Releases in favour of the directors and officers of an insolvent company have become commonplace in restructurings conducted under the Companies’ Creditors Arrangement Act (“CCAA”). Among other things, they may allow individuals who play an active role in a restructuring to participate in the process without remaining exposed, once the restructuring is completed, to certain claims arising from the performance of their duties.

In Arrangement relatif à Lion Electric Company, 2025 QCCS 4192 (“Lion Electric”), the Quebec Superior Court nevertheless refused to grant the broad release sought in favour of the company’s directors and officers. Among other consequences, the release would have protected them against claims advanced in class actions alleging, among other things, wrongful conduct in connection with the sale of securities^[1].

The decision reiterates several essential principles. A third-party release must be justified by evidence that its beneficiaries made a meaningful contribution to the restructuring process and that the release was necessary, if not essential, to the intended outcome^[2]. The evidence must identify each beneficiary and establish the meaningful role played by that beneficiary in the restructuring process^[3].

To understand the significance of Lion Electric, it is helpful to begin with the general principles governing third-party releases.

The proposed release must be connected to the restructuring

Since Metcalfe & Mansfield Alternative Investments II Corp. (Re), courts have recognized that, in appropriate circumstances, an order made under the CCAA may grant a third-party release where the release is rationally connected to the restructuring^[4].

This principle does not mean that courts will grant third-party releases as a matter of course. In Lydian International Limited (Re), the Court identified several factors for assessing the required connection: whether the parties to be released were necessary and essential to the restructuring; whether the claims to be released were rationally connected to the purpose of the restructuring and necessary for it; whether the restructuring could succeed without the releases; whether the parties being released contributed to the restructuring; and whether the release benefited the debtor and its creditors generally^[5].

The analysis is therefore highly fact-specific^[6].

A release may be justified where it is necessary to retain individuals who are essential to the process, preserve the value of the business, facilitate a transaction or otherwise contribute to the success of the restructuring^[7]. It is more difficult to justify where its primary purpose is to protect its beneficiaries against claims that may continue without compromising the restructuring.

Lion Electric: customary practice is no substitute for evidence

In Lion Electric, the debtor companies sought a broad release in favour of their current and former directors and officers, as well as certain individuals who might be “deemed” directors or officers^[8].

Among other consequences, the release could have extinguished claims advanced in securities class actions, as well as certain related claims for contribution or indemnity^[9].

The debtors’ assets had already been sold through a reverse vesting order (“RVO”). With the Court’s approval, this procedural mechanism allows unwanted liabilities to be transferred to a corporation created for that purpose, while the desired assets remain within the existing corporate structure, which is then sold to the proposed purchaser.

The RVO had already been approved and the transaction completed when the debtors sought to remove the Carve-out contained in the order approving the transaction, which preserved certain claims against the directors and officers^[10].

The Court refused to grant the Full D&O Release with the scope requested. In particular, it emphasized that:

• the identity of certain individuals covered by the proposed release remained uncertain^[11];
• the evidence did not establish that the proposed beneficiaries of the release had made a sufficiently meaningful contribution to the restructuring^[12];
• the evidence relied largely on the fact that they had remained in office and cooperated with the restructuring process^[13]; and
• importantly, the transaction implemented through the RVO had been completed without the Full D&O Release being in place^[14].

The last point is particularly significant. If a proposed restructuring transaction can be completed without a release, it becomes much more difficult to establish that the release is necessary to the restructuring.

The Court thus distinguished between two concepts that are sometimes conflated in practice: a measure may be desirable for its beneficiaries without being necessary to the restructuring^[15].

The ordinary performance of one’s duties is not enough

Lion Electric also underscores the need to pay close attention to the evidence concerning the contribution of the directors and officers.

Continuity of corporate governance may, of course, have significant value for a distressed company. However, simply remaining in office, attending meetings, cooperating with the Monitor or fulfilling one’s fiduciary duties will not necessarily justify extinguishing claims belonging to third parties through a release^[16].

Where the release is contested, the evidence must go further.

