Iovate: the directors are released and the holdback goes to the lenders

When the reverse vesting transaction for the MuscleTech and Hydroxycut business closed on May 27, 2026, the monitor kept back two sums from the US$90 million in cash proceeds. One was US$1,900,000 "to fund the wind-down and termination of these proceedings and a claims process in respect of the Potential D&O Claims." The other was CAD$1,310,000, the maximum amount of the directors' charge, held to collateralize a charge that had not been released at closing, per the Endorsement of Dietrich J., Sept. 22, 2026, para. 4. The claims process that the first sum was partly meant to pay for will not now be run, and most of both sums is on its way to Royal Bank of Canada as administrative agent for the group's lenders.

Justice Dietrich granted the monitor's motion in full on September 22, by videoconference, with counsel for the monitor and for the agent the only parties appearing. The Distribution and Fee Approval Order releases the directors' charge, releases the directors and officers of the original applicants from post-filing claims, authorizes distributions to the agent up to the amount of the lenders' debt, extends the stay to January 29, 2027, and approves the Sixth Report and the fees of the monitor and its counsel, per the Order (Distribution and Fee Approval), Sept. 22, 2026, paras. 3–4, 9–13. The relief, and the history of the two potential director claims behind it, were set out here on September 17, when the motion was filed; what follows is what the court decided and the law the monitor put in front of it.

A release outside a plan

There is no plan in this proceeding and there will not be one: the only remaining applicant is 2807727 Alberta Ltd., the residual company, which has no operations and no employees, per the Factum of the Monitor, Sept. 20, 2026, pp. 4–5. The monitor's factum therefore opened its argument on jurisdiction. The court's power to approve releases in favour of parties other than the debtor, outside a plan, is "well-established," it said, quoting the Québec Superior Court in Blackrock Metals, 2022 QCCS 2828, that it "is now commonplace for third-party releases, in favor of parties to a restructuring, their professional advisors as well as their directors, officers and others, to be approved outside of a plan in the context of a transaction," per the Factum of the Monitor, Sept. 20, 2026, p. 9.

The factum then pointed to two lines of Toronto Commercial List orders. In the reverse vesting line it cited Contract Pharmaceuticals, where an April 17, 2024 approval and reverse vesting order granted broad releases to directors and officers and a September 17, 2024 termination order later ended the directors' charge without a claims process. In the termination line it cited 2688182 Alberta Inc. (May 15, 2025), Aleafia Health (March 1, 2024) and Biosteel Sports Nutrition (July 31, 2024), each an order releasing directors and officers and discharging a directors' charge as the proceeding wound down, per the Factum of the Monitor, Sept. 20, 2026, p. 9, nn. 26–27. From the Alberta Court of King's Bench's decision in ENTREC Corporation, 2020 ABQB 751, it drew the proposition that a release can be supported where it "would facilitate the distribution of funds that would otherwise be held back for a charge to secure an indemnity in their favour", per the Factum of the Monitor, Sept. 20, 2026, p. 10, n. 28. The monitor applied it to Iovate in those terms: the release would let it terminate the charge and pay the holdback to the agent, per the Factum of the Monitor, Sept. 20, 2026, p. 11.

The test, and the reasons

The test the monitor argued was the five-part inquiry from Lydian International, 2020 ONSC 4006 at para. 54: whether the released parties were necessary and essential to the restructuring, whether the released claims are rationally connected to its purpose, whether it could succeed without the releases, whether the released parties contributed to it, and whether the releases benefit the debtors and creditors generally, per the Factum of the Monitor, Sept. 20, 2026, p. 10.

On rational connection, the factum put the alternative plainly. Without the release the monitor would have to run a claims process for post-filing claims against the directors and officers, which in its submission "would be neither necessary nor desirable and would only erode the Lenders' collateral." The two parties "who would be most familiar with whether any post-filing claim against the Directors and Officers would be warranted" — the agent and Xiwang Foodstuffs Co., Ltd., the indirect majority shareholder of the original applicants — had decided not to pursue one, and other parties had had "ample opportunity" to come forward, per the Factum of the Monitor, Sept. 20, 2026, p. 11. The monitor did not investigate the merits of the two potential claims; the factum says that investigation's cost would have fallen on the lenders, per the Factum of the Monitor, Sept. 20, 2026, p. 8.

Justice Dietrich's endorsement accepted the monitor's view in two words — "I agree" — and gave her reasons in a single paragraph. The release reaches only claims relating to the period between the October 31, 2025 filing date and closing, and leaves untouched claims that cannot be compromised under ss. 5.1(2) or 19(2) of the CCAA. The released parties "have facilitated and contributed to these CCAA proceedings, which ultimately saw the Original Applicants' business continue until such time as it was sold for the benefit of a variety of stakeholders including creditors, suppliers, customers and employees," she wrote, adopting the factum's language, and "[g]iven the corresponding release of the Directors' Charge," the Lydian factors support the relief. Counsel advised that the affected directors had been served, and no one appeared to oppose, per the Endorsement of Dietrich J., Sept. 22, 2026, para. 6.