Distress & Turnarounds

The Absolute Priority Rule

Understand the single rule that determines who gets paid, who gets wiped out, and who therefore controls a restructuring, before anyone in the room says a word.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: Where in the capital structure the value breaks, what your class can actually demand, and whether an owner can keep any equity at all.

What this topic is

The absolute priority rule is the principle that a junior class cannot receive or keep anything under a plan of reorganization over the objection of a more senior class that has not been paid in full. Senior debt before junior debt, all debt before preferred, preferred before common. Absolutely, not proportionally.

Why it matters

It is the backdrop against which every restructuring negotiation happens, in court and out. Priority determines who has leverage: the class where the value runs out is the class that controls the outcome, and everyone below it is negotiating for consent payments rather than for entitlement. Misread the break point and you will spend months negotiating from a position you do not have.

Who should learn it

Owners facing insolvency, lenders and noteholders working out a position, distressed buyers, and anyone who needs to know what a capital structure is worth when the business is worth less than its debt.

What you will understand

  • How the priority ladder actually orders claims, rung by rung
  • When the rule binds, and why most deals lawfully deviate from it
  • Where the value breaks and why that class holds the pen
  • The new value exception, and the small-business regime that suspends the rule entirely

Prerequisites

Common misconception

"Absolute priority means everyone gets paid in strict order, so a deal that pays unsecured creditors while equity keeps a stake must be illegal." It is not. The rule only binds when an impaired class objects. If every impaired class votes to accept, the plan can distribute value in almost any order the parties agree to. That is exactly why so many real restructurings look like violations and are not.