Absolute Priority

What Is Absolute Priority?

Absolute priority, otherwise called "liquidation preference," is a rule overseeing the order of payment among creditors and shareholders in the event of a corporate liquidation. The absolute priority rule is utilized in corporate bankruptcies to conclude the portion of payment that will be made to every participant. Debts to creditors will be paid off first, then shareholders partition the excess assets. Absolute priority additionally applies to people who are liquidating their assets to settle claims. Secured claims generally overshadow unsecured claims.

Concerning estate of a deceased person, the absolute priority rule guarantees the payment of outstanding debts before the distribution of assets to beneficiaries.

How Absolute Priority Works

Under Section 1129(b)(2) of the U.S. Bankruptcy Code, a liquidation plan must be "fair and equitable" to creditors. Setting to the side certain provisions to handle back wages, benefits, and tax claims, absolute priority indicates the payment hierarchy to satisfy the directive for fair and equitable treatment. Senior creditors are paid in full before junior creditors are paid except if the senior creditors consent to subordinate a portion of their claims to those unsecured creditors. After the claims of junior creditors are fulfilled, any excess funds are given over to equity holders.

In estate cases, in the event that the resources of the estate are deficient to pay off the debts, assets will be liquidated to fulfill the excess debt obligations.

Courts Intervene to Affirm Absolute Priority

In a few prosecuted cases, courts have needed to certify the absolute priority rule. Such cases included cooperation between certain creditors and debtors who tried to prohibit sets of different petitioners from liquidation proceeds. The courts hearing these cases considered that secured creditors must be paid first, then unsecured creditors, and ultimately equity holders, assuming any assets remain. Except if extraordinary conditions exist, or then again on the off chance that secured creditors consent any other way, no set-ups may break this sequence.

Features

• Courts have certified that secured creditors must be paid first, then unsecured creditors, and ultimately equity holders, assuming any assets remain.
• Absolute priority is a rule that is utilized in corporate liquidations to decide the order of payment among creditors and shareholders; it likewise applies to people who are liquidating assets to settle claims.
• In a liquidation plan, the U.S. Bankruptcy Code states that creditors must receive "fair and equitable" treatment, and absolute priority indicates the payment hierarchy to satisfy that directive.
• This rule likewise guarantees the payment of outstanding debts on the estate of a deceased person before the distribution of assets to beneficiaries.