Meddling with the Climate? A Key Consideration in Airline Insolvencies 

Posted on by guulr in GUULR Blog

Written by Jayanti Dhingra.

Introduction 

Climate change is increasingly disrupting air travel, leading to flight delays and increasing operational costs among other challenges.1 Because airlines are major fossil fuel consumers, these corporations contribute to worsening climate change; at the same time, their coastal operations are disrupted by the subsequent rise of sea levels, increased flood risks, and temperature-driven shifts in wind patterns.2 This, therefore, forms a self-perpetuating cycle of environmental damage that results in climate-related operational challenges. Communities near airports are further impacted by extreme weather conditions, such as low visibility, posing serious safety concerns.3 

These risks become especially probable and dangerous when airlines face insolvency proceedings. An insolvent debtor, such as a financially burdened airline company, usually has insufficient assets to satisfy various stakeholders in full, so a strict waterfall mechanism is followed to determine which stakeholders will be paid in priority out of the corporate debtor’s liquidation estate. The waterfall is designed to cover creditors, employees, and other statutory dues, where the priority is first given to secured creditors. 

Currently, insolvency laws prioritize the claims of these actors, while environmental claims, which can include both compensation for past environmental damages as well as environmental obligations linked to existing assets and other hazardous materials, are treated as less important, reflecting how “insolvency law supersedes environmental law/policy by design.”4 For example, in Minister for the Environment and Local Government & Ors v. Irish Ispat Ltd. (In Voluntary Liquidation) & Anor, Ireland’s courts allowed liquidators to disclaim environmental licenses as “onerous property,” thereby relieving them of compliance with environmental obligations through the liquidation process.5 The intersection of climate factors and the risk of a debtor company’s “going concern” can be integrated to protect the environment.6 The idea behind keeping the debtor as a “going concern” stems from the assumption that a company that continues operating, rather than being immediately liquidated, is considered beneficial for the economy; it is thus a goal of insolvency laws to revive a distressed company to maximize the interests of all stakeholders, as far as possible. 

In response to greenhouse gas emissions and ozone damage caused by airlines, numerous agencies across different countries have developed compliance guidelines and assessment reports to regulate the industry. For example, the European Union’s (“EU”) Emissions Trading System (“ETS”) limits the emissions that can be produced across the EU, allowing companies within the limit to trade emission allowances.7 This system covers greenhouse gas emissions from installations and operators across various sectors in the EU, including the aviation sector. Germany’s Federal Environmental Agency (“UBA”) has further warned that airlines pose non-CO2 problems that are equally responsible for climate risks, including forming contrails as well as releasing nitrogen oxides and water vapor.8 Reports have suggested that the non-CO2 effects account for approximately two-thirds of the climate risks associated with aircraft emissions.9 However, these frameworks are still in their nascent stages with no fully developed regulation enacted yet; Germany still operates within the EU ETS framework. 

Although these compliance reports outline permissible limits of greenhouse gas emissions in particular sectors or industries, none address environmental responsibilities during airline insolvencies. In times of insolvency, airlines face various costs, such as pending litigation. This period of uncertainty can cause aircraft to be grounded for a considerable amount of time, environmental claims to be unmet, or the dispossession and decommissioning of aircraft to occur. The delayed grounding of aircraft can further deteriorate the aircraft.10 

Therefore, because airline emissions significantly harm the environment, a pressing need remains to establish guidelines addressing environmental challenges involved during airline insolvencies. To account for these climatic factors, robust measures such as risk assessment factors should be explored while incorporating public interest considerations in commercial laws.

