ENHANCING TRANSPARENCY IN CIRP: MANDATORY DISCLOSURE OF CARRY FORWARD LOSSES IN THE INFORMATION MEMORANDUM

This post is authored by Vishvajeet Rastogi, 2nd year B.B.A. LL.B. (Honours) student at CNLU, Patna.

1. INTRODUCTION

Information Memorandum (IM) is a crucial document prepared by the Resolution Professional (RP) during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, that provides financial, operational, and legal information about the corporate debtor to help resolution applicants frame effective resolution plans. The Information Memorandum (IM) plays a vital role in India’s insolvency resolution process. On March 17, 2025, the Insolvency and Bankruptcy Board of India (IBBI) issued a circular amending Regulation 36 of the CIRP Regulations to mandate the disclosure of carry forward of losses under the Income Tax Act, 1961, in the Information Memorandum. This move aims to bring greater transparency and help resolution applicants make better-informed decisions.

Historically, the IM has transformed from a simple tool for due diligence to a strategic document with a direct impact on the desirability of a stressed company to bidders. Nonetheless, important tax-related information, such as carry-forward losses, used to be underreported or left out. Realising the economic impact such losses can cause to resolution strategies, the IBBI’s new directive demonstrates a regulatory drive towards detailed and standardized disclosures.

2. AMENDMENT AT A GLANCE

IBBI issued this new circular for an enhanced disclosure framework intended to provide potential resolution applicants with a more comprehensive understanding of the corporate debtor’s financial position, enabling them to develop more informed and viable resolution plans while considering the benefits of carry-forward losses.

The IBBI released this circular as it observed that several IMs were not providing proper or sufficient information regarding tax losses available to be carried forward by a company. These tax losses are valuable as they help offset tax in the coming years and improve the desirability of the company as a takeover target. To rectify this problem, the circular has made it mandatory to include certain information regarding such tax losses in the IM.

Resolution Professionals are then required to give four important details. First, they must state clearly the amount of loss that the company can bring forward under the Income Tax Act. Second, they must categorize such losses into different types, such as business loss, unabsorbed depreciation, capital loss, or speculative loss, so that each becomes understandable. Third, the IM must state the number of years for each type of loss since such a loss can be set off for only a limited number of years by the Act. Finally, if the company has no such loss, the IM must state that clearly. These steps will avoid ambiguity and ensure that the IM provides a true and correct picture of the company’s financial position.

3. IMPORTANCE OF CARRY FORWARD LOSSES

Carry forward losses are previous company financial losses that haven’t yet been applied to decrease its tax bill. For the individual seeking to acquire an insolvent company, such losses are useful. This is because such losses function as tax shields, effectively reducing the company’s future tax liability by allowing a deduction of past losses from upcoming taxable profits. Consequently, they enhance the financial attractiveness of the distressed entity by potentially improving post-acquisition cash flows and overall valuation.

When a Resolution Applicant (RA) is thinking of filing a resolution plan, a clear understanding of the quantum and nature of carry-forward losses becomes crucial. First, such losses can directly affect the valuation of the company. A company with substantial carry-forward losses may be more desirable since it decreases future tax charges and raises the prospect of financial turnaround. Second, it enables the applicant to formulate a more sustainable resolution plan, knowing precisely how much future savings can be achieved through the tax benefits. And third, it makes strategic bidding possible, where investors can include tax savings in the amount they are willing to bid.

The Income Tax Act, 1961, under Section 72, allows certain losses (such as business loss or unabsorbed depreciation) to be carried forward and offset from future earnings. There is, however, a condition under Section 79 that the tax benefit is only available if the company continues to exist in a similar manner and specific shareholding percentages are kept. If the test for 'continuity of business' is not satisfied, the tax benefit may be lost.

For this Reason, the recent amendment by IBBI has disclosed such information explicitly in the Information Memorandum compulsory, so that RAs have a comprehensive picture before bidding.

