Complex Restructuring With A Simple Solution? Understanding Director Releasees Under Governing Canadian Statues

As the restructuring landscape evolves, Canadian courts continue to balance both the Companies’ Creditors Arrangement Act (“CCAA”) and associated federal taxing statutes. Two Alberta decisions; Freedom Cannabis Inc. (Re), 2025 ABKB 272 (“Freedom Cannabis”) and Delta 9 Cannabis Inc. (Re), 2025 ABKB 52 (“Delta 9”), illustrate the carful balance that exists between two of these governing federal statues. Both cases confirm that director releases granted in a CCAA restructuring can extinguish a director’s personal liability for unpaid excise duties, including liabilities assessed under s. 295 of the Excise Act.

For distressed companies operating in highly regulated sectors, these decisions underscore how the CCAA is a robust and flexible tool that can stabilize management participation and facilitate going-concern outcomes—even where the CRA objects.

Background: Excise Duty Liability for Directors

Under s. 295 of the Excise Act, directors can be personally assessed for a corporation’s unremitted excise duties. The rationale is to hold directors accountable to the Crown. Unlike suppliers, who can limit their financial exposure by requiring advanced payment from a corporation. The Crown is an involuntary creditor. As a result, their exposure is difficult to mitigate in circumstances where a corporation is facing financial difficulties and is tempted to divert certain Crown remittances to satisfy other creditors.

In both Freedom Cannabis and Delta 9, the CRA opposed the granting of director releases as part of a reverse vesting order (“RVO”). RVOs are becoming a common feature in complex restructurings where preserving enterprise value is paramount. They allow a debtor company to transfer unwanted liabilities out of the operating entity while keeping key assets, contracts, and regulatory licenses intact—effectively reversing the traditional vesting structure seen in asset sales. In both Freedom Cannabis and Delta 9, the court rejected the CRA’s position and granted director releases that relieved them of any personal liability for unremitted excise duties.

The Jurisdictional Question

At the heart of these disputes was whether the Court could approve director releases that effectively nullified the CRA’s statutory recourse under the Excise Act. The CRA argued that:

• the Court has no jurisdiction to grant director releases as section 11 of the CCAA does not authorize overriding other federal statutes beyond the Bankruptcy and Insolvency Act (“BIA”) or the Winding-up and Restructuring Act; and
• The Excise Act provides a complete code for assessments, objections, and appeals (ultimately to the Tax Court).

Justice Mah rejected this argument in Freedom Cannabis. Relying on the Supreme Court of Canada’s majority reasoning in Canada North Group Inc., 2021 SCC 30, the Court emphasized that the court has jurisdiction to make CCAA orders that affect rights created under other federal statutes, including the Excise Act.

Director releases are often integral to the viability of an RVO. The Court found that interpreting section 11 of the CCAA in this manner would provide equal access to an RVO as a restructuring vehicle to all large companies, regardless of whether their directors are exposed to liability under the Excise Act.

The Court also determined that no provision in the Excise Act actually prohibits the release of directors’ liability, noting that the CRA itself can and likely does grant relief in certain cases (e.g., settlements or compassionate grounds).

Applying the Director Release Test

Having found jurisdiction, the Court applied the established five-part test for third-party releases in restructurings

1. the directors were necessary to the restructuring;
2. the claims were connected to the restructuring’s purpose;
3. the restructuring could proceed without the releases;
4. the directors contributed to the restructuring; and,
5. the releases benefited creditors generally.

The Court concluded that each factor was met in both circumstances. Continuity of management was essential to the success of an RVO, and without director releases, the transaction would not proceed. The directors contributed significantly throughout the CCAA process, and the releases benefited the debtor and its stakeholders by preserving Freedom Cannabis as a going concern enterprise.

In granting the directors’ releases, Justice Mah expressly warned against abuse of the RVO mechanism as a “cleansing tool” for avoiding excise tax, but found that in this case, Freedom Cannabis had engaged with the CRA in good faith and had not deliberately evaded obligations.

U.S. Based Companies

Cross-border insolvency has recently seen some U.S. based companies with Canadian ties opting to file their primary insolvency proceedings in Canada. The CCAA offers a degree of flexibility, which has become more appealing to U.S. companies. Typically, the company will initiate a bankruptcy proceeding in Canada through the BIA or the CCAA, then the debtor seeks recognition under Chapter 15 of the U.S. Bankruptcy Code.

Canada offers several advantages for debtors seeking to restructure. Bankruptcy proceedings in Canada are often faster, less burdensome, and cheaper that Chapter 11 proceedings. Additionally, the flexibility that Canadian Courts have for creative restructuring solutions and director releases can be an attractive solution for cross-border companies, since U.S. Courts have limited the ability to obtain certain releases under Chapter 11.

Conclusion

Freedom Cannabis confirms that director releases under the CCAA can extinguish statutory excise tax liabilities, provided the releases are necessary for the restructuring and the debtor acted in good faith. This decision further underscores the flexibility of orders made under the CCAA and provides clarity and restructuring opportunities to companies in excise tax impacted industries. So much so that U.S. companies are strategically choosing to file their primary insolvency proceedings in Canada.