What is the Absolute Priority Rule?
The absolute priority rule, also known as “liquidation preference”, is a rule that specifies the order in which creditors and shareholders stand to be compensated in case the company undergoes liquidation. Absolute priority rules typically prioritize a creditor’s claim over a shareholders claim. Furthermore, secured claims are invariably prioritized over unsecured claims.
How Does the Absolute Priority Rule Work?
Section 1129(b)(2) of the U.S. Bankruptcy Code protects creditors interest by making it obligatory for liquidation plans to be non-partisan and non-discriminatory towards creditors. The absolute priority rule draws up the following hierarchy :
- The senior class of creditors is paid first and in full.
- Claims of junior creditors are fulfilled.
- Claims of equity holders are serviced.
There are also rare situations where secured creditors have consented to permuting this hierarchy. There also exists a common law exception to the absolute priority rule. It is known as the New Value Exception, and is variously referred to as the New Value Doctrine and the New Value Corollary.
Related Topics
- Bankruptcy Law (Intro)
- What is Bankruptcy?
- Insolvency – Definition
- What are the types of business bankruptcy?
- Chapter 9 Bankruptcy
- Chapter 12 Bankruptcy
- Chapter 15 Bankruptcy
- Who are the participants in the bankruptcy process?
- Key concepts behind the bankruptcy process?
- Absolute Priority Rule
- Pari Passu
- What rules govern the bankruptcy process?
- Bankruptcy Abuse Prevention and Consumer Protection Act
- American Bankruptcy Institute Definition
- What the authority of the bankruptcy court?
- What is the authority of the trustee (debtor in possession) in bankruptcy?
- Debtor in Possession
- What assets of the debtor are included in the bankruptcy estate?
- Bulk Sales Law
- What is the automatic stay in bankruptcy?
- What is a claim by creditors of the bankruptcy estate?
- What is voluntary and involuntary bankruptcy?
- What is the Chapter 7 bankruptcy process?
- What is the Chapter 11 bankruptcy process?
- How to File Bankruptcy for a Business
- Accept or reject contracts?
- Avoiding powers?
- Stay of Proceeding?
- Use of Business Assets?
- Post-Petition Financing?
- Bankruptcy Financing – Definition
- What is the appointment of a Trustee or Examiner in business bankruptcies?
- What is a Plan of Reorganization?
- Reorganization – Definition
- Subordinated Debt
- Preferred Debt
- What is Cramdown of a reorganization plan?
- To what extent does the bankruptcy process relieve a debtor‘s debts?
