Rule of Absolute Priority

Rule of Absolute Priority

A condition of bankruptcy proceedings under which junior (subordinated) claim holders can receive no payment until senior (priority) claim holders are paid in full.

Absolute Priority

A rule stating that, in liquidation, certain creditors must be satisfied in full before any other creditors receive any payments. That is, in the liquidation of a company, the absolute priority rule states that holders of secured debt must be paid before holders of unsecured debt. Holders of unsecured debt have precedence over preferred shareholders, and, finally, preferred shareholders must be satisfied before common shareholders.
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63) Thus, the plan could not be confirmed despite the approval by over 90% of bondholders(64) because the stockholders' retention of an interest in the company when creditors were not paid in full violated the general rule of absolute priority.
Besides determining that the fair and equitable standard required the rule of absolute priority, the Court in Case stated that: