Lion Electric tests the limits of Directors’ and Officers’ releases under the Companies’ Creditors Arrangement Act

The collapse of The Lion Electric Company and its affiliates (Lion Electric) has attracted considerable attention as a sign of potential trouble in Québec’s manufacturing and electric vehicle sectors¹. The recent decision of the Québec Superior Court also marks an important shift for restructuring practitioners across Canada. In an extensive decision of almost 75 pages, Justice Pinsonnault upheld an objection from certain litigation claimants and co-defendants, significantly restricting the releases sought by the company’s directors and officers (D&Os) in connection with a sale of substantially all of the business and assets of Lion Electric. The decision imposes important boundaries on both the scope and availability of third-party releases in the course of CCAA proceedings.

What you need to know

• The CCAA empowers the court to grant releases to third parties in connection with a sale of an insolvent business. For the most part, these releases are uncontested and frequently granted. In Lion Electric, however, the court rejected the notion that sweeping D&O releases should be granted automatically simply because it is a common practice.
• The court in Lion Electric held that in order to justify the grant of D&O releases, compelling evidence is required to establish that the D&Os were necessary and essential to the restructuring, and that they had contributed in a meaningful way that surpassed merely fulfilling their fiduciary obligations to the company. That evidence was not present in this case.
• Debtors must also establish that there is a nexus between the proposed third-party releases and the goals of the restructuring. Seeking to obtain releases after a sale transaction has already closed—as was the case here—sends a strong signal that the releases are wanted rather than needed.
• Finally, any D&O releases sought in the context of a sale transaction must be tailored and limited in scope. The court rejected the company’s attempt to release not only D&Os but also the indefinite broader category of “deemed D&Os”.

The details

Background: D&O releases

Third-party releases have become a significant feature—and point of controversy²—in Canadian restructuring law. Historically, CCAA proceedings were designed to facilitate compromises between insolvent companies and their creditors, enabling businesses to continue as going concerns. Since the Ontario Court of Appeal’s decision in Metcalfe & Mansfield Alternative Investments II Corp. (2008), the courts have recognized that successful restructurings often require contributions from parties other than the debtor, who seek protection from future claims in exchange for significant contributions. In particular, D&O releases have been seen as an important mechanism to ensure that D&Os “stay at the helm” to guide the company through implementation of a successful restructuring without exposure to statutory and other forms of liability.

The importance of protecting directors is now codified in section 5.1(1) of the CCAA, which provides that a plan of arrangement “may include in its terms provision for the compromise of claims against directors of the company that arose before the commencement of proceedings…that relate to the obligations of the company where the directors are by law liable in their capacity as directors”. This is limited, however, by section 5.1(2) of the CCAA, which provides that a release in favour of directors may not include claims that relate to contractual rights of one or more creditors, or claims that are based on allegations of misrepresentations made by directors³ or of wrongful or oppressive conduct by directors. Releases may never be given for fraud or willful misconduct.

The practice of obtaining D&O releases has persisted as Canadian restructuring practice has shifted away from formal plans of arrangement toward a greater reliance on sale transactions. But this has also given rise to concerns where an order approving a sale transaction—with no creditor vote—also extinguishes claims against D&Os, particularly in the context of ongoing shareholder litigation. Nevertheless, the courts have generally maintained the validity and availability of broad D&O releases.

In two recent decisions, the Québec Superior Court upheld a debtor’s proposed D&O releases in the face of opposition from litigation claimants arguing that the D&Os should be disentitled to releases under section 5.1(2) because the directors had made misrepresentations to shareholders.

In NMX Residual, 2025 QCCS 1205, the court confirmed that broad releases granted in a 2020 reverse vesting order (RVO) under the CCAA were valid and enforceable, dismissing claims against former directors and officers. The court held that the exceptions in section 5.1(2) of the CCAA apply only to contractual creditors, not shareholders, and applied only to post-filing claims. The court emphasized the necessity of releases for restructuring success. The decision is currently under appeal.

Similarly, in Bruneau c. Lacerte, 2025 QCCS 1853, the court confirmed that the exceptions under section 5.1(2) of the CCAA apply only to creditor claims, not to shareholder claims, and rejected arguments that former shareholders could invoke this provision to limit releases granted in an RVO. The court adopted reasoning from NMX Residual that shareholder remedies fall outside its scope.

The Lion Electric Company

Lion Electric, based in Saint-Jérôme, Québec, is a manufacturer specializing in all-electric medium- and heavy-duty urban vehicles, including school buses and trucks. Founded in 2008, Lion positioned itself as a leader in electrified transportation, benefiting from strong provincial and federal support during the EV boom.

By late 2023, however, Lion Electric faced severe financial distress, citing high production costs and declining demand, compounded by geopolitical uncertainty and reduced U.S. electrification priorities. Despite cost-cutting and multiple financing attempts, the company defaulted on debt and sought CCAA protection in December 2024, reporting liabilities exceeding $244 million. Ultimately, Lion Electric was sold through a court-supervised sale and investment solicitation process (SISP) to a consortium of Québec-based investors via RVO dated May 22, 2025.

Following the commencement of CCAA proceedings, a group of shareholders sought authorization to bring a securities class action against Lion Electric’s D&Os, its auditors, and the underwriters of Lion Electric’s publicly issued securities. The class action, which remains at a very preliminary stage and has not yet been authorized, notably alleges that the D&Os made various misrepresentations about the company’s financial health and sales prospects.