Public Interest Considerations 

Bankruptcy laws have, in many instances, incorporated public interest considerations. This usually entails generating employment, preserving jobs, maintaining economic activity, and building revenue.11 Public interest is an all-encompassing term that goes beyond mere protection of creditors’ interests to also assess the broader impacts of an insolvent company on the economy and society as a whole. For example, in Midlantic Nat’l Bank v. NJDEP, the U.S. Supreme Court prohibited the abandonment of environmentally hazardous land in a bankruptcy proceeding, mandating the company to follow environmental protocols and “clean up the property.”12 The public interest is also an especially significant consideration in bankruptcy proceedings involving railroad industries.13 In the case of Atlantic Coast Line Railroad Co. v. St. Joe Paper Co., the U.S. Court of Appeals stated that “bankruptcy laws have evolved from an unforgiving creditor-protection system into one based on humanity as well as justice.”14 In all bankruptcy proceedings, the court’s discretion should be present in considering matters of public interest.15 

In other jurisdictions, public interests are also taken into account. For example, in the United Kingdom, the prioritization given to public interest has been described as “National Interest Insolvency.”16 This was observed in a waste management case where the High Court stated that “the benefit to the public of maintaining a healthy environment should take priority over the interests of the good administration of business.”17 

In India, public interest concerns have notably shaped legal developments, including the establishment of absolute liability following the Bhopal Gas Tragedy and the application of the “Polluter Pays” principle to ensure that environmental obligations are fulfilled.18 India has committed to making the aviation sector greener, furthering sustainable development goals in the form of adopting carbon offsetting strategies and building fuel efficiency.19 However, this has not been applied to airline insolvencies yet, with scholars noting that initiating environmental claims in insolvency proceedings has received limited discussion within the Indian legal framework.20 For example, India’s Insolvency and Bankruptcy Code does not include any provisions that give “precedence” to environmental claims.21

This raises a pertinent question: if public interest is the norm in many jurisdictions, why shouldn’t climatic factors also be woven into that framework? Environmental, social, and governance (ESG) factors offer a possible lens to evaluate airline policies.22 Environmental factors in aviation primarily concern carbon emissions, fuel efficiency, and compliance with other environmental regulations, key to assessing the ecological impact of airlines. Social factors then cover workplace safety, passenger safety, and staff training, helping combine people’s interests with the environment. Governance factors encompass board independence, transparency, internal controls, accountability, and risk oversight, which are necessary for the smooth running of procedures. A full consideration of ESG factors can help airlines internalize environmental costs, consider stakeholders’ interests, and reduce risks through transparent governance systems. Such integration should require boards to adopt and implement risk-mitigation strategies and incorporate these considerations into board deliberations and reporting. This would involve keeping a constant track record of fuel emissions, compliance risks, climate-related targets, safety risks, and other governance practices to ensure accurate data reporting.23 If this reporting gets mandated, it would eventually affect the decisions of investors, suppliers, governments, and any future relationships of the company would be directly attributable to the company’s policies and operations.  

Conclusion 

Protecting debtor and creditor interests should not be the sole aim of bankruptcy proceedings; it is equally important to consider broader societal implications involved in insolvencies, especially those related to the environment. It is thus important to revise insolvency laws to incorporate environmental liabilities and revisit the traditional waterfall rule to facilitate systematic changes in bankruptcy, which would help pave the way for a safer and more sustainable future. It remains uncertain whether courts will choose to prioritize public interests or continue to sidestep environmental responsibilities to protect airline companies. Because airline businesses are not typically seen by the public as obvious emitters of hazardous chemicals in the same way coal or other fossil fuel companies are, it is worth observing how courts might interpret these climate-related claims. Adoption of the ESG framework by companies can help establish standards that ensure continued compliance even after insolvency. By integrating ESG considerations and sustainability standards, airline insolvency procedures can go beyond addressing purely creditor-debtor problems to a broader risk prevention framework.

