As financial pressures affect cannabis operators across Canada, restructuring and insolvency is becoming an increasingly common topic in boardrooms and legal consultations. While insolvency can be perceived as a last resort, the reality is more nuanced. For cannabis businesses facing tax debt, licensing constraints, or liquidity crises, formal restructuring proceedings may provide a critical path to recovery.
This article outlines key legal frameworks, practical considerations, and strategic options available to operators navigating restructuring and insolvency in a highly regulated and still-maturing sector.
Understanding cannabis-specific restructuring tools
Restructuring proceedings in Canada can take several forms, including receivership, Notice of Intent (NOI) proposals under Canada's Bankruptcy and Insolvency Act (BIA), or arrangements under the Companies' Creditors Arrangement Act (Canada) (CCAA). For cannabis businesses, the latter options are particularly relevant because they often allow the cannabis operator to continue to operate the company during the restructuring process.
A properly timed NOI or CCAA filing can impose a stay of proceedings – thereby halting litigation against the company and giving the business critical breathing room to stabilize cash flow, negotiate with creditors, and preserve enterprise value. These tools are especially useful when paired with debtor-in-possession (DIP) financing, which can fund operations during the restructuring period.
Unique challenges in cannabis restructurings
While the general legal tools are similar across industries, cannabis restructurings present unique regulatory complications. Health Canada licensing rules do not easily accommodate traditional asset sales. The result – cannabis deals frequently require the use of a Reverse Vesting Order (RVO). RVOs allow the license to remain with the operating entity – which is cleansed of unwanted liabilities – while transferring those same liabilities to a separate corporate shell.
This approach helps ensure business continuity, but demands precision in deal structuring, close coordination with regulators, and robust legal oversight. Operators must also account for limitations in their ability to transfer or monetize key assets, especially licenses, without triggering regulatory delays.
Cash flow constraints and DIP financing
One of the core challenges for distressed cannabis companies is liquidity. Access to DIP financing – though limited – is available more often than many assume. Working with DIP lenders who understand the regulatory environment and the commercial realities of the cannabis sector is essential. These partners can help bridge funding gaps during the insolvency process and provide operational stability while the business works through a turnaround.
However, maintaining day-to-day operations during insolvency is still difficult. Many companies are unable to make capital expenditures or invest in strategic initiatives while in an insolvency process. As such, pre-planning, interim budgeting, and active communication with stakeholders are vital.
Tax debt: CRA enforcement and director liability
Tax obligations, particularly related to excise duties, are a major trigger for insolvency filings. Recent cases suggest that the Canada Revenue Agency (CRA) is becoming more aggressive in how it approaches unpaid excise tax. While enforcement has been inconsistent, there are indications of a policy shift toward pursuing directors personally for unpaid amounts.
The Delta 9 case is a developing example – here, CRA is seeking to hold directors accountable for outstanding excise tax. This approach, if upheld, could set a precedent and dramatically reshape risk calculations for cannabis executives. Regardless of whether this shift is justified, it underscores the urgent need for consistent enforcement and clarity from both the CRA and the courts.
Strategic advice for cannabis operators in distress
While insolvency is often seen as a sign of failure, in the cannabis context it is often a strategic reset. When used proactively, restructuring tools can help protect core business operations, reduce liabilities, and pave the way for future growth.
Key considerations:
- Act Early. Waiting too long to engage legal and financial advisors reduces available options and can erode enterprise value.
- Maintain Transparency. Keeping lenders, regulators, and stakeholders informed builds trust and facilitates smoother negotiations.
- Engage Key Stakeholders. Collaborating early with Health Canada and other regulators, and considering the appointment of a Chief Restructuring Officer, can provide much-needed structure and perspective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
