Answers / Restructuring

What is the absolute priority rule (APR) in insolvency, and how does it affect the distribution of value in a restructuring plan?

A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

The absolute priority rule states that in a liquidation or reorganization, claims must be satisfied in order of priority: senior secured first, then unsecured, then subordinated, then equity. A class cannot receive any recovery unless all senior classes are paid in full. In a restructuring plan, the APR must generally be respected unless junior classes consent or the plan is a 'cram-down' that treats them fairly. This rule ensures that value is distributed strictly according to legal priority, preventing senior creditors from being diluted without their consent.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Strict priority order
  • ✓Senior paid in full before junior
  • ✓Cram-down exceptions
  • ✓Prevents dilution without consent

COMMON MISTAKES

  • ✗Suggesting equity can recover before debt
  • ✗Ignoring cram-down possibilities
  • ✗Confusing with waterfall in going-concern

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