  1.  Athanasia Voskaki et al., The Impact of Climate Hazards to Airport Systems: A Synthesis of the Implications and Risk Mitigation Trends, 43 Transp. Rev. 652 (2023). ↩︎
  2. Id.
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  3. Id. ↩︎
  4. Sriram Prasad, Environmental Claims in Insolvency in India, Oxford Business Law Blog (May 17, 2023), https://blogs.law.ox.ac.uk/oblb/blog-post/2023/05/environmental-claims-insolvency-india. ↩︎
  5. Minister for the Environment and Local Government v. Irish Ispat Ltd (In Voluntary Liquidation) [2004] IEHC 278. ↩︎
  6. Michael H. Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 Yale L.J. 1043 (1992). ↩︎
  7. European Commission, EU Emissions Trading System (EU ETS), Climate Action, https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets_en. ↩︎
  8. Umweltbundesamt, UBA Presents Concept for Environmentally Acceptable Aviation: Adjust Taxes, Reduce Noise, Promote Rail and Climate-Friendly Fuels (Jun. 11, 2019), https://www.umweltbundesamt.de/en/press/pressinformation/uba-presents-concept-for-environmentally-acceptable. ↩︎
  9. DS Lee et al., The contribution of global aviation to anthropogenic climate change via a complex set of processes that lead to a net surface warming, Atmospheric Environment (Sep. 3, 2020), https://www.sciencedirect.com/science/article/pii/S1352231020305689. ↩︎
  10. Ishita Das, Airline Insolvencies and Environmental Concerns: A Comparative Legal Perspective, 29 Uniform L. Rev. 44 (2024). ↩︎
  11. Andreas Frössel, Tomáš Troup, Public Interest in Insolvency Law, L. Tichý and M. Potacs (eds.) Public Interest in Law. Intersentia (2021), pp. 247–270. ↩︎
  12. Midlantic Nat’l Bank v. NJDEP, 474 U.S. 494 (1986). ↩︎
  13. Alexander Gouzoules, Going Concerns and Environmental Concerns: Mitigating Climate Change through Bankruptcy Reform, 63 Boston Coll. L. Rev. 2169 (2022); Alexander Gouzoules, Going Concerns and Environmental Concerns: Mitigating Climate Change through Bankruptcy Reform, 63 Boston Coll. L. Rev. 2169 (2022). ↩︎
  14. Atlantic Coast Line Railroad Co. v. St. Joe Paper Co., 347 U.S. 980 (1954). ↩︎
  15. Julie A. Veach, On Considering the Public Interest in Bankruptcy: Looking to the Railroads for Answers, 72(4) Indiana Law Journal (1997). ↩︎
  16. Murrays Legal, “National interest insolvencies” – Creditors vs The Public Interest? (May 14, 2022), https://murrayslegal.com.au/blog/2022/05/14/national-interest-insolvencies-creditors-vs-the-public-interest/. ↩︎
  17. In Re Mineral Resources Ltd (1999) 1 AER 746 (UK). ↩︎
  18. M. P. Ram Mohan Sriram Prasad, Environmental Claims under Indian Insolvency Law: Concepts and Challenges, IIMA Working Paper (Apr. 11, 2023), https://www.iima.ac.in/sites/default/files/2023-04/WP-2023-02-01-updated.pdf. ↩︎
  19. Vasavi Thummala, Rahul B. Hiremath, Green aviation in India: Airline’s implementation for achieving sustainability, 7 Cleaner and Responsible Consumption (2022). ↩︎
  20. Ishita Das, Airline Insolvencies and Environmental Concerns: A Comparative Legal Perspective, 29 Uniform L. Rev. 44 (2024). ↩︎
  21. Insolvency and Bankruptcy Code, No. 31 of 2016, Acts of Parliament, 2016 (India);  Ishita Das, Airline Insolvencies and Environmental Concerns: A Comparative Legal Perspective, 29 Uniform L. Rev. 44 (2024).
    ↩︎
  22. Seokho Han et al., Shaping Sustainable Skies? Developing a Consumer-Centric ESG Scale for the Aviation Industry, Current Issues in Tourism (Jun. 1, 2025), https://doi.org/10.1080/13683500.2025.2512394. ↩︎
  23. Nicole D’Silva. Towards Net-Zero: Analyzing Sustainability Reports of Global Airlines. International Journal of Environmental Sciences (2025), 11(5s), 781-813, https://doi.org/10.64252/e8t51d12. ↩︎
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