Synonyms
Definition
Absolute priority is a rule by which different classes of creditors are paid in full one after another in a corporate insolvency and the owners are paid last if anything remains.
Explanation
Absolute priority means that in a corporate insolvency, different classes of creditors are paid one after another, while the (former) owners of an insolvent firm get the rest if anything remains after all creditors have been paid in full. Normally this means that the owners get nothing because otherwise the company would not be insolvent in the first place. Accordingly, absolute priority is not relevant for solvent companies because they pay everything they owe their creditors and the owners own the rest. If a company cannot pay everything it owes because its liabilities are higher than the value of all its assets, then it is insolvent and all its debts are due immediately. Following absolute priority the most senior creditors are paid first. If the value...
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References
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Dilger, A. (2014). Absolute Priority. In: Backhaus, J. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_76-1
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DOI: https://doi.org/10.1007/978-1-4614-7883-6_76-1
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