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U.S. Steel gutted Stelco. The government, one hopes, has learned its lesson when it comes to foreign takeovers.

MIKE CASSESE/REUTERS

The government of Ontario could well win its challenge to U.S. Steel Canada Inc.'s proposal to provide financing to its insolvent Canadian arm and, in doing so, jump ahead of pension obligations in the queue to get paid back. But a win is unlikely to set a precedent that pensions have any more rights in a restructuring tomorrow than they did yesterday.

The province is not arguing that pensions should come first in every case – it is arguing that the facts of this particular case don't allow U.S. Steel to move ahead of the obligations to fund the pension plan. That means that even if Ontario and the employees' union win their challenge, a victory will not signal a sea change in insolvency law that will protect pensioners in the next restructuring. And there is always another restructuring where this is an issue.

A fundamental principle underpinning the restructuring of companies under the Companies Creditors Arrangement Act is that any soul brave enough to offer operating financing to the company when it is insolvent gets first claim on any assets at the company. That financing is known as debtor-in-possession (DIP) financing. The DIP lender is generally given "super priority." That means, should the restructuring not work out and the company be liquidated before the DIP loan is repaid, cash from the liquidation goes to the DIP lender before anybody else. That includes prior lenders and pensions. Pensioners do not like this. They have fought back, all the way to the Supreme Court of Canada, in a case against Sun Indalex Limited Finance LLC brought by United Steelworkers.

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In that situation, the Supreme Court held (with a few new asterisks) that DIP priority remained.

This case won't change that. In its objection to U.S. Steel, the province is simply saying that the way U.S. Steel has gone about arranging a DIP loan to its Canadian subsidiary does not meet the existing test in CCAA legislation that allows a DIP lender to be granted priority to all other claims.

The argument put forward by the deal's opponents is that U.S. Steel has a conflict of interest. It is an existing creditor, and the sole shareholder. And by offering the DIP (and, according to the allegations, rigging the process to ensure it was the DIP lender), U.S. Steel gets priority for its own claims ahead of other parties.

If the judge in the case agrees, he can refuse to approve this DIP, or demand that U.S. Steel run fairer process to find a DIP. And he can do it all under the existing legislation, which gives him that power.

But that's far from saying that pensioners in general have the right to be ahead of a DIP deemed fair and reasonable under CCAA legislation.

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