Absolute Priority Rule (Definition)

 Absolute Priority Rule

What is the Absolute Priority Rule?

Absolute Priority Rule is a policy that says that secured claims should be paid before the junior claims at the time of company liquidation. The absolute Priority Rule also says that the equity holders will get only the residual amount of assets. Here we can get a clear idea of how much of a firm's assets should be distributed to the shareholders in the time of bankruptcy or liquidation.

How does Absolute Priority Rule Work?

According to the U.S. Bankruptcy Code, the liquidation of a business should be equal and fair. Senior creditors should be paid before the junior creditors and after the junior creditors, all the remainings are subject to equity holders.
  • The senior class of creditors is paid first and in full.
  • Claims of junior creditors are fulfilled.
  • Claims of equity holders are serviced.
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