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IBBI : IPs explicitly disclose carry forward losses in IM

Initiation of Liquidation under the IBC

IBBI Circular: IPs explicitly disclose carry forward losses in IM

This IBBI circular reinforces the importance of transparency in the insolvency resolution process by mandating that insolvency professionals explicitly disclose carry-forward losses in the information memorandum. On March 12, 2025, the Insolvency and Bankruptcy Board of India issued a circular mandating that all insolvency professionals include a dedicated section in the information memorandum detailing the carry forward of losses under the Income Tax Act, 1961. IMs form the basis for resolution plans and must include:

  • List of creditors and admitted claims
  • Debt due from related parties
  • Details of workers/employees and liabilities
  • Material litigations
  • Latest audited & provisional financial statements
  • Liquidation value and other material disclosures

Purpose of the IBBI Directive, which Helps Resolution Applicants Assess Tax Benefits While Formulating Resolution Plans. This ensures better valuation of distressed assets, as carryforward losses can reduce future tax liabilities. Aligns with Regulation 36 of Corporate Insolvency Resolution Process Regulations, reinforcing transparency in the insolvency process. IMs need to be more comprehensive, detailed, and structured to help resolution applicants make informed decisions. This makes the accurate representation of assets, liabilities, financial performance, legal issues, and tax benefits (such as carry-forward losses) crucial.

Key takeaways from the circular:

  • Regulatory Amendment: Regulation 36 of the Corporate Insolvency Resolution Process Regulations, 2016, has been amended to require the disclosure of carry forward losses under the Income Tax Act, 1961. Insolvency professionals must ensure all relevant details related to such losses are comprehensively captured in the information memorandum. This Insolvency and Bankruptcy Board of India circular initiative aims to enhance transparency and provide potential resolution applicants with a clear understanding of the tax attributes associated with the corporate debtor.
  • Enhanced Disclosure Requirements: This move aligns with the Insolvency and Bankruptcy Board of India’s efforts to improve transparency and efficiency in the insolvency resolution process. A dedicated section in the information memorandum must explicitly cover:
    • The quantum of carryforward losses available.
    • A breakdown of these losses under relevant heads (business loss, unabsorbed depreciation, etc.).
    • The applicable time limits for utilizing these losses.
    • A statement confirming if no such losses exist.
  • Objective: This framework aims to provide potential resolution applicants with a clear picture of the corporate debtor’s financial health. It helps in formulating resolution plans that effectively consider tax benefits from carry-forward losses.
  • Legal Authority: Issued u/s 196 of the Insolvency and Bankruptcy Code, 2016, reinforcing its statutory backing.

In summary, this IBBI circular must prominently highlight the following aspects:

  • Quantum of carry forward losses: Specify the total amount of losses available for carry forward. Certain business losses can be carried forward for up to 8 assessment years.
  • Breakdown under specific heads: Category these losses as per the Income Tax Act, 1961, such as business losses, unabsorbed depreciation, etc. Unabsorbed depreciation can be carried forward indefinitely.
  • Applicable time limits: Detail the time frames within which these losses can be utilized. These losses help offset future profits, lowering tax liabilities for the acquiring entity
  • Absence of carryforward losses: If no such losses are available, explicitly state this fact in the Information Memorandum.

Impact on CIRP and Stakeholders:

Impact on Insolvency Resolution Makes financially distressed firms more attractive to buyers due to potential tax savings. And Enables better pricing of assets, aiding creditors in recovering dues. This change encourages more competitive bidding by resolution applicants factoring in tax advantages. A higher-quality information memorandum will attract more serious and competitive resolution applicants, leading to better recovery for creditors. Transparency measures can reduce litigation and delays, improving overall Corporate Insolvency Resolution Process efficiency. Strengthened due diligence practices by RPs can boost investor confidence in the insolvency resolution ecosystem.

Extend Period prescribed under Clause 12 of Schedule I of Liquidation Regulations

  • NCLT has the authority to extend the period prescribed under Clause 12 of Schedule I of the Liquidation Regulations for the payment of the balance sale consideration.
  • In the case of Rajabhau Shinde Vs. S.M. Electric Works and Ors. – NCLAT New Delhi, the Hon’ble NCLAT referred to precedents set in Potens Transmissions & Power Pvt. Ltd. [(2022) ibclaw.in 359 NCLAT] and V.S. Palanivel [(2024) ibclaw.in 223 SC]. The NCLAT observed that, in this case, it was not the liquidator who unilaterally extended the payment timeline but rather the Adjudicating Authority (NCLT) that allowed the successful bidder’s application for an extension.
  • Additionally, the Supreme Court upheld the NCLT’s decision to extend the payment period beyond the originally prescribed time, indicating that such an extension is permissible under judicial discretion. This reinforces the principle that the adjudicating authority has the power to grant extensions for balance sale consideration payments in liquidation cases, considering the circumstances of each case.

Evolving Landscape of IBC

Enactment of the IBC marked a crucial step in addressing bankruptcy & insolvency challenges that have impacted individuals & businesses across the country. This transformative law has empowered insolvency service providers to recover losses from defaulters and delinquent borrowers while instilling accountability among them. The risk of losing ownership in case of non-repayment within the stipulated timeframe has created a strong deterrent effect.

The Insolvency and Bankruptcy Code has streamlined insolvency resolution processes, introducing well-defined frameworks for individuals, companies, and partnership firms. By replacing multiple outdated Indian laws, the code has significantly improved the efficiency of insolvency and bankruptcy proceedings. But it continues to evolve, & while complete eradication of insolvency cases remains a distant goal, the efforts of Insolvency and bankruptcy service providers are proving instrumental in securing creditors’ interests.

Need for Professional Insolvency Services 

Professional insolvency and bankruptcy code service providers act as a guiding force for creditors navigating complex bankruptcy & insolvency cases. India Financial Consultancy Corporation Pvt Ltd specializes in CIRP advisory, providing expert support in recovering the maximum possible dues from defaulters. By executing resolution strategies efficiently, our team has helped creditors reclaim substantial financial losses, bringing clarity and resolution to distressed assets. For expert insolvency and bankruptcy assistance, reach out to us—we are here to help you navigate the evolving Insolvency and Bankruptcy Code landscape effectively.

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The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.