A provision in bankruptcy proceedings that determines the pecking order in the event of a company’s liquidation or reorganization. This calls for the full compensation of senior creditors before junior creditors receive anything. In turn, junior creditors are fully paid off before shareholders receive anything. After both senior and junior creditors get their duly compensation, left-over amounts, if any, will be passed on to shareholders and low-ranking creditors. This prioritization of rights provides creditors with some protection against insolvency or default by debtors.

The absolute priority rule applies also in the case of partial liquidation, i.e., selling off a portion of a company’s assets in order to pay down its debts or obligations.