Include more details of carry forward losses in information memorandum: IBBI
The Insolvency and Bankruptcy Board of India (IBBI) has tightened disclosure requirements for Insolvency Professionals (IPs), mandating them to include comprehensive details of carry forward losses in the Information Memorandum (IM) prepared during corporate insolvency resolution processes.
In a directive issued under Section 196 of the Insolvency and Bankruptcy Code, 2016, the IBBI has asked IPs to create a dedicated section in the IM explicitly outlining the quantum and nature of carry forward losses available to the corporate debtor under the Income Tax Act, 1961.
The move follows the Board’s observation that recent IMs lacked adequate disclosures on the carry forward of losses, despite amendments made to Regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which made such disclosures mandatory.
An Information Memorandum is a key document in the corporate insolvency resolution process. Prepared by Insolvency Professionals, it provides crucial financial and operational details about the corporate debtor, enabling potential resolution applicants (RAs) to assess the company’s viability and formulate informed resolution plans. It typically includes information on assets and liabilities, financial statements, creditors, litigation, and other material information relevant to the decision-making process.
Under the revised framework, IPs must now provide detailed information, including:
- The quantum of carry forward losses available to the corporate debtor.
- A breakdown of these losses under specific heads as defined in the Income Tax Act, 1961.
- The applicable time limits for utilizing such losses.
- A clear statement if no carry forward losses are available.
The regulator said the enhanced disclosure norms aim to offer potential resolution applicants a clearer picture of the corporate debtor’s financial position. “This will enable RAs to formulate more informed and viable resolution plans, factoring in the potential benefits of carry forward losses,” IBBI noted.
Carry forward losses refer to business losses that a company or individual incurs in a financial year, which can’t be fully set off against income in the same year. Under the Income Tax Act, 1961, these losses can be “carried forward” to future years and set off against future profits, reducing the tax liability in those years.
For example: In subsequent profitable years, the company can adjust those past losses against its profits, thus lowering its taxable income and saving on taxes. If a company makes a loss of ₹10 crore in a year and doesn’t have enough income to offset it, it can carry that loss forward to future years.
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