Freshstone: the reverse vesting evidence the judge found wanting

"Expedition and efficiency are important aspects of what this court offers and generally delivers," Justice W.D. Black of the Ontario Superior Court of Justice (Commercial List) began. "That does not mean, however, that we can or should dispense with the rules of evidence in service of rapidity or commercial imperatives." His reasons, dated October 5, 2026 and cited as Freshstone Brands Inc., 2026 ONSC 5605, explain why, at a hearing three days earlier, he did not grant Freshstone the approval and reverse vesting order it had asked for, per the Endorsement of Justice W.D. Black, Oct. 5, 2026, paras. 1–2, 4, 17–19. The order would have approved a credit bid by Frank Burdzy, the company's chief executive and a secured creditor, under which he would become its sole shareholder and the liabilities he was not keeping would move to a new company, per the Third Report of the Monitor, Sept. 15, 2026, paras. 24–25, 32 and n. 1.

Freshstone describes itself as "a leading Canadian manufacturer of prepared meals," made at what its affidavit calls the Steinway Facility and the Mississauga Facility in Ontario, per the Affidavit of Leigh Wilson, Sept. 11, 2026, paras. 4, 25–26. Its motion, reported here on September 12, followed a sale process in which Mr. Burdzy's stalking-horse bid was "not only the sole going concern offer" but "the only offer altogether," in the words of the affidavit filed in support, per the Affidavit of Leigh Wilson, Sept. 11, 2026, para. 53. When reverse vesting motions in fifteen proceedings were counted here on September 23, all thirteen that had been decided had ended in an order; Freshstone's was one of the two then pending.

What went to the hearing

Freshstone has been under the CCAA since Justice Black's initial order of June 9, 2026, which appointed Deloitte Restructuring Inc. as monitor, per the Initial Order, June 9, 2026 and the Third Report of the Monitor, Sept. 15, 2026, para. 1. The subscription agreement it asked the court to approve is dated June 12 and was amended four times. Its price was the amount outstanding on the notes Mr. Burdzy was credit-bidding (approximately $7,733,270 when Leigh Wilson, Freshstone's chief development officer, swore her affidavit on September 11), plus cash for the court-ordered charges, an administrative reserve and known cure costs, with the liabilities he was keeping staying in the company, per the Affidavit of Leigh Wilson, Sept. 11, 2026, paras. 1, 9, 11, 16 and the Third Report of the Monitor, Sept. 15, 2026, para. 27.

The rest would have gone to a residual company, 9576-0385 Québec Inc. Based on Freshstone's books and records, the monitor said those liabilities include approximately $28.1 million of non-employee pre-filing liabilities and approximately $1.1 million of severance and termination claims, along with unquantified claims under excluded contracts, per the Third Report of the Monitor, Sept. 15, 2026, paras. 5(d)(ii), 92. By September 25 the motion had narrowed. A second residual company had been dropped because the investor confirmed there were no excluded assets to put in it. After discussions with the Attorney General of Canada, Freshstone also agreed, "without any admission whatsoever," to adjourn its request for an order under the Wage Earner Protection Program Act, given a pending motion by the Attorney General for leave to appeal to the Court of Appeal for Ontario in 1001270243 Ontario Inc. (formerly Synaptive Medical Inc.), where that statute's application to a reverse vesting transaction is also at issue, per the Factum of the Applicant, Sept. 25, 2026, paras. 5 n. 2, 6.

Deloitte, as monitor, recommended the order in its Third Report, calling the structure "reasonable, justified and appropriate in the circumstances" and saying that creditors whose claims were excluded liabilities "will have no recovery under the Transactions" but "also have no prospect of recovery under any other alternative currently available." It also concluded that the structure was necessary to preserve the tax losses, per the Third Report of the Monitor, Sept. 15, 2026, paras. 12(b), 12(e), 13, 81.

"Freshstone's understanding"

"When part of what is sought, as in this case, is a reverse vesting structure, the need for admissible and persuasive evidence is particularly acute," Justice Black wrote. "Notwithstanding its increased use in recent years, a reverse vesting order remains an exceptional and extraordinary remedy, only to be permitted when clear and cogent evidence justifies that structure." The proposed order itself, he noted, "contains fairly typical features of reverse vesting structures that have increasingly frequently been granted by this and other courts," per the Endorsement of Justice W.D. Black, Oct. 5, 2026, paras. 3–4. In his June 18 endorsement approving the sale process, he had written that his purpose in raising the point with counsel was "to give counsel a heads up that the recourse to a reverse vesting structure should not be taken for granted, and that proper and sufficient evidence will have to be provided in that regard," per the Endorsement of Justice W.D. Black, June 18, 2026, para. 14. The October reasons reproduce that paragraph and continue: "Despite that specific admonition, I found the evidence put before me today to be wanting," per the Endorsement of Justice W.D. Black, Oct. 5, 2026, paras. 6–7.

He took up the licences first, "a frequent basis for the asserted need for a reverse vesting structure and one of the key purported bases presented to justify the use of that structure here." The evidence on them, he wrote, "was by way of an affidavit of Leigh Wilson sworn September 11, 2026 (her second affidavit in these proceedings)," per the Endorsement of Justice W.D. Black, Oct. 5, 2026, para. 8. Ms. Wilson's affidavit lists the licences, certificates and registrations Freshstone holds for the two facilities, among them Canadian Food Inspection Agency licences under the Safe Food for Canadians Regulations, SQF certificates of conformity and, for Steinway, a U.S. Food and Drug Administration registration. It then says: "Freshstone's understanding is that these licences, certificates and registrations cannot be assigned or otherwise transferred to a third-party," and that under a traditional approval and vesting order "the Investor would be required to re-apply and re-submit the relevant applications in order to obtain the above licences, certifications and registrations, without which the Investor would not be able to operate," per the Affidavit of Leigh Wilson, Sept. 11, 2026, paras. 26–27, 29.