Absolute Priority Rule:
The absolute priority rule is a legal principle that governs the distribution of assets during bankruptcy proceedings. According to this rule, creditors with higher priority must be paid in full before those with lower priority receive any payment. This rule ensures that the rights of senior creditors, such as secured creditors and bondholders, are protected and that they are given priority over junior creditors, equity holders, and shareholders. In the event of liquidation or reorganisation, the absolute priority rule helps maintain fairness and order by establishing a clear hierarchy for the distribution of assets.
The Absolute Priority Rule is a legal principle that governs the distribution of assets in bankruptcy cases. Under this rule, creditors with higher priority claims must be paid in full before creditors with lower priority claims receive any payment. This rule ensures that the rights of senior creditors are protected and that they are given priority over junior creditors in the distribution of assets. The Absolute Priority Rule is particularly relevant in Chapter 11 bankruptcy cases, where the debtor seeks to reorganize and continue its operations. In such cases, the rule prevents equity holders from receiving any distribution until all creditors with higher priority claims have been paid in full. This rule promotes fairness and encourages the orderly resolution of bankruptcy cases by providing a clear framework for the distribution of assets.
Q: What is the Absolute Priority Rule?
A: The Absolute Priority Rule is a bankruptcy law principle that states that in a Chapter 11 bankruptcy case, creditors with higher priority must be paid in full before creditors with lower priority receive any payment.
Q: What are the priorities of creditors under the Absolute Priority Rule?
A: The priorities of creditors under the Absolute Priority Rule are typically as follows: secured creditors, administrative expenses, priority unsecured creditors, general unsecured creditors, and equity holders.
Q: Can the Absolute Priority Rule be waived or modified in a bankruptcy case?
A: The Absolute Priority Rule can be waived or modified if all affected creditors and equity holders agree to the modification through a plan of reorganisation.
Q: What happens if the Absolute Priority Rule is not followed in a bankruptcy case?
A: If the Absolute Priority Rule is not followed in a bankruptcy case, the court may reject the proposed plan of reorganisation and require the debtor to come up with a new plan that complies with the rule.
Q: Are there any exceptions to the Absolute Priority Rule?
A: There are certain exceptions to the Absolute Priority Rule, such as the “new value” exception, which allows equity holders to retain their interests in the debtor in exchange for providing new value to the reorganized company.
Q: How does the Absolute Priority Rule impact equity holders in a bankruptcy case?
A: Under the Absolute Priority Rule, equity holders are typically not entitled to receive any distribution from the debtor’s assets until all higher priority creditors have been paid in full.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 29th March 2024.
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