Absolute Priority Rule
Absolute Priority Rule the absolute priority rule is a bankruptcy principle that determines the strict order of payment for creditors and equity holders during company restructuring or liquidation.
This rule ensures that senior claims are fully satisfied before junior claims receive any distribution of remaining assets.
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How Absolute Priority Rule Works
In bankruptcy proceedings, the absolute priority rule establishes a clear hierarchy of claims, protecting the interests of senior creditors before junior stakeholders receive any compensation.
The rule operates like a financial waterfall, where each level of creditors must be paid in full before the next level receives any payment. This means secured creditors, priority unsecured claims, and general unsecured creditors are prioritized over equity holders.
While the rule appears rigid, bankruptcy courts do allow some flexibility through exceptions like the 'new value' exception and consensual reorganization plans.
Key Points
- •Secured creditors are paid first, up to the value of their collateral
- •Priority is strictly enforced from top to bottom of the claim hierarchy
- •Equity holders typically receive nothing if debt claims exceed company assets
- •Exceptions exist for new capital contributions and consensual plans
- •The rule protects senior creditors' interests in distressed scenarios
Frequently Asked Questions
Related M&A Concepts
Waterfall
The sequential distribution of financial proceeds in a specific order of priority
Learn moreBankruptcy
A legal process for individuals or companies unable to repay their outstanding debts
Learn moreSecured Creditor
A lender with a legal claim on a borrower's assets as collateral
Learn moreChapter 11
A bankruptcy proceeding that allows a company to reorganize its debts while continuing operations
Learn moreTalk to an Expert
Understanding absolute priority rule is critical when navigating M&A transactions. Quantive has helped hundreds of business owners through this process.