In connection with but following the closing of the RVO transaction, Lion Electric sought broad releases in favour of its D&Os, including any “deemed D&Os”. The court observed that these releases would extinguish not only the class action claims against the D&Os, but also any claims for contribution and indemnity that the auditors and underwriters might bring in the class action. As a result, the auditors and underwriters would not only be left to defend the class action without the D&Os but they would also be deprived of any recourse for contribution or indemnity from the D&Os.

The court was asked by the plaintiffs, auditor, and underwriters to decide whether to approve a full D&O release, or whether the class action claims should be carved out and remain unaffected.

Return to first principles

In extensive reasons, the court firmly rejected the notion that third-party releases should be granted as a matter of course or because they have become common in CCAA practice. Citing Metcalfe and subsequent jurisprudence, Justice Pinsonnault emphasized that such releases must be exceptional, not the norm, and justified by a clear restructuring purpose. Reliance on precedent alone—without probing necessity and fairness—should be discouraged.

Importantly, the court emphasized that a third-party release must be reasonably connected to the restructuring objectives and supported by evidence that the beneficiaries made a tangible and meaningful contribution to achieving those objectives. The court noted that this standard had eroded in recent years as broad uncontested releases became the norm. The judgment calls for a return to first principles: releases should incentivize extraordinary efforts.

The court stressed that this nexus requirement is even more critical in RVO scenarios. Unlike plans of arrangement, RVOs bypass creditor voting, leaving judicial oversight as the sole safeguard. Where creditors have no voice, the court must exercise heightened vigilance before extinguishing rights—particularly rights against non-debtor parties.

Fulfilling directors’ duties is not enough

Lion Electric argued that directors had “earned” their release by supporting the restructuring and continuing in their roles rather than resigning. The Court disagreed, holding that compliance with fiduciary obligations is not a ticket to immunity. Directors cannot “become entitled” to a release simply by doing their job. Instead, they must demonstrate exceptional, measurable contributions beyond ordinary duties—contributions that materially advanced the restructuring. No such evidence was provided, and the court found that mere assertions and reliance on the Monitor’s support for the granting of the releases were insufficient.

The CCAA is not a tool to reshape third-party relationships

The court repeatedly emphasized that the CCAA facilitates compromises between debtors and their creditors—not between creditors themselves or between third parties. Using the statute to rearrange the litigation landscape among non-debtors, absent a restructuring imperative, is improper. The full D&O releases sought here were not necessary to close the RVO transaction, which had already been completed. They served no restructuring purpose and conferred no benefit on the debtor’s estate or its creditors. Instead, the court found that the release would harm stakeholders by stripping them of legitimate rights without advancing any CCAA objective.

In this respect, the court also observed that the proposed release was strikingly broad, covering not only actual directors and officers but also anyone “deemed” to be one by virtue of involvement in management. Neither Lion Electric nor the Monitor could identify to the satisfaction of the court who was intended to be captured or benefitted by this expanded release. The court criticized this as “pushing the envelope” and warned that such drafting invites uncertainty and litigation. Similarly, the definition of “Released Claims” swept in virtually all conceivable liabilities, save for fraud and willful misconduct. This approach, the judge observed, risked both unfairness to stakeholders and the undermining of confidence in insolvency proceedings.

Aspects of the releases remain a live debate

Finally, the court considered whether the proposed releases were permissible under section 5.1(2) of the CCAA in light of the recent decisions in NMX and Taiga. Both of these cases read section 5.1(2) narrowly, such that section 5.1(2) would permit releases of post-filing claims by creditors but not of pre-filing claims by shareholders. The judge expressed skepticism about this interpretation, noting that the French-language version of the CCAA does not restrict the exception to misrepresentations made “to creditors,” and that public policy disfavors insulating directors from liability for pre-filing misconduct. However, the Court declined to rest its decision on a broader interpretation of section 5.1(2), given conflicting jurisprudence and the pending appeal in NMX. Instead, it relied on fairness principles and its discretion under sections 5.1(3) and 11 to require that the class action claims be carved out of the D&O releases granted in this case.

The debate over third-party releases remains active. On December 1, 2025, the Québec Court of Appeal granted leave to appeal in Varennes Cellulosic Ethanol LP on the issue of third-party releases, in addition to the outstanding appeal in NMX. The decision in Lion Electric is now also subject to motions for leave to appeal to the Québec Court of Appeal. The resolution of these appeals may serve to further clarify the law of third-party releases under the CCAA in Canada.

Implications

Third-party releases are—and will likely remain—a common feature in Canadian restructuring law. However, the court’s decision in Lion Electric signals a new degree of judicial scrutiny in restructuring transactions, and particularly in RVO transactions. With respect to current practice, the court held both that the scope of such releases should be narrowed and that the evidentiary burden to satisfy the court as to appropriateness of such releases should be higher.

Debtors should therefore be prepared to submit detailed evidence of their D&Os contributions to the restructuring, and to show that the D&Os contribution is meaningful, going beyond mere fulfillment of fiduciary duties. There should be a demonstrable connection between the proposed releases and the goals of the restructuring, as well as clear evidence that the releases contribute to those goals.

Debtors and drafters will also need to be mindful of the scope of the releases sought, tailoring any releases to the needs of the restructuring to avoid objections from stakeholders. In this case, the effect of the releases on third-party claims could be addressed through a carve-out; however, the decision marks a stark change in tone, a perspective which may be applied to other releases that are viewed as unduly broad. While third-party releases may be common, they are not “one size fits all” in how they are administered.