IBBI asks resolution professionals to be more open about losses carried forward

New Delhi: The Insolvency and Bankruptcy Board of India (IBBI) has told debt resolution professionals to be more open about bankrupt companies’ past losses that can be carried forward, helping attract fresh investments into the company.

The idea is that greater disclosures about ‘carry forward’ of past losses, which will lower future tax liability of the company, could result in more viable debt resolution plans. 

In an order issued late on Monday, IBBI told professionals that in their notices inviting bids, they should have a separate section showing the extent of carry forward of past losses available to the entity. 

The regulator said that based on its review of notices inviting bids for bankrupt companies it felt disclosures about carry forward of losses have to be more robust. The regulator’s order mandated professionals to give a breakdown of the quantum of carry forward losses available to the business under specific heads as per the Income Tax Act and the time-limit for utilizing these losses.

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“If there are no carry forward of losses available to the corporate debtor, the information memorandum should explicitly specify the fact,” said the order.

“This enhanced disclosure framework is intended to provide potential resolution applicants with a more comprehensive understanding of the corporate debtor’s financial position,” the order said. It will enable them to develop more informed and viable resolution plans while considering the benefits of carry forward losses, the order added.

Experts said the government had amended section 79 of the Income Tax Act dealing with ‘carry forward and set off of losses’ through the Finance Act of 2018 to allow carry-forward of losses even in case of change in shareholding following a debt resolution plan. That gave relief to distressed companies from the requirement of continuity in controlling shareholding in order to avail of this benefit. 

This amendment provided the successful resolution applicant the benefit of utilizing such carry-forwarded losses, explained Yogendra Aldak, partner at Lakshmikumaran & Sridharan Attorneys.

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IBBI has taken a positive step towards increased transparency in the resolution process by mandating a more comprehensive and robust reporting of carry-forward losses by insolvency professionals under the information memorandums, said Aldak. 

“A dedicated section pertaining to carry-forward losses will ensure that potential resolution applicants have a comprehensive understanding of the debtor’s financial position and thus enable them to submit a viable resolution plan after duly considering benefits from such carry-forwarded losses,” said Aldak.

The regulator has been taking steps to optimize the resources available to companies undergoing bankruptcy so that it becomes easier to stitch together a rescue plan. That include efforts to reverse voidable transactions done by the management or major shareholders in the pre-bankruptcy period and make recoveries. It has been noticed that debt resolution becomes easier for companies with assets than those that have fewer assets. The manufacturing sector accounts for 46% of bankrupt entities that have been rescued under the bankruptcy code. 

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Till September 2024, 1,068 bankrupt firms had drawn up resolution plans, leading to creditors realizing ₹3.55 trillion, according to data available from IBBI.