Publications

Authors: Stephanie Fernandes and Denna Jalili

The breadth and routine approval of third-party releases have come under renewed judicial scrutiny in recent Ontario decisions, with courts criticizing proposed releases as overly broad and refusing to approve them. However, this critical approach has not resulted in a blanket rejection of broad third-party releases, with even more recent decisions approving such releases where their scope is justified in accordance with the applicable legal principles and case law.

In May 2026, Justice Black in SRx Health Solutions (Canada) Inc. (“SRx”)[1] rejected a proposed third-party release and cautioned courts against handing out releases “like Halloween candy.”[2] In June 2026, in Paystone Holdings Inc. (Re) (“Paystone”),[3] Justice Myers,[4]  in obiter, criticized the proposed releases as “far too broad” and further held that carving out claims of objecting creditors “exacerbated the problem rather than fixing it” by treating stakeholders differently based solely on whether they opposed the relief.[5]

Conversely, in July 2026, in Field Aviation Company Inc. and Field Aviation East Ltd. (Re) (“Field”),[6] Justice Steele distinguished SRx and approved third-party releases that were supported by evidence of the releasees’ contributions and appropriately tailored through several claim-specific exclusions. Most recently, in Freshstone Brands Inc. (Re) (“Freshstone”),[7] Justice Black approved broad releases similar to the form rejected in SRx, finding that they were proportionate and rationally connected to the restructuring and that the directors and officers had contributed meaningfully to the restructuring.

The Governing Framework

Third-party releases have become an important feature of Canadian insolvency law. Properly tailored releases protect non-debtor parties whose participation or contributions are necessary to a restructuring and provide the finality required to implement a value-maximizing transaction. Releases granted under the Companies’ Creditors Arrangement Act R.S.C., 1985, c. C-36 (the “CCAA”) and the Bankruptcy and Insolvency Act R.S.C., 1985, c. B-3 (the “BIA”) are discretionary relief that the Court may award only in appropriate circumstances.[8]

The starting point for the Court is therefore that third-party releases are the exception, rather than the rule.[9] Among other things, the party seeking the release must establish why the release is necessary, who requires protection and why the scope of the release is proportional to the restructuring contribution being protected.

The test for approving third-party releases was set out in Lydian International Limited (Re).[10] In this decision, the Court identified the following non-exhaustive factors to be considered when determining whether to approve a release, commonly referred to as the “Lydian factors”:

1. whether the parties to be released are necessary and essential to the restructuring;
2. whether the claims to be released are rationally connected to the purpose of the restructuring and necessary for it;
3. whether the restructuring could succeed without the releases;
4. whether the parties being released contributed to the restructuring; and
5. whether the releases benefit the debtors as well as their creditors generally.[11]

The Lydian factors are not intended to be used as a checklist and not every factor must be satisfied for the Court to grant a release. The factors provide courts with criteria to assist in considering the necessity and benefit of proposed releases. As such, some factors may assume greater weight in one case than another.[12]

The Court’s Decision in SRx

In SRx, the applicants sought third-party releases in favour of four individuals who had assisted with the restructuring and expedited sale process. The Court accepted that each had made material contributions satisfying various Lydian factors.[13] The issue before the Court was therefore not whether some protection could be justified for the proposed releasees, but whether the breadth of the proposed release was appropriate.

The proposed release would have extinguished all present and future claims, whether known or unknown, based on any act or omission occurring before the filing of the termination certificate and relating in any way to the applicants, their business, assets, operations or the CCAA proceeding:

[Proposed releasee] shall be deemed to be forever irrevocably released and discharged from any and all present and future claims, liabilities, demands, actions, causes of action, damages and obligations of any kind or nature whatsoever (whether direct or indirect, known or unknown, contingent or absolute), based in whole or in part on any act or omission, transaction, dealing or other occurrence existing or taking place prior to the filing of the Termination Certificate and in any way relating to the Applicants, their business, assets or operations, or these CCAA proceedings.[14]

Although no creditor formally opposed the proposed release at the hearing, one creditor had raised concerns about its breadth with the Monitor. The applicants argued that those concerns should carry little or no weight because the creditor lacked “the courage of their convictions”[15] to attend the hearing and advance their concerns. The Court disagreed, holding that the absence of formal opposition did not relieve the Court’s supervisory obligations to assess the appropriate scope of proposed releases.[16]

The Court proceeded to reject the proposed release. In doing so, it distinguished between the contributions necessary to justify a release and the scope of the release those contributions could support. The proposed releasees had helped raise funds, preserve operations and ensure patient safety in the period leading to and during the CCAA proceeding. Those efforts could justify a release for restructuring-related conduct, but not for “anything and everything” relating to SRx, throughout its history, including matters unconnected to the restructuring, refinancing efforts or CCAA proceeding.[17]

The applicants relied on releases previously granted in other proceedings. The Court held that the examples provided were divorced from their specific factual context,  rendering their precedential force as “attenuated.”[18] More importantly, the Court cautioned that a release approved in one case should not become the baseline for similar or incrementally broader language in the next. Courts must be “scrupulous to avoid” giving out releases “like Halloween candy to whomever shows up at our door asking for them.”[19] Doing otherwise amounts to “unwarranted largesse” and invites “release-creep” and “ever-more expansive requests.”[20]

The Court directed the applicants to return with a proposed release that “more precisely tied to the activities contributing to the CCAA proceedings,” rather than extinguishing all claims relating to SRx extending “as far back in time as that entity existed and operated”.[21]

The Court ultimately granted an order that limited the release to conduct on or after the filing date, being August 6, 2025, and, critically, only to claims arising from or connected with the commencement, conduct, administration, implementation or completion of the CCAA proceeding.[22]

The Court’s Decision in Paystone

Another release was scrutinized and rejected by the Court just one month later in Paystone, albeit in obiter.

