What is the Absolute Priority Rule?
” This is where the concept of the absolute priority rule comes into play. Basically, the absolute priority rule confirms that any claims by creditors are to be honored and settled before any of the remaining assets from the liquidation are divided among shareholders. Assuring the absolute priority of any claims by creditors help to ensure that debtors who are going through a debt reorganization or even bankruptcy will have a chance of regaining financial health at some time in the future. .
In situations where assets have to be liquidated in order to handle outstanding liabilities, there has to be a clear establishment of who will receive any benefits realized from the sales. This is where the concept of the absolute priority rule comes into play. Basically, the absolute priority rule confirms that any claims by creditors are to be honored and settled before any of the remaining assets from the liquidation are divided among shareholders. Assuring the absolute priority of any claims by creditors help to ensure that debtors who are going through a debt reorganization or even bankruptcy will have a chance of regaining financial health at some time in the future. The most common application of the absolute priority rule occurs during the liquidation of assets of a business entity that has chosen to file bankruptcy. As the assets are converted into cash, the bankruptcy court will evaluate the creditor claims, then determine the amount of payment each of the creditors will rece
