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2020-01-doc4 Relative priority rule explained


Professor Stephan Madaus, my colleague from the German University of Halle Wittenberg, recently posted, what he calls ‘A Simple Guide to the Relative Priority Rule’. With a more detailed version to be published, he points at the Directive (EU) 2019/1023 on Restructuring and Insolvency, which provides for a new rule to assess the fairness of the distribution of value under a plan if an affected class of creditors voted against the plan: the Relative Priority Rule (RPR). This apporach is captured in Art. 11(1)(c), stating that one of the conditions to confirm a plan over the veto of a class is that the plan ‘… ensures that dissenting voting classes of affected creditors are treated at least as favourably as any other class of the same rank and more favourably than any junior class’. The alternative to the RPR appears in Art. 11 (2) which allows Member States the option to implement the much more known Absolute Priority Rule (APR), stating that the plan must ensure ‘… the claims of affected creditors in a dissenting voting class are satisfied in full by the same or equivalent means where a more junior class is to receive any payment or keep any interest under the restructuring plan.’

As a result, all EU Member States are faced with the choice of either implementing the RPR or the APR when implementing the Directive into their local restructuring laws. The debate among scholars is heated, see blog/2019-03-doc10-the-full-version-of-my-reply-to-professor-de-weijs-et-al.

Prof. Madaus now is one of the first to explain the RPR in more detail. This is useful, not only for understanding both sides in the debate, but also for Member States to understand where the debate is about and to consider the pros and cons of a certain option te be implemented. Prof. Madaus guides readers through uncharted waters. See: