructuring and Reorganization” (Ministry of Finance and State Administration of Taxation Announcement No. 51 of 2023) to temporarily suspend the collection of the environmental protection tax. In the context of corporate bankruptcy, it would be worthwhile to explore mechanisms for deferring the collection of the environmental protection tax or earmarking its use specifically, thereby promoting better coordination between the tax system and bankruptcy proceedings.

As bankruptcy administrators, you should fully implement the forecasting and early-warning mechanisms, proactively identify potential environmental risks, and scientifically develop emergency response and disposal plans for hazardous waste. As local governments, you should strive to establish a regular mechanism for addressing environmental pollution caused by bankrupt enterprises, effectively fostering collaboration among bankrupt companies, ecological conservation authorities, and government agencies to achieve positive interaction and multi-stakeholder governance between judicial and administrative approaches to environmental protection. As courts or other relevant judicial authorities, you should promptly disclose any pollution-related defects and risks, while also clearly identifying the classification of related environmental claims—whether they are treated as ordinary claims, joint beneficial debts, or subordinated claims—thus ensuring that environmental liabilities are properly addressed following the bankruptcy liquidation of an enterprise.

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