How does the absolute priority rule work in German insolvency?
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
In InsO, creditors are ranked: (1) secured creditors (from collateral), (2) estate claims (post-filing admin costs), (3) unsecured creditors, (4) subordinated creditors, (5) shareholders. Higher-ranking claims must be satisfied in full before lower ranks receive anything. In StaRUG, the rule is modified: a cram-down plan must not leave a dissenting class worse off than in liquidation (relative priority / best-interest test).
WHAT INTERVIEWERS LISTEN FOR
- ✓Absolute priority rule in InsO
- ✓Ranking: secured, estate, unsecured, subordinated, shareholders
- ✓Full satisfaction before lower ranks
- ✓StaRUG modifies with best-interest test
- ✓Cram-down requires no worse off than liquidation
COMMON MISTAKES
- ✗Confusing InsO and StaRUG priority
- ✗Ignoring estate claims ranking
- ✗Claiming shareholders always get something
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