Insolvency litigation: year in review

This past year has featured a diverse range of consequential, precedent-setting insolvency disputes across various industries, reflecting both the breadth of challenges facing Canadian businesses and the adaptability of Canada’s insolvency framework in resolving these issues. The most consequential decisions in which we have been involved are described below, alongside key takeaways for stakeholders participating in insolvency proceedings in 2026 and beyond.

Landmark decision on forced contractual assignment and ipso facto clauses: Hudson’s Bay Company ULC et al.

In a case that captured the public’s attention throughout 2025, eight objecting landlords successfully opposed Hudson Bay Company’s (HBC’s) proposed sale of 25 of its most consequential leases to Ruby Liu Commercial Investment Corp (Central Walk)¹. This dispute tested the boundaries of Section 11.3 of the Companies' Creditors Arrangement Act (CCAA) and the ability to force contractual assignments over the objection of solvent counterparties. The Ontario Superior Court of Justice (Commercial List) also provided an important ruling on ipso facto clauses as applied to contractual rights that are consensually altered by the parties before the commencement of CCAA proceedings. In this case, it upheld contractual amendments entered into by the landlords and tenant prior to HBC’s insolvency proceedings.

This decision is now the seminal authority on forced contract assignments under the CCAA. For those seeking or opposing a forced contractual assignment in future CCAA proceedings, the HBC decision provides a clear roadmap of considerations and criteria that must be addressed. The decision does not necessarily move the bar in the sense of making it harder or easier to obtain a forced assignment; rather, it provides all parties with helpful clarity as to what is required in order for the court to approve a forced assignment of contract. With respect to ipso facto clauses, the decision provides comfort to contracting parties that, if properly drafted, a subsequent insolvency proceeding by a counterparty will not render unenforceable contractual agreements and amendments entered into prior to insolvency.

Court refuses to grant D&O release in connection with RVO: Lion Electric Company et al.

In this case, the Québec Superior Court (Commercial Division) was faced with a motion to grant a broad third-party release in favour of directors and officers (D&Os) in connection with the approval of a sale transaction: a motion which was opposed by certain parties, including the debtors’ underwriters². While such releases have commonly been granted in CCAA proceedings, the scope of such releases and the circumstances in which they are sought continues to attract scrutiny. The Court refused to grant the D&O releases, finding that they were not warranted.

In seeking third-party D&O releases, compelling evidence is required to establish that the releases are necessary and essential to the restructuring and that the released D&Os contributed meaningfully to the restructuring. D&O releases sought in connection with a sale transaction must have a nexus with the proposed sale and must be limited and tailored in scope. Going forward, debtor companies requesting D&O releases from the courts should be prepared to provide meaningful evidence of D&O’s contributions to the restructuring. Where D&Os merely fulfil their fiduciary obligations, that alone does not warrant their receiving expansive releases.

But hang on—standalone D&O release granted in foreign recognition proceeding: Nevada Copper Corp. et al.

The Nevada Copper group successfully sold substantially all its assets in its Chapter 11 proceeding in Nevada and its corresponding foreign recognition proceeding under Part IV of the CCAA, and the U.S. Bankruptcy Court confirmed its Plan of Liquidation³. However, neither the plan nor the U.S. Plan Confirmation Order included a release in favour of directors and officers due to recent guidance from the U.S. Supreme Court in the Purdue matter.

Nonetheless, Torys sought a court-ordered release in favour of Nevada Copper’s directors and officers as part of the company’s Canadian Motion for Plan Recognition. The Ontario Superior Court of Justice (Commercial List) granted the release, emphasizing the directors’ and officers’ significant contributions to the restructuring. The ruling paves the way for directors and officers of future debtor companies to seek releases in foreign recognition proceedings, even when such a release is not available at first instance in the foreign jurisdiction, provided there is sufficient evidence to support that such releases are warranted in the circumstances.

Supreme Court clarifies corporate attribution doctrine: Aquino v. Bondfield Construction Co.

This was a landmark decision on the doctrine of corporate attribution and the “transfer at undervalue” provisions of the Bankruptcy and Insolvency Act (BIA)⁴. The case arose from a “false invoicing scheme” spearheaded by corporate insiders that siphoned tens of millions of dollars out of two debtor construction companies: Forma-Con and Bondfield. Forma-Con’s Trustee and Bondfield’s Monitor applied to recover these amounts, relying on the transfer at undervalue provisions codified in Section 96 of the BIA.