To the extent possible, the evidence should identify each beneficiary’s specific contribution, explain the significance of that contribution to the restructuring and establish what would actually have been placed at risk without the requested protection.^[17]

The issue is therefore not merely whether the beneficiaries participated in the restructuring, but what their participation made possible^[18].

An RVO does not, on its own, justify granting releases

An RVO can be an effective tool for preserving the essential assets and operations of a business while isolating certain liabilities in a residual corporation. However, approval of a transaction of that nature does not necessarily mean that every ancillary measure sought in connection with it must also be approved^[19].

In Lion Electric, the Court distinguished between granting the RVO and granting releases in favour of the directors and officers. A measure may be necessary to complete the transaction without the extinguishment of claims against the directors and officers also being necessary^[20].

This distinction is particularly important where the proposed release affects the rights of third parties who are not parties to the transaction and do not directly benefit from it.

Third-party rights are not ancillary to the transaction

A release in favour of directors and officers does not affect only those it protects. It may also alter the rights of other parties.

In Lion Electric, the proposed release could have extinguished claims brought personally against certain directors and officers. As a result, it could also have extinguished the recursory or subrogatory recourses, including potential claims for contribution or indemnity, available to other defendants^[21].

The Court therefore had to weigh the benefits of the release against the consequences of extinguishing those rights^[22].

The message is important: the existence of a transaction that benefits the debtor company and its creditors does not, on its own, justify extinguishing existing claims against its directors and officers.

The party seeking a release bears the onus of establishing the required connection to the restructuring and demonstrating that the release is justified in that context^[23].

Conversely, a party opposing the release should precisely identify the rights it seeks to preserve and establish the concrete consequences that would result from their extinguishment.

Third-party releases are not governed by the same rules as releases of directors under section 5.1 of the CCAA

Third-party releases sought in connection with a transaction must also be distinguished from the specific statutory regime applicable to directors under section 5.1 of the CCAA^[24].

In certain circumstances, section 5.1 permits a compromise or arrangement to include claims against directors that relate to obligations of the company for which the directors may be liable in their capacity as directors.

However, section 5.1(2) establishes certain exceptions, including claims relating to a creditor’s contractual rights and claims based on allegations of misrepresentations made by directors or of wrongful or oppressive conduct by them^[25].

The provision also preserves judicial oversight: certain claims may not be included in the compromise where the court determines that their inclusion would not be fair and reasonable in the circumstances^[26].

This distinction is important for practitioners. The question is not simply whether a claim is brought against a director. One must also determine the true nature of the claim and the legal basis for the alleged liability.

A personal liability does not become an obligation of the company simply because it arose in the context of the company’s activities^[27].

Arrangement relatif à DavidsTea inc. illustrates this difficulty in a different context. The Court was required, among other things, to determine whether a claim brought personally against an officer truly arose from an obligation of the company or from an obligation personally assumed by that officer^[28].

The characterization adopted by the parties will therefore not necessarily be determinative. What matters is the substance of the claim and the legal basis for the alleged liability.

Three questions the evidence should answer

In light of Lion Electric, an application for a release should clearly answer three questions.

1. Why should the proposed beneficiaries receive a release?

The individuals covered by the release should first be precisely identified. The evidence should describe their role in the restructuring and, where applicable, their specific contribution to the outcome achieved^[29].

2. Why should the claims covered by the proposed release be extinguished?

The categories of claims that may be extinguished should be clearly identified, and their connection to the restructuring should be explained^[30]. It should also be established that the restructuring could not succeed without the proposed release^[31].

3. Why should the release have the scope requested?

The identity of the persons protected and the scope of the claims to be released should be justified. The broader the protection sought, the more important it is to explain why a more targeted release, or a release subject to additional exclusions, would not be sufficient^[32].

These questions should be addressed before, rather than after, the transaction is negotiated. A justification developed only after the transaction has been concluded may suggest that the release serves the interests of its beneficiaries more than it constitutes a necessary condition of the transaction contemplated as part of the restructuring.

Appeals to Watch

The decision in Arrangement relatif à 7037163 Canada inc., commonly referred to as “Varennes,” illustrates that a release may be granted where the evidence establishes that its beneficiaries made a significant contribution to the restructuring process^[33].

In that case, the Court considered, among other things, the beneficiaries’ sustained participation in preserving the project and in the investment solicitation and sale process. The Court nevertheless circumscribed the release through exclusions, including claims that the CCAA does not permit to be compromised.

Leave to appeal has been granted in both Varennes and Lion Electric. The appeals may provide further guidance on the scope of the supervising court’s discretion to grant third-party releases, the application of section 5.1 of the CCAA and the evidentiary standard required to justify such protection in the context of an RVO^[34].

Conclusion

Releases in favour of directors and officers remain an important potential benefit of restructurings under the CCAA. However, Lion Electric confirms that they are not granted automatically and cannot be treated as merely ancillary to the transaction.

A third-party release may be authorized where it is fair and reasonable in the circumstances and rationally connected to the objectives of the restructuring^[35]. The party seeking the release must justify its necessity and scope through probative evidence specific to the case^[36]. The evidence must precisely identify each beneficiary and establish that beneficiary’s meaningful contribution to the restructuring process^[37]. The release must be limited to what is strictly necessary and must not, without sufficient justification, prejudice the rights of third parties^[38].

For debtor companies and purchasers, this means that any proposed release should be considered from the outset of the transaction negotiations. Addressing the issue at that stage will facilitate proof of the release’s necessity where, for example, the parties to the proposed transaction have made the granting of the release a condition of closing^[39].

For holders of claims against directors and officers that may be affected by a proposed release, Lion Electric underscores the importance of precisely identifying the rights at risk, explaining the concrete consequences of their extinguishment and, where possible, proposing a targeted carve-out. The onus of justifying the release nevertheless remains on the party seeking it^[40].

Ultimately, Lion Electric calls for a clear distinction between protection that is necessary to the restructuring and protection that principally benefits its recipients. The Quebec Court of Appeal’s forthcoming decisions should provide important guidance on where that line must be drawn.

[1] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 12 and 367.

[2] Ibid., paras. 69 and 176.

[3] Ibid., para. 144.

[4] Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, para. 70; Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 65.

[5] Lydian International Limited (Re), 2020 ONSC 4006, paras. 53 and 54; Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 63.

[6] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 76.

[7] See, in particular, Lydian International Limited (Re), 2020 ONSC 4006, paras. 53 and 54.

[8] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 80.

[9] Ibid., paras. 29 and 30.

[10] Ibid., para. 53.

[11] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 178.

[12] Ibid., para. 177.

[13] Ibid., para. 180.

[14] Ibid., para. 201.

[15] Ibid., para. 173.

[16] Ibid., para. 78.

[17] Ibid., para. 144.

[18] Ibid., para. 192.

[19] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 162.

[20] Ibid., para. 169.

[21] Ibid., paras. 29 and 30.

[22] Ibid., para. 196.

[23] Ibid., para. 71.

[24] CCAA, s. 5.1; Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 152.

[25] CCAA, ss. 5.1(1) and (2); Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 272 and 273.

[26] CCAA, s. 5.1(3); Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 332 and 338.

[27] See Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 219.

[28] Arrangement relatif à DavidsTea inc., 2023 QCCS 1141, paras. 10, 26 and 36–39.

[29] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 144.

[30] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 77 and 206.

[31] Ibid., para. 63(c).

[32] Ibid., para. 147.

[33] Arrangement relatif à 7037163 Canada inc., 2025 QCCS 4498.

[34] See, in particular, Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 60-78, 141-153, 176-195 and 245-348.

[35] Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, paras. 65, 77 and 339.

[36] Ibid., paras. 71 and 76.

[37] Ibid., para. 144.

[38] Ibid., paras. 146, 147 and 196.

[39] See Arrangement relatif à Lion Electric Company, 2025 QCCS 4192, para. 162.

[40] Ibid., para. 71.