What is an 'Absolute Priority'

Absolute priority is a rule that stipulates the order of payment in the event of corporate liquidation among creditors and shareholders. The absolute priority rule is used in corporate bankruptcies to decide what portion of payment will be received by which participants. Debts to creditors will be paid first and shareholders divide what remains. Absolute priority also applies to individuals, who face liquidation of their assets to settle claims. Secured always takes precedence over unsecured claims.

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'

Under Section 1129(b)(2) of the U.S. Bankruptcy Code, a liquidation plan must be "fair and equitable" to creditors. Setting aside certain provisions to handle back wages and benefits and tax claims, absolute priority specifies the pecking order to carry out the directive for fair and equitable treatment. Senior creditors are paid in full before junior creditors unless the senior creditors consent to subordinate some of their claims to unsecured creditors. After the claims of junior creditors are satisfied, any remaining funds or assets are handed over to equity holders.

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.

Courts Intervene to Affirm Absolute Priority

In some litigated cases, courts have had to affirm the absolute priority rule. Such cases involved cooperation between certain creditors and debtors who sought to exclude sets of other claimants from liquidation proceeds. The courts hearing these cases deemed that secured creditors must be paid first, then unsecured creditors, and finally equity holders if any assets remain. Unless extraordinary circumstances exist or if secured creditors consent otherwise, no prearrangements are allowed to break this sequence.

RELATED TERMS
  1. Creditors' Committee

    A creditors' committee is a group of people who represent a company's ...
  2. Notice To Creditors

    The notice to creditors is a public notice usually posted in ...
  3. Liquidation

    Liquidation is the process of bringing a business to an end and ...
  4. Senior Issue

    An issue of bonds, preferred stock or other securities that represents ...
  5. Junior Issue

    A corporate security that ranks lower in claim to another corporate ...
  6. Satisfaction and Release

    When a debt that is due under a court judgement has been paid ...
Related Articles
  1. Personal Finance

    Fighting Back Against Collection Lawsuits

    There are still options available to those being pursued by a creditor.
  2. Financial Advisor

    Corporate bankruptcy: An overview

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  3. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  4. Personal Finance

    Unemployed? 5 Smart Ways to Get Control of Debt

    When you're unemployed and barely making ends meet, smart debt advice can help you stay on top of your payments and protect your credit rating.
  5. Small Business

    Whom Should Corporations Please?

    Companies balance the interests of owners, customers and employees. Find out who comes out on top.
  6. Personal Finance

    Debt Collection: Know Your Rights

    Learn about the debt collection process so you know how to handle it if it happens to you.
  7. Personal Finance

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
  8. Managing Wealth

    Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
RELATED FAQS
  1. 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 >>
  2. What is the difference between compulsory and voluntary liquidation?

    Learn about the primary differences between voluntary liquidation and compulsory liquidation, two ways of selling off company ... Read Answer >>
  3. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center