IBC UPDATE: IBBI ENHANCES DISCLOSURE OF CARRY-FORWARD LOSSES IN INFORMATION MEMORANDUM
Introduction
The Insolvency and Bankruptcy Board of India (IBBI) has recently strengthened disclosure requirements within the Corporate Insolvency Resolution Process (CIRP) through Circular No. IBBI/CIRP/83/2025, dated March 17, 2025. This circular mandates that Insolvency Professionals (IPs) include comprehensive details regarding carry-forward losses in the Information Memorandum (IM) provided to Prospective Resolution Applicants (PRAs). Under the framework of the Insolvency and Bankruptcy Code, 2016 (IBC), this enhancement seeks to provide PRAs with a more robust understanding of the Corporate Debtor’s financial standing, enabling them to formulate better-informed and more effective resolution plans that capitalize on potential carry-forward loss benefits.
This regulatory update will examine the circular’s provisions, its contextual background, and the broader implications for the CIRP process.
Background
Under the IBC, the Information Memorandum (“IM”) is vital for prospective resolution applicants. Prepared by the Resolution Professional (RP), it details the corporate debtor’s assets, liabilities, and affairs, aiding in formulating resolution plans.
Regulation 36 of the IBBI CIRP Regulations outlines the IM’s content, emphasizing key selling propositions and comprehensive information. This includes detailed asset and liability descriptions, financial statements, creditor lists, related party debt particulars, guarantee details, stakeholder information, litigation details, employee liabilities, and a company overview highlighting its value as a going concern. For larger debtors, it also requires industry and growth driver analysis. The IM must include all relevant data, empowering applicants to assess the debtor’s financial health and potential for revival.
In particular what is relevant to note here is sub-regulation (j) of Regulation 36 which provides for disclosure as to brought forward losses in the income tax returns of the Corporate Debtor under the Company Overview chapter of the IM. However, the IBBI in its review of recent IM(s), observed that disclosure of carry forward of losses by Insolvency Professionals need to be more robust as accurate and thorough information tax liabilities of the Corporate Debtor is crucial for ensuring transparency and facilitating effective resolution processes under the IBC.
Breaking Down the IBBI Circular
Given the above background, the IBBI through the Circular directed that all Insolvency Professionals shall include a dedicated section in the IM explicitly detailing the carry forward of losses under the Income Tax Act, 1961.
This section shall prominently highlight, but is not limited to, the following aspects:
i. The quantum of carry forward losses available to the corporate debtor ;
ii. A breakdown of these losses under specific heads as per the Income Tax Act,1961;
iii. The applicable time limits for utilizing these losses; and
iv. If there are no carry forward of losses available to the Corporate debtor , the Information Memorandum should explicitly specify the fact.
Analysis
The abovementioned IBBI circular, enhancing Information Memorandum (IM) disclosures, significantly impacts IBC resolution processes. By mandating detailed particulars of accumulated losses and operational insights at the preliminary stage itself, the IBBI aims to reduce information asymmetry and attract a wider pool of resolution applicants.
This move allows applicants to accurately assess a Corporate Debtor’s financial position, particularly tax benefits, crucial for strategic resolution planning, including mergers and demergers. Improved transparency fosters investor confidence, potentially leading to higher valuations and better recoveries for creditors. This would also help in streamlining due diligence and accelerating interest from the PRAs. This enhanced clarity empowers applicants to formulate efficient structures for availing tax benefits, facilitating faster resolutions and reducing future disputes.
Ultimately, the IBBI’s reformist approach aims to promote more robust and viable resolution plans, enhancing the effectiveness and efficiency of insolvency proceedings.
Conclusion
To sum up, the abovementioned IBBI’s Circular boosts transparency in insolvency cases by providing PRAs with vital information about the Corporate Debtor’s accumulated losses. This data is crucial for accurately gauging the Corporate Debtor’s financial health and long-term prospects. Requiring clear disclosure of these carry-forward losses creates a fairer environment for PRAs, enabling them to make more accurate valuations and develop stronger, more sustainable restructuring plans.
(This IBC update has been prepared by Shubham Sharma, student at Chanakya National Law University. He can be reached out at 2636@cnlu.ac.in)
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