Meaning
Bankruptcy allocation standards enforce a strict hierarchy where senior creditors receive full satisfaction before any junior equity holder obtains distributions. Under an absolute priority rule, senior debt claims command payment priority over equity interests during distribution proceedings. The doctrine ceases to control when every senior class consents to a modified plan.
Statutory Priority
Senior creditors hold enforceable legal rights to intercept asset distributions ahead of equity holders. The absolute priority rule establishes that equity holders retain zero residual value while unsatisfied senior claims remain outstanding. Written debt instruments document these obligations, leaving written evidence of senior status that prevents informal founder claims from altering distribution rankings.
Securing priority relies on contemporaneous recordation of security interests rather than post-hoc recollections of deal intentions.
Distribution Order
Administrative records track the exact valuation thresholds at which equity value is extinguished. When an entity enters formal restructuring, valuation assessments establish whether senior obligations exceed asset proceeds. The rule operates mechanically through these paper filings to bar junior equity recovery unless senior debt gets completely satisfied.
Consensual Departure
Impaired senior classes retain specific authority to waive strict distribution ordering through formal voting. Negotiated plan waivers allow former founders to retain equity in exchange for fresh capital inputs. Without signed documentation of class approval, unapproved equity retention invalidates the plan.