4. IMPLEMENTATION CHALLENGES

While the New IBBI circular is a positive step in the direction of enhancing transparency, Insolvency Professionals (IPs) would have to face several practical difficulties in executing it. The most significant issue is procuring proper and updated tax records of the insolvent company. These companies are often in poor financial condition, and their accounts may be incomplete, scattered, or outdated. It becomes extremely difficult for IPs to know how much loss the company has incurred, what type of loss they are (i.e., business loss or depreciation), and whether such a loss can be carried forward under the Income Tax Act.

Another concern arises from the recent issuance of the circular, coupled with the lack of explicit guidance on the specific methodology for making disclosures in the information memorandum. This limited guidance may result in different interpretations by IPs, which may result in inconsistent reporting. Miscalculation of the losses, if not disclosed properly, may mislead the resolution applicants, skew the valuation of the corporate debtor, and may result in legal issues that may impact the success of the resolution process.

5. LEGAL MANDATES AND THE GLOBAL PICTURE

The requirement for compulsory disclosure of carry forward losses in the Information Memorandum (IM) has a foundation in Section 196 of the Insolvency and Bankruptcy Code, 2016, under which the Board can issue regulations for ensuring equitable and effective resolution processes. The IBBI is making a clear move towards promoting financial transparency as a fundamental aspect of every successful process by instituting this requirement.

This step also promotes equality among resolution bidders, ensuring each bidder for a distressed company receives identical key finance information. It lessens opportunities for a bidder to get preferential treatment, thus ensuring a level playing field. Further, if financial disclosures are comprehensive and reliable, naturally, investor confidence is enhanced, hence willing to engage in the resolution process.

Looking at the global picture, nations such as the United States, in Chapter 11 bankruptcy, and the United Kingdom, as part of their insolvency regimes, in the Insolvency Act 1986, along with The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008, mandates comprehensive financial disclosures during insolvency proceedings. This includes the requirement for companies to disclose tax assets, such as carry-forward losses, as part of their financial statements. These disclosures are essential for assessing the company’s value and formulating appropriate restructuring strategies. Similarly, Germany's Insolvency Code (InsO) requires the disclosure of financial statements, which may include tax-related information, to ensure transparency in the process. In Australia, the Corporations Act 2001 focuses on the disclosure of financial liabilities and assets, though tax attributes like carry-forward losses are not explicitly mandated. These disclosure requirements are essential for assessing the company’s true value and formulating effective restructuring strategies. The IBBI’s new mandate brings reform in India in sync with such international standard practice, ensuring that Resolution Applicants (RAs) are equipped with a comprehensive financial picture to develop viable resolution plans. By incorporating such disclosures, India’s insolvency framework has become more transparent, credible, and investor-friendly, enhancing the overall effectiveness of corporate restructuring.

6. CONCLUSION AND WAY FORWARD

The IBBI’s requirement for carry-forward loss disclosures in the Information Memorandum is a major step towards enhancing financial transparency in the framework of resolution. By mandating exhaustive, organized details on tax loss, the rule enables resolution applicants to take better-informed decisions, supports accuracy in valuation, and brings India’s practice of handling resolution at par with international practice in the U.S. as well as the U.K. corporate resolution regimes. It also facilitates a level playing field for bidders, checks information asymmetry, and encourages investor confidence in stressed asset markets.

But effective implementation relies on something beyond the intent of the regulation. It is suggested by the author that further steps to be taken by IBBI, including the issuance of specific guidance or a standardized template, to ensure uniform disclosure procedures. Regular training for Insolvency Professionals regarding tax-related issues will help them cope with such complexities, and this process might potentially be facilitated through a coordinated method for obtaining verified data from the Income Tax Department. Provisions for penal action in the event of wilful non-disclosure will help shore up confidence in the system. These measures, if implemented, will not just correct the current implementation issues but will further embed the depth and maturity of India’s insolvency ecosystem over the long term.