Absolute Priority

What is an 'Absolute Priority'

An absolute priority is a rule that stipulates the order of payment - creditors before shareholders - in the event of liquidation. The absolute priority rule is used in bankruptcies to decide what portion of payment will be received by which participants. Debts to creditors will be paid first and shareholders (partial owners) divide what remains.

Regarding the estate of a deceased person, the absolute priority rule will ensure payment of outstanding debts before the distribution to beneficiaries.

Also known as "liquidation preference."

BREAKING DOWN 'Absolute Priority'

Absolute priority specifies the pecking order. Senior creditors always get first grabs at the proceeds from liquidation, and shareholders are the last to get paid. This rule provides a degree of protection to creditors in the event of insolvency or death. The division of benefits (cash) is not always the result of a bankruptcy. It can also occur due to the liquidation of assets in order to pay down a company's liabilities.

In estate cases if the resources of the estate are insufficient to pay off the debts, assets will need to be liquidated to handle the obligations.

RELATED TERMS
  1. Liquidation

    Usually occurs when a company is insolvent, meaning it cannot ...
  2. Receiver

    A person appointed by a bankruptcy court or secured creditor ...
  3. Liquidation Preference

    A term used in venture capital contracts to specify which investors ...
  4. Preferred Creditor

    An individual or organization that has priority in being paid ...
  5. Creditors' Committee

    A group of people who represent a company's creditors in a bankruptcy ...
  6. Senior Issue

    An issue of bonds, preferred stock or other securities that represents ...
Related Articles
  1. Markets

    What Does Liquidation Mean?

    Creditors liquidate assets to try and get as much of the money owed to them as possible.
  2. Investing

    What Does a Creditor Do?

    A creditor is a person or entity that loans money or provides goods or services to another entity with the expectation of being paid back in the future.
  3. Markets

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  4. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  5. Investing

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  6. Investing

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  7. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
  8. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  9. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  10. Investing

    Not All Debt Holders Are Equal

    Senior debt is borrowed money a company repays first if the company goes out of business.
RELATED FAQS
  1. What are the full rights of creditors in cases of bankruptcy?

    Learn more about corporate bankruptcy and the rights of creditors. Find out how creditors are repaid in the event of bankruptcy ... Read Answer >>
  2. Under what circumstances might a company decide to liquidate?

    Learn about the circumstances under which a company may decide to liquidate, and understand how assets are liquidated in ... Read Answer >>
  3. In a corporate liquidation, why are unpaid taxes and wages paid before general creditors ...

    The Bankruptcy Code, section 507, states that when a corporation is liquidated, creditors are paid in a particular order: ... Read Answer >>
  4. What are the differences between chapter 7 and chapter 11 bankruptcy?

    Chapter 7 bankruptcy is sometimes also called liquidation bankruptcy. Firms experiencing this form of bankruptcy are past ... Read Answer >>
  5. What is the purpose of liquidation?

    Read about the role of liquidation in corporate finance and why it encourages discipline and efficiency in a market economy. Read Answer >>
  6. What happens to the stock of a public company that goes bankrupt?

    Occasionally, publicly listed companies go bankrupt. The company's shareholders, depending on the type of stock they hold, ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center