The Insolvency and Bankruptcy Board of India (IBBI) has introduced stricter disclosure requirements for insolvency professionals, requiring them to provide comprehensive details on the carry forward of losses in the information memorandum (IM) prepared during the corporate insolvency resolution process (CIRP).
These enhanced disclosures aim to give potential resolution applicants a clearer picture of a corporate debtor’s financial position, allowing them to formulate well-informed resolution plans while factoring in the benefits associated with carried-forward losses. The IBBI emphasized that this measure would improve transparency in the insolvency process and facilitate better decision-making for all stakeholders involved.
The information memorandum, a key document in CIRP, is compiled by insolvency professionals and includes vital financial and operational data about the corporate debtor. It typically covers details on assets and liabilities, financial statements, creditor information, pending litigation, and other material aspects necessary for the resolution process.
A review of recent information memorandums revealed that disclosures related to the carry forward of losses required further strengthening. In response, the IBBI has mandated that all insolvency professionals include a dedicated section explicitly outlining the extent of losses carried forward under the Income Tax Act, 1961. This section must detail the total amount of losses, their classification under specific tax provisions, and the applicable time frame for their utilization.
Under existing tax laws, businesses incurring losses can carry them forward to offset against future profits, thereby reducing taxable income and lowering tax liability in profitable years. Experts believe that the IBBI’s directive will minimize information asymmetry, enabling resolution applicants to assess a corporate debtor’s financial standing more accurately. This improvement is expected to enhance recoveries for creditors and increase transparency in the insolvency process.
Disclosures related to carried-forward losses become especially relevant when a resolution plan involves a merger or demerger of the debtor’s assets. Providing clear insights into tax benefits can boost investor confidence, potentially leading to better valuation and more competitive resolution plans. Greater transparency also reduces the likelihood of disputes or litigation arising post-resolution.
Legal and financial experts have welcomed the move, noting that the inclusion of such details will help applicants structure their proposals more effectively. Leveraging potential tax benefits can facilitate faster resolutions, improving overall efficiency in the insolvency framework. The increased clarity in financial reporting may also attract a broader pool of bidders, enhancing competition and driving better outcomes for distressed businesses and their creditors.