In Paystone, the applicants sought approval of a pre-packaged, non-arm’s-length sale of its business to an entity associated with existing management. The Court dismissed the sale-approval motion because the applicants had not established a fair and transparent process or met the requirements for a related-party sale under section 36 of the CCAA. The proposed releases were therefore not determinative of the motion. Nonetheless, the Court addressed them for completeness, and its comments provide an important extension of the scrutiny emphasized in SRx.[23]

The proposed releasees included, among others, the applicants’ current and former directors, officers and legal counsel, the chief restructuring officer, the purchaser, the Monitor and its legal counsel, as well as the Monitor’s current directors, officers, partners, employees and advisors.

The claims proposed to be released included all present and future liabilities and claims arising in connection with or relating to: (i) any omission, transaction, offer, dealing, fact, matter, occurrence or thing taking place before delivery of the Monitor’s certificate; (ii) the CCAA proceedings; (iii) the loan transaction, the asset purchase agreement or completion of the sale; and (iv) any related closing document, agreement, instrument, matter or transaction.[24]

While the scope of the claims to be released was very broad, the applicants carved out from the application of the release “all creditors who complained” about the overbreadth ahead of the hearing.[25]  As a result, only some creditors of Paystone would have their claims released, while others had their claims against the proposed releasees preserved by the carve-out.

In support of the release, the applicants relied on the proposed releasees’ collective involvement in the pre-filing process, negotiation of the loan purchase and forbearance agreements, preparation of the CCAA filing, finalization of the asset purchase agreement, stakeholder negotiations and management of the business. They also submitted that the releasees’ continued support was required to close the transaction and that similar releases had been granted in other CCAA proceedings.[26]

The Court rejected the release. In doing so, it held that the releases were “far too broad in scope and in the people to whom they applied.”[27] Further, there was no evidence that supported the proposition that the releases or the proposed releasees were necessary to implement the proposed sale.[28]

In addition, the Court was particularly critical of the applicants’ attempt to address objections to the releases by carving out the claims of objecting creditors. The Court held that it was unfair to bind all except those stakeholders who knew enough to object and “threaten to throw a spanner in the works.”[29] In the Court’s view, the differential application of the proposed release made the releases more, not less, problematic.[30]

The Court’s Decision in Field

After the decisions in SRx and Paystone, the Court in Field approved a third-party release, and in doing so, specifically distinguished SRx.

In Field, the Court approved revised releases that contained several negotiated and claim-specific exclusions, including, among others, claims recoverable under applicable directors’ and officers’ insurance policies. The Court also had evidence that the directors, officers and employees were necessary to complete the transaction and had made significant contributions to the restructuring, including securing a transaction, assisting with the court-approved sale process and facilitating due diligence.[31] Those efforts produced sufficient proceeds to satisfy outstanding wages and vacation pay and repay the secured lender in full. The Court held that, unlike the release considered in SRx, the releases before it had been appropriately tailored and supported by the evidence.[32]

The reasons in Field therefore demonstrate that the Court may approve third-party releases containing negotiated, claim-specific carve-outs where the scope of the releases is appropriately limited and their necessity is established by the evidence, having regard to the Lydian factors.

The Court’s Decision in Freshstone

Most recently, in Freshstone, the Court approved third-party releases with language similar to that which was rejected in SRx. The releases extended to all present and future claims against the company's directors and officers arising from acts or omissions occurring before delivery of the Monitor's Certificate, including claims relating to the company's business, affairs, prior dealings and management.[33] Unlike the revised releases ultimately approved in SRx, the releases in Freshstone were not expressly limited to post-filing conduct or activities connected with the CCAA proceedings. The Court found that the proposed releases satisfied the Lydian factors, as they were proportionate and rationally connected to the purpose of the restructuring, and the directors and officers had contributed meaningfully to the restructuring efforts.[34] Although the endorsement does not elaborate on the basis for distinguishing the scope of the releases from those rejected in SRx, Freshstone demonstrates that the appropriateness of a third-party release remains fact-specific, and informed by the contributions of the proposed releasees in the circumstances of the restructuring.[35]

Conclusion

Read together, these recent decisions demonstrate greater judicial scrutiny of third-party releases.  Parties seeking releases should be prepared to provide clear evidence supporting both the specific need for the release and its scope, informed by the Lydian factors, rather than overly relying on similar language approved in prior cases. The Court may approve broadly worded releases where it is satisfied that they are proportionate and rationally connected to the restructuring.