The Supreme Court rejected the corporate insiders’ argument—based on the doctrine of corporate attribution—that because the directing mind had been acting to defraud the companies, and because the companies received no benefit from his fraud, his intention to defeat, delay or defraud creditors could not be attributed to the companies for the purpose of the transfer at undervalue test under Section 96 of the BIA. The Court rejected this argument and held that prior articulations of the doctrine of corporate attribution in the criminal context (Canadian Dredge) or in the civil context (Livent and DeJong) should not be imported wholesale into the bankruptcy and insolvency context. The Court explained that the doctrine must be applied in a manner sensitive to the context.

As a result, the corporate insiders’ intention could be attributed to the debtors, even if they were acting in fraud of the company, or without any view to the company’s benefit.

Trustee entering a guilty plea on behalf of a bankrupt company: First Swiss Mortgage Corp.

This case involved a rare intersection of insolvency and quasi‑criminal law⁵. The Financial Services Regulatory Authority of Ontario charged First Swiss Mortgage Corp., a bankrupt company, with offences under the Ontario Mortgage Brokerages, Lenders and Administrators Act concerning alleged deceptive mortgage practices.

After its independent review, the Trustee in Bankruptcy of First Swiss concluded that the charges were likely to succeed and that contesting them would erode creditors’ recoveries in the bankruptcy. Accordingly, the Trustee obtained approval from the Ontario Superior Court of Justice (Commercial List) to plead guilty on behalf of First Swiss in exchange for a suspended sentence (meaning there would be no payable fine, thereby preserving creditor recoveries). With that approval, the Trustee entered the guilty plea on behalf of First Swiss.

This case affirms the authority of a Trustee to enter criminal or quasi-criminal pleas on behalf of a bankrupt corporation in the course of administering a bankrupt estate and advancing creditors’ interests.

Partnership interests conveyed under RVO: Varennes Cellulosic Ethanol LP & 7037163 Canada Inc.

The Québec Superior Court (Commercial Division) recently approved another reverse vesting order (RVO) transaction⁶. While RVOs have become commonplace in distressed M&A transactions, this case marked a noteworthy expansion of RVOs so as to apply them to partnership structures and not just to corporate entities. In this case (i) the purchaser acquired directly or indirectly all of the shares of the general partner and all of the partnership units in the limited partnership and (ii) the prior holders of the partnership units exchanged those units for shares in a newly-incorporated “residualco”.

There are significant complications in respect of a distressed equity sale where there is partnership or limited partnership structure in place rather than a more traditional corporate structure. This case provides a roadmap for using an RVO to effect a sale of partnership interests and confirms the expanded utility of the RVO tool in distressed M&A transactions.

U.S. courts adopt heightened review of Canadian sale transactions in Chapter 15 proceedings: Li-Cycle Inc. et al.

In the Li-Cycle CCAA proceeding, Glencore Canada Corp. and Glencore AG’s (Glencore) successfully credit bid as a stalking horse in a court-approved sale and investment solicitation process (SISP)⁷. The Canadian court granted a customary approval and vesting order (AVO) in favour of Glencore following selection of Glencore’s bid in the SISP process.

Interestingly, based on prevailing law in the Southern District of New York, the parties determined that the U.S. court’s approval of the AVO required a standalone Section 363 order under the U.S. Bankruptcy Code, as opposed to more cursory recognition of the Canadian AVO. This has now happened on several occasions in cross-border sale transactions involving Chapter 15 of the U.S. Bankruptcy Code, and it signals a potentially more significant review from U.S. courts in ancillary insolvency proceedings—one that may require satisfying more robust U.S. plenary standards. Canadian parties seeking U.S. Chapter 15 recognition for sale transactions should be prepared to address a more fulsome review under Section 363 of the U.S. Bankruptcy Code.

Largest settlement in Canadian history in CCAA proceeding: JTI-Macdonald Corp.

The combined Plans of Compromise and Arrangement of JTI‑Macdonald Corp., Imperial Tobacco, and Rothmans Benson & Hedges collectively addressed over $900 billion in smoking‑related litigation claims⁸. These Plans represent the largest settlement of claims through a CCAA process in Canadian history. JT Canada LLC Inc. and PricewaterhouseCoopers Inc., in its capacity as receiver of JTI‑Macdonald TM Corp., initially opposed the Plan put forward by the Monitor of JTI‑Macdonald Corp. and participated in the settlement of an acceptable Plan that was eventually approved by the Ontario Superior Court of Justice (Commercial List).

The case resulted in important jurisprudence regarding (i) the powers of a court‑appointed mediator; (ii) the scope of releases for future claims; (iii) the use of a cy‑près trust to address claims that cannot be determined; and (iv) the approval of contingency fee arrangements for class action counsel.

Appeals on securities disclosure and WEPPA entitlement in RVO sale: Valeo Pharma Inc. et al.

The CCAA proceeding for this TSX-listed pharmaceutical company generated several noteworthy court decisions, two of which are now before the Québec Court of Appeal⁹. Their importance is underscored by the intervention of Canada’s leading organization of insolvency practitioners: the Insolvency Institute of Canada.

The pending appeals concern (a) the suspension of a CCAA debtor’s continuous disclosure obligations under securities laws and (b) the extension of benefit entitlement under the Wage Earner Protection Program Act for employees transferred to a residual company as part of an RVO sale transaction. Orders approving these matters were unsuccessfully opposed by Québec securities regulators and the Attorney General of Canada, respectively.

The issues under appeal will be settled in the new year, with the Québec Court of Appeal’s decisions expected to provide important guidance on disclosure obligations and WEPPA entitlements in RVO transactions. As an aside, we note that a similar question about WEPPA eligibility following an RVO sale is expected to be heard by the Ontario Superior Court of Justice (Commercial List) in Synaptive Medical Inc.’s CCAA proceeding, where Torys represents the debtor; that matter, which will address whether terminated employees can access WEPPA benefits under an RVO structure, is expected to be decided in 2026 after the Valeo appeals.

The Valeo case also featured a contested DIP priming charge. The Québec Superior Court (Commercial Division) dismissed a working capital lender’s objection to being primed after reviewing the factors to be considered in approving interim financing under Section 11.2(4) of the CCAA¹⁰. In particular, the Court rejected the working capital lender’s claim that it would be materially prejudiced (a consideration under Section 11.2(4)(f) of the CCAA), holding that material prejudice must be present and certain—not merely a future and hypothetical risk of non-payment of the primed debt—for a priming DIP charge to be denied. Creditors objecting to interim financing on the basis of material prejudice must provide a sufficient evidentiary basis to permit a court to conclude that there is actual present prejudice and not merely possible future prejudice.

Court rejects constructive trust assertions in the context of an RVO: Long Run Exploration Ltd.

This decision involved an allegation concerning a proprietary constructive trust of approximately $44 million based on assertions of fraud and misrepresentation¹¹. The applicants asked the Court of King’s Bench of Alberta to rewrite an RVO sought by the parties and that had been extensively negotiated so as to retain and fund the trust claim pending adjudication.

The Court declined to reengineer the deal and approved the RVO, emphasizing deference to a fair, transparent sale process led by the Monitor. In this framework, the Court established a high threshold that the objecting creditor could not overcome. It held that the creditor must prove fraud or misrepresentation on a balance of probabilities, identify specific trust property to justify a proprietary remedy, and overcome the equities that favour the single proceeding model and the integrity of established priorities.

Creditors advancing proprietary trust claims should appreciate these standards and ensure they have a robust evidentiary foundation and valid reasons in objecting to sale transaction approvals. Practitioners structuring RVOs should build a record that demonstrates necessity of the RVO, an appropriate balancing of stakeholder interests, and convincing evidence that amendments to the form of RVO sought would destabilize the transaction.

Court pierces the corporate veil to claw back preferential insider payments: Wolverine Equipment Inc. et al.

In this case, the Court of King’s Bench of Alberta ruled that directors cannot sidestep the BIA and provincial preference regimes by routing pre-insolvency payments to themselves through controlled or shell corporations¹². The Court treated hurried and undocumented insider settlements made in a liquidity crunch, with no contemporaneous value to the estate, as voidable pursuant to applicable insolvency and preference statutes. The Court also pierced the corporate veil on an agency basis where related companies operated as receiving conduits for a director.

The Trustee in Bankruptcy applied to set aside certain impugned transactions made on the eve of the debtors’ CCAA filing. The decision highlights badges of fraud and governance gaps in a public company context and shows that insider payments outside formal agreements and board approvals will draw scrutiny and reversal.

Boards and officers should ensure any insider payment is supported by formal approvals, clear written agreements, and arm’s length evidence, and should present consideration that benefits the